ASK THE EDD ATTORNEY – NO ONE IS IMMUNED FROM BEING PERSONALLY ASSESSED BY THE EDD OR THE IRS FOR PAYROLL TAXES
By Robert S. Schriebman
Both the IRS and the EDD have tough laws for the personal assessment from unpaid corporate or LLC payroll taxes. Internal Revenue Code § 6672 provides that any person required to collect, truthfully account for, and pay over corporate payroll taxes, and fails to do so, may be held personally responsible for most of the corporation’s payroll tax deficiency. The EDD has a similar statute in CUIC §1735. In order for the IRS and EDD to “pierce the corporate veil” the targeted individual must be responsible for payroll tax compliance and the failure to pay payroll taxes must be willful. These two elements are required for both IRS and EDD personal level assessments.
The IRS calls it the “Trust Fund Recovery Penalty” (TFRP). In the old days, it was known as the “100% Penalty.” The EDD calls it a personal assessment. For example, a typical EDD 1735 assessment reads as follows: “John Jones as Responsible Person for Ajax Corporation.”
It does not matter what your line of work is. You could run a widget factory, a medical corporation, or even a law firm. Yes, we lawyers too have exposure. In this article I want to call to your attention the Spizz case decided by a New York District Court in the closing days of 2017.
The Spizz Case
In the Spizz case attorneys who were shareholder-members of a law firm, were liable for the Trust Fund Recovery Penalty. The first shareholder was the president and a one-third owner of the law firm. He took an active role in the day-to-day fiscal affairs of the law firm. He paid the bills, opened or closed bank accounts, signed checks, and was involved deeply in the payroll compliance process. The second partner’s role was a bit more vague. He too owned one-third of the firm and was also responsible for the firm’s finances. These actions and roles clearly established that these law partners were “responsible persons.” However, in addition to responsibility the IRS also had to prove “willfulness”. Willfulness is established by outward actions. We all know that actions speak louder than words.
How do you prove willfulness? Willfulness is generally proven by how the partners spent the firm’s money. In this case, the partners paid others when they knew the firm owed the IRS. For example, if the firm paid wages, instead of back payroll taxes, that is a sign of bad willfulness. If they paid the rent and/or utilities when they knew they owed payroll taxes, that’s a sign of willfulness. According to the Court in the Spizz case, the day the partners were made aware that the firm owed the IRS, they had the money to pay the IRS in full, but instead they paid their employees. Talk about a “Catch 22!”
The responsible individual cannot hide behind the corporation or LLC. However, the IRS is limited to collecting only those taxes that have been withheld from an employee’s paycheck. This usually means federal income taxes and the employee’s portion of Social Security taxes. The IRS cannot hold the individual responsible for the corporate-employer’s portion of matching payroll taxes. Also, the IRS cannot hold the responsible person personally liable for corporate level penalties, and interest. The IRS assesses daily compounding interest on deficiencies, but until the responsible person is actually and finally assessed, he or she is not liable for any accruing interest.
The Difference Between IRS and EDD Assessments
Relatively speaking the EDD is much tougher on responsible persons than is the IRS. The IRS assesses the TFRP only for those taxes that have been withheld from the employee’s paycheck. These are usually withheld income taxes and Social Security taxes (FICA). Proportionally this amounts to about 60% of the corporate payroll tax liability. There is no interest accruing on the TFRP until it is actually assessed against the targeted responsible person. So, if the proposed assessment is appealed within the IRS, and that process takes almost 2 years to resolve, no interest is assessed or accrued on the underlying TFRP until the IRS records the assessment on its records. If the targeted individual does not promptly pay the TFRP once it is assessed, daily compounding interest will begin to accrue on the unpaid deficiency.
On the other hand, the EDD’s assessment is a full 100% exposure. Whatever the corporation or LLC owes the EDD, that amount is assessed pursuant to CUIC § 1735. If the proposed assessment is petitioned before the CUIAB, and it takes 3 years to get a hearing, interest accrues and becomes part of the assessment if a judge rules against the targeted individual.
Personal exposure to unpaid corporate or LLC payroll taxes is no laughing matter. These assessments can be economically devastating to the personal assets and income of the targeted individual. You can run, but you can’t hide.
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
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