ASK THE EDD LAWYER- DO I HAVE PERSONAL EXPOSURE TO UNPAID CORPORATE EDD EMPLOYMENT AND WITHHOLDING TAXES? PART I
by Robert S. Schriebman
This is Part I of a three-part series discussing the potential of personal liability for unpaid corporate level EDD employment and withholding taxes. We see this happen frequently, almost routinely, when a corporation fails to pay IRS employment and withholding taxes. This article will discuss the EDD’s approach to holding corporate officers and shareholders personally responsible for unpaid corporate level payroll taxes. This is nothing to take lightly. Personal exposure could mean that you life savings, wages, home equity, and valuable personal assets could be sacrificed to pay the EDD.
The IRS Point of View
By way of background, let us first look at how the IRS holds an individual corporate officer or shareholder personally liable for unpaid payroll taxes. At the IRS level a determination of this type is usually made by a field-level IRS collector known as a revenue officer. The revenue officer first gets a file on unpaid corporate-level payroll taxes. The revenue officer, as part of his or her duties, must conduct an investigation into why the corporation owes the IRS. Who is responsible within the corporation for quarterly payroll tax compliance?
The key IRS code section used by the revenue officer is Internal Revenue Code (IRC) Section 6672. This code section has two primary elements: 1. Who is responsible for payroll tax compliance; and 2. Were the actions of the responsible individual willful when it came to the failure of the corporation to: a) withhold; b) account for; c) pay over employment and withholding taxes? The so-called “responsible” individual, in addition to being personally assessed for payroll taxes may also be facing federal criminal exposure for his or her actions. These are all very serious matters.
The EDD Point of View
The EDD operates almost the same way as its IRS counterpart. When a corporation files a quarterly payroll tax return but fails to pay all or a part of the taxes due the EDD, the collection of the unpaid balance is turned over to an EDD collector. The EDD collector’s job is to collect taxes, delinquency penalties, and interest. The collector may call the corporation or send the corporation a letter demanding full payment either in a lump sum or in a negotiated installment payment agreement. An installment payment agreement will not be allowed if the corporation is not current in its payroll tax compliance. If the taxpayer corporation does not respond to the EDD collector, it can expect to be on the receiving end of enforced collection action such as a bank account levy.
As part of the EDD’s collection efforts at the corporate level, the EDD collector may, but not always, look into the possibility of assessing the responsible shareholder or corporate officer. This is a major difference between how the IRS does business and how the EDD does business. With the IRS, an individual-level assessment is a matter of routine; with the EDD it is hit and miss.
If the EDD believes it should consider assessing the responsible individuals for corporate-level payroll taxes it will send out one or two letters asking for information about potential responsible individuals. The EDD may even send out a questionnaire to be completed by corporate officers or shareholders. If these individuals respond to these EDD inquiries, they run the risk of personal assessment. If they fail to respond the EDD collector may not follow up with any type of investigation. It is entirely up to the collector.
The EDD has a statute similar to IRC § 6672 discussed above. The EDD uses § 1735 of the California Unemployment Insurance Code (CUIC). This code section is structured along the lines of its IRS counterpart and has basically the same elements – responsibility and willfulness. The EDD often uses IRS guidelines and Tax Court decisions in making its determination on who is a so-called responsible person.
Differences Between IRS and EDD Personal Exposures.
Both the IRS and EDD use the same standards and tests to evaluate an individual’s exposure to corporate level payroll taxes. The percentage differences, however, are significant. The individual exposure under IRC § 6672 is about 60% of that of the corporation. Interest does not accrue against the individual until he or she is formally assessed the penalties. The exposure under EDD laws is 100% of every dime owed by the corporation and interest continues to accrue against the targeted individual from the beginning.
In Parts II and III in this series we will examine the elements of personal-level assessment and provide you with a “self test” that you can use to evaluate your personal exposure.
©Robert Schriebman 2013.
An EDD attorney, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angles County serving clients throughout California and the United States. As a trusted EDD lawyer, Robert Schriebman has successfully dedicated more than 30 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 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.