ASK THE EDD ATTORNEY – WORKER INFORMATION RETURN PENALTIES – A LEGISLATURE DISASTER WAITING TO HAPPEN
By Robert S. Schriebman
October 11, 2016
I recently had the pleasure of meeting Mr. Bradley Hodges who is the current Taxpayer Advocate for the EDD. Over lunch Mr. Hodges expressed his goal of a system of fair treatment and due process for employers who have been assessed Worker Information Return Penalties pursuant to CUIC § 13052 and 13052.5. It is a slow and frustrating process to have the California legislature take a look in the mirror and admit to perhaps enacting laws that were not thoroughly reviewed in a devil’s advocate process.
This article will discuss these penalties, how they are cavalierly assessed by overzealous EDD auditors and how, once assessed, there is absolutely no administrative due process available to challenge them.
Recent Experience With Worker Information Return Penalties
It has been my unpleasant experience to be on the receiving end of these penalties on behalf of the employers I represent. These penalties may be the final nail in the coffin that drives businesses out of California and into friendlier states.
There are two of these penalties. The first is CUIC § 13052. This penalty imposes a $50 per worker penalty for every failure to issue a W2 or 1099 or if the W2 or 1099 is wrong. CUIC 13052.5, on the other hand, provides an ever increasing penalty, currently at 12.3% of gross compensation paid to a worker who did not receive a W2 or 1099 or who’s W2 or 1099 was not accurate. The math is simple enough.
The real problem occurs at CUIC § 13052(d) that states, “Sections 1221 and 1222 of the Unemployment Insurance Code shall not apply to assessments imposed by this section.” What this sub-section means on its face is that if an employer is assessed this penalty the employer cannot file an administrative petition to challenge the penalty. The penalty has to be paid immediately. If the penalty is to be paid in installments, the employer risks the filing of a Notice of State Tax Lien.
Under the Federal and California tax systems, for the most part, one is entitled to administrative due process to be able to challenge an audit and to have that challenge heard by an impartial US Tax Court Judge or California Administrative Law Judge. If the IRS makes an audit assessment, one can go to the US Tax Court without having to pay the tax. If the FTB or BOE issues an audit assessment, one may file a Protest, and take the matter to the Board of Equalization without having to pay the tax. When the EDD assesses most taxes, one may appeal to the CUIAB, without having to pay the tax. Of course one is welcomed to pay a part of the tax to stop the running of interest.
However, with Worker Information Return Penalties you do not have any appeal rights. You have to pay the assessment or risk enforced collection action and a tax lien against your credit rating.
All government taxing agencies, the IRS, and all agencies in California, allows a taxpayer to pay the tax, stop the running of interest, and have an administrative appeal before going to court. This is known as the refund process. However, CUIC § 13052.5(d), as interpreted by EDD lawyers, does not allow any post payment administrative review. Your only avenue, according to these attorneys, is to take the EDD to court. Going to court costs a lot of money. Very few Worker Information Return Penalties make going to court economically viable.
The bottom line: There is absolutely no administrative due process when it comes to Worker Information Return Penalties. I seriously doubt if the legislature intended these consequences. Clearly a change is needed.
The EDD Assesses Worker Information Return Penalties In A Cavalier Fashion
From my experience it is clear that EDD auditors adopt a “knee jerk” approach to assessing these harsh penalties that carry no real due process. Reading CUIC § 13052 it is clear from the language of the statute that the penalty should be an exception. It should be applied only to situations where the employer furnishes a false or fraudulent W2 or 1099 or otherwise attempts to flaunt the law. In other words, it should be a “bad guy” penalty. Instead it’s applied with the same criteria as a negligence penalty. The penalty should only be applied in extreme situations where an employer deliberately evades the law. However, the EDD applies both Worker Information Return Penalties whenever it finds an unintentional error or inadvertence. They also assess the negligence penalty in the same assessment. Clearly the EDD should not be allowed to have it both ways.
When it comes to imposing these penalties, the EDD gets it wrong.
It is clear that these Worker Information Return Penalties were not sufficiently thought out by the California Legislature. Perhaps they have unintended consequences. However it is clear that CUIC § 13052 and 13052.5 should be repealed as soon as possible and a new system of due process enacted so that employers who are victims of overzealous EDD auditors will be able to administratively contest the imposition of these penalties without first having to pay them and then having no place to go for justice!
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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