ASK THE EDD ATTORNEY – THE IMPORTANCE OF BEING PROATIVE WHEN YOU DEAL WITH THE EDD, FTB AND IRS
By Robert S. Schriebman
September 9, 2015
You must be extremely careful and ever diligent when you are dealing with the IRS, FTB and EDD. A recent decision in the US Tax Court, as well as examples from my own practice, has added emphasis to the old Boy Scout motto, “Be prepared.” In this article I will discuss the just-released US Tax Court Haben Decision and will also discuss the importance of being proactive when dealing with the FTB and EDD.
US Tax Court Haben Decision
Kurt H. Haben represented himself in the US Tax Court. He was the controller of American Consolidated Transportation Cos., Inc. The corporation fell behind in its quarterly payroll tax obligations. The IRS conducted an investigation into the assessment of the Trust Fund Recovery Penalty (TFRP) against the person or persons responsible for payroll tax compliance within the corporation. Haben was targeted for the assessment of the TFRP. The IRS sent Haben a certified letter informing him that he was a TFRP target and afforded him an opportunity to file an administrative appeal to contest the proposed assessment. Haben never picked up the certified letter from the post office. He turned his back on the opportunity to contest the proposed assessment. The time passed for Haben to protect his rights and the proposed assessment became final and subject to IRS collection.
As part of the normal IRS collection process a taxpayer is issued a notice to take advantage of a Collection Due Process (CDP) proceeding. The purpose of a CDP hearing is to allow a taxpayer to resolve collection issues without the threat of IRS enforced collection activity. The notice was sent by certified mail to Haben. This time Haben picked up the notice and timely filed a CDP Petition. However, in the petition Haben sought to challenge whether or not he was the person responsible for the TFRP assessment. The IRS Settlement Officer had to inform Haben that he missed the boat. It was too late to challenge the merits of the TFRP. Haben had to pay the assessment, at least in part, and go through a time-consuming and a potentially expensive IRS refund process.
The US Tax Court totally backed the IRS Settlement Officer. Haben had slept on his rights. He was not diligent. Kurt H. Haben v. Commissioner., U.S. Tax Court, T.C. Summary Opinion 2015-55, (Sept. 8, 2015).
The Haben case is an excellent example of something that I tell my clients all the time: if the IRS sends you a certified letter, get it as fast as you can! Take it to an experienced tax professional to learn what you need to do to protect your rights.
Be Diligent With The FTB
We constantly see examples where the FTB is collecting an assessment that should never have landed on a collector’s desk. When the FTB conducts an audit, or issues a “Me Too” assessment based upon a prior IRS examination, it issues a Notice of Proposed Assessment (NPA). When the IRS conducts an income tax audit the FTB statute of limitations for a corresponding “Me Too” assessment remains open according to some fairly complex Revenue & Taxation Code Provisions (See prior articles.)
Like the TFRP proposed assessment in the Haben matter, these FTB NPAs are sent by certified mail. You have only a short time to file a protest to the NPA. Nevertheless, taxpayers fail or refuse to make the trip to the Post Office for fear of the bad news. If an NPA is not timely protested it becomes a final assessment and subject to collection. The tax debt will have to be paid in full before you can take advantage of the FTB refund process. Many NPAs contain faulty assessments that fail to take into account itemized deductions. They often have penalties that can be removed by showing reasonable cause. However, if you do not timely take advantage of your right to contest the NPA, the assigned collector does not want to hear about your itemized deductions, credits, or penalty abatement reasons. The collector is there for one purpose – to collect the tax.
Being Diligent with EDD Matters
Most EDD audits result in the issuance of a Notice of Assessment (NA). The NA usually has 2 dates in the upper right-hand corner – the date the NA was issued and the date it was mailed. A taxpayer has only 30 days to file a Petition with the CUIAB. The official EDD instructions simply state that the Petition must be filed within 30 days; but from what date? The instructions are not clear. Therefore, always assume that the earlier date governs.
The NA is not necessarily a final word to the audit. For example, the NA may assess penalties that are improper or based upon a misunderstanding or a communication failure with the auditor. The policy of the EDD is to allow any taxpayer to reopen an audit for purposes of clarification or to provide documentation that was not previously given to an auditor. That is at least the policy, however, it is up to the taxpayer to be very diligent when protecting his or her rights to reduce or eliminate a potential assessment. Let me give you a couple of real life examples:
Case Study No. 1
George is an excellent painter. He has a small painting company. He was audited by the EDD but did not understand the process. He failed to supply the auditor with key documentation. The auditor got tired of waiting and issued a NA. When George got the NA, he made an appointment with the auditor and brought in additional documentation. The auditor informed George that he would look at the documents and get back to him. Unfortunately George interpreted the auditor’s words as telling him that the NA did not count. The EDD auditor forgot about George and never contacted him to revise the NA. George failed to timely file a petition with the CUIAB. The NA became a final assessment and was assigned to a collector. George was not diligent in protecting his rights. The lesson: Never assume that things will take of themselves when it comes to the EDD. George should have hounded the EDD agent to make sure the changes to the NA were made.
Case Study No. 2
Henry owns and operates a domestic worker agency. He issued W2s for his employees and 1099s for his independent contractors for the years 2012, 2013 and 2014. He was audited by the EDD. Henry chose to handle the audit by himself. A communication problem developed between Henry and the assigned EDD auditor, Ms. Jones. When Ms. Jones issued the NA she added stiff penalties because she concluded that Henry failed to issue any W2s or 1099s for all audit periods. After the NA was issued, Henry timely filed a Petition with the CUIAB. Unfortunately the CUIAB had no jurisdiction over the penalties. They were due and payable. Henry attempted to contact the EDD office. He sent the EDD copies of all W2s and 1099s. Henry did not know that Ms. Jones left the EDD to work in the private sector. The new auditor handling Ms. Jones’ case load failed to revise the NA to remove the stiff penalties for failure to issue W2s and 1099s. Henry assumed that once the EDD received his documentation, they would automatically remove the penalties. This did not happen. Henry was contacted by an EDD collector for the payment of the penalties. Henry tried several times to call Ms. Jones’ supervisor. However, the supervisor did not return his several calls. Henry’s fault was failing to contact Ms. Jones as soon as he sent the documentation to the EDD to make sure she removed the penalties.
Never neglect to pick up from the Post Office any certified mail sent from any governmental agency, especially a taxing agency like the IRS, FTB or EDD. If you are trying to reduce or eliminate an EDD Notice of Assessment never assume that once the EDD receives your documents or other information, they will take care of the problem for you. You must “be prepared” and be diligent and proactive.
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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