ASK THE EDD ATTORNEY – HOW TO PROTECT YOURSELF FROM IMPROPER EDD WORKER INFORMATION RETURN PENALTIES – PART 2
By Robert S. Schriebman
October 9, 2015
This is Part 2 of a 2-Part article that will discuss EDD Worker Information Return Penalties. In Part 1 I discussed these penalties and gave you some guidance on how to protect yourself from the improper assessment of these penalties. Here we will discuss how to obtain a breakdown of these penalties from your EDD auditor and how to challenge these penalties if your auditor made errors in their calculations.
In my experience I have found that these penalties are often assessed against innocent taxpayers in an improper and inaccurate manner, leaving the poor taxpayer with a bill that must first be paid before you can exercise any other available procedures within the EDD or the CUIAB. I do not advocate the refund process because it is full of frustration and rarely ends well. However, it is important that a timely Claim for Refund be filed with the EDD to protect your future options.
Be Proactive – Contact Your Auditor
At the completion of your EDD audit, your assigned EDD auditor will send you only the proposed Notice of Assessment (PNA) followed shortly thereafter by a Final Notice of Assessment (NA). Both the PNA and the NA will set forth 2 Worker Information Return Penalties. The first penalty listed will be small in comparison to the second penalty. This penalty is only $50 for every payee not receiving a W2 or a 1099. The second penalty will be much larger and will be an assessed at the rate of at least 12% of the gross payments to each payee.
Your assigned EDD auditor will not give you a specific breakdown of these penalties unless and until you make a formal written request, and even then you may have to contact his or her boss.
Going Over The Auditor’s Head
If you receive no response from your auditor after making your written request for an itemization of how the Worker Information Return Penalties were calculated, contact the auditor’s manager. Everyone in the EDD has a boss. Your auditor is no exception. Your auditor will give the name and contact information of his or her manager.
Reviewing the Breakdown
Once you receive a written breakdown of the 13052 and 13052.5 penalties review them to make sure that the auditor did not assess a penalty for payments made to third-party established business. In a recent breakdown that I received, I found that 4 out of 10 payees were established corporations or independently-owned small businesses. These mistakes must be corrected, and the penalties reduced accordingly. You should also match the dollar amount of the payments stated in the breakdown with the amounts reflected in your books and records. Auditors make mistakes.
Contact both the EDD agent and his or her manager and demand in writing that the mistakes be corrected and the penalties reduced.
Filing a Claim for Refund
If you find mistakes in the breakdown of your 13052 and 13052.5 penalties do not assume that the EDD auditor or manager will honor your request for a reduction. You must consider making an EDD Claim for Refund.
A Claim for Refund may not be legally filed unless and until you pay the full amount of both penalties. The refund claim must be filed within 60 days after payment. (See CUIC §§ 1178 and 1179.) There is no specific form for your claim. See my articles relating to the content of Refund Claims. (Published May 3, 2012)
CUIC §§ 13052 and 13052.5 must be read in conjunction with CUIC § 13050. It is clear from a review of this section that the Worker Information Return Penalties only apply to a proven employer-employee relationship. These penalties are to be applied only and if when the EDD makes a valid determination that the employer is attempting to avoid payroll taxes through an intentional effort to hide or evade the employer-employee relationship. Worker Information Return Penalties were not meant to be assessed to any and all payees required to be issued a form 1099. For example, if a 1099 was required to be issued to an independent but incorporated business, but was not so issued, the Worker Information Return Penalty is not appropriate.
The key word in assessing 13052 and 13052.5 penalties is “worker.” Individuals who have independent businesses are not “workers.” Therefore, these penalties should not be assessed against them.
My motto is, “Never take a penalty lying down – fight back.” Whether it is the EDD, FTB BOE or IRS, auditors love adding penalties to their assessments. When it comes to Worker Information Return Penalties assessed pursuant to CUIC §§ 13052 and 13052.5 it is very important for you to see the breakdown of how these penalties were assessed against you. If you find errors quickly bring them to the attention of your EDD auditor and his or her manager. Do not assume that they will see things your way. Be prepared to file a Claim for Refund to protect your rights and always file your claim so you can prove that it was timely filed.
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.