ASK THE EDD ATTORNEY – HOW TO PROTECT YOURSELF FROM IMPROPER EDD WORKER INFORMATION RETURN PENALTIES – PART 1
By Robert S. Schriebman
October 5, 2015
This is Part 1 of a 2-Part article that will discuss EDD Worker Information Return Penalties. In Part 1 we will discuss what these penalties are and to give you some guidance in how you can protect yourself from the improper assessment of these penalties. In Part 2 we will look at a real-world example of a recent case in this office and how we challenged these penalties.
In the EDD’s arsenal of penalties, there are two very harsh penalties that you need to know. These penalties are regularly assessed against small to medium sized businesses that fail to issue 1099s or W2s, or if these forms were issued they were not timely filed with the IRS. CUIC §§ 13052 and 13052.5 impose stiff penalties that must be paid first before they can be contested. The EDD is assessing these penalties at an ever increasing rate. These penalties are imposed by EDD auditors, some of whom, do not understand the laws governing how these penalties should be asserted.
In Part 2 I will show you how these penalties are sometimes assessed against innocent taxpayers in an improper and inaccurate manner, leaving the poor taxpayer – you – with a bill that you must first pay; file a claim for refund; and go through so many delays that you wind up in the Superior Court with a big attorney bill. Or you let the EDD keep your hard-earned money because the fight is not economically feasible.
The EDD Settlement Office will tell you that they have no jurisdiction to settle the case unless and until you pay the penalties in full.
CUIC §§ 13052 and 13052.5 Penalties Explained
CUIC §§ 13052: This section imposes a $50 penalty for each failure to issue a W2 or a 1099 to an individual who has performed services for your company. This penalty is relatively small when compared to its teammate CUIC § 13052.5.
CUIC §§ 13052.5: This section imposes a penalty that increases each year with the level of inflation. When I first wrote about this penalty in 2011, the penalty rate was 9.3%. In 2015 it is 12.3%. But 12.3% of what? The penalty is imposed upon the gross compensation paid to the worker.
Example: The difference between the 13052 penalty and the 13052.5 penalty can be staggering. In a recent case brought to our attention, the EDD auditor assessed a 13052 penalty in the amount of $150, but the 13052.5 penalty was $56,000!
Worker Information Return Penalties Are Subject To Immediate EDD Collection.
Once these penalties are assessed they must be paid immediately or they will be assigned to an EDD collector. This collector has the option of calling you and making a payment arrangement or simply taking the money out of your bank account without warning.
Fighting Back – You Must Be Pro-Active
I do not take penalties assessed against my clients lightly. My motto is, “Never take a penalty lying down – fight back.” Here are a few suggestions based upon what I have learned since 2011 when I wrote my first article about 13052 and 13052.5 penalties.
First: Understand Why The EDD Assessed These Penalties
Remember what these penalties are all about – your alleged failure to furnish either a W2 or a 1099 form to an individual who performed personal services. The EDD went through your documents such as your check register and/or your general ledgers and found payments to third persons. The chances are that the EDD auditor did not find a W2 or a 1099 to that person. Unfortunately there are those situations in which a taxpayer was not cooperative in the audit process and did not furnish W2s or 1099s for any or all for the years in issue. Ask the auditor for a list of the names of the problematic workers. Your job now is to go through your records and send the auditor every W2 or 1099 you can find for those individuals on the list.
If the auditor is not responsive to your request for the names of those individuals whom the auditor believes were not issued a W2 or 1099, contact the auditor’s supervisor – don’t be bashful.
Second: Look at the Internal Revenue Code (IRC)
CUIC § 13052.5 refers to the reader to IRC § 6041(A) for elaboration and federal guidelines for what constitutes remuneration and compliance under the law. Subsection (a) states in substance, that if any service recipient engaged in a trade or business, receives $600 or more per calendar year, that recipient must make a return according to the forms or regulations prescribed by the Secretary of the Treasury. If you comply with IRC § 6041(A), you should have a safe harbor against the application of 13052.5.
Third: Visit the Internal Revenue Service Website
The IRS has an excellent short explanation of the requirements regarding issuing1099s. It is entitled “Am I Required to File a Form 1099 or Other Information Return?” If you paid an individual, whom you treated as an independent contractor, $600 or more per year you are required to issue a 1099 to that individual and to timely file a form 1096 with the IRS together with copies of your issued 1099s. Of course your employees must be issued W2s and you must file with the IRS form W3 together with copies your issued W2s.
Fourth: Take Advantage of the Pre-Assessment Conference Offered by the EDD
During an audit, the EDD usually issues a Proposed Notice of Assessment (PNA) offering you a conference prior to issuing a final Notice of Assessment (NA). The PNA is issued several weeks before the Final Notice (NA). This may be a good time to discuss the merits of the assessment as well as to determine what penalties will be assessed along with the taxes. There will (usually) be penalties attached to the assessment. Will 13052.5 penalties be assessed as well? If so, the informal conference may be the ideal time to convince the EDD that the penalty is improper or should be withdrawn. You may also be able to resolve the entire proposed assessment during this conference.
I wish I could tell you that EDD that all auditors are well aware of these rules and issue Worker Information Return Penalties when they come upon a clear example of taxpayer abuse. Sadly I have found that some EDD auditors do not understand how their own penalties apply and often assess penalties improperly. In Part 2 we will look at a recent case in my office that clearly demonstrates the necessity for you being pro-active in challenging the assessment of these penalties.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.