ASK THE EDD LAWYER- DO I HAVE PERSONAL EXPOSURE TO UNPAID CORPORATE EDD EMPLOYMENT AND WITHHOLDING TAXES? PART II
by Robert S. Schriebman
This is Part II of a three-part series discussing your 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 EDD or IRS employment and withholding taxes.
In Part I we examined the points of view of both the IRS and EDD. Basically, they both look at the twin factors of responsibility and willfulness. We also learned that while the IRS only assesses about 60% of the corporate liability against the responsible individual, the EDD assesses a full 100% exposure. While the EDD amount may be relatively smaller compared to the IRS, the percentage rate is much higher.
In this part we will look at some of the basic questions the EDD will ask you to determine if you are going to be the target for a personal assessment of corporate payroll taxes.
Here are examples of questions you may be asked by the EDD:
- Do you handle the day-to-day fiscal affairs of the corporation?
Explanation: Those who make the day-to-day fiscal decisions on which creditors will be paid and when they will be paid are clear targets for a personal assessment. It does not matter what your title is, or if you have any title at all, it is the decision-making process that is of key importance. On the otherhand, a person who has a title such as Treasurer or CFO but has no real decision-making authority is not usually a target.
- Is your signature on the bank signature card?
Explanation: The EDD may request copies of signature cards from company banks and base its assessment on this fact alone. This factor, however, is not a true indication of corporate responsibility. If your signature is on the bank signature card, but you do not sign checks, the EDD does not have sufficient proof that you are responsible for controlling the company’s day-to-day fiscal affairs.
- Did you resign your position from the company when you found out it when it was in payroll tax trouble?
Explanation: Many years ago a federal judge held that it was the duty of a corporate officer, facing potential personal liability exposure, to resign and leave the company instead of staying on to try to help the company get current on its payroll tax obligations. It has long been the position of the IRS that indeed one had to quite his or her job in order to avoid personal exposure. However, in 2005, a different federal court issued a more realistic decision and held that resignation was not required. If the targeted individual was in a position to control funds and reduce the deficiency he or she need not quit. I recently used this decision to prevail upon the IRS and the EDD not to assess my client for corporate payroll taxes.
- When and how did you first become aware of the delinquent taxes? What actions did you take to see that the taxes were paid?
Explanation: If you are or were the COO or the CEO or even the CFO of a corporation with control over corporate funds with knowledge that the EDD was owed back payroll taxes you will have the burden of proving that you could have diverted funds to pay the EDD. If you did nothing to reduce the tax debt but kept on paying rent, utilities, supplies, etc., you will be a target for personal liability. Whatever you say to the EDD to show your innocence most likely will be disregarded. The EDD understands that people in your position point the finger of guilt at others in the company in an effort to save themselves. Finger pointing does not work. The best defense is to produce coworkers who have no exposure to come to your defense.
In Part III we will look at the so called “responsibility test.” You can take this test to see whether you pass or fail.
©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.