ASK THE EDD LAWYER – EDD WORKER INFORMATION RETURN PENALTIES – HOW TO SALVAGE A TRAINWRECK
By Robert S. Schriebman
January 12, 2017
This website contains many articles discussing Worker Information Return Penalties (WIRP) assessed pursuant to CUIC §§ 13052 and 13052.5. WIRP assessments are especially harsh because once assessed there are no prepayment administrative rights to contest these penalties. As soon as these penalties are assessed, pursuant to a final Notice of Assessment, they must be paid or the EDD will assign collection to an EDD collector. If you are lucky the collector will give you the courtesy of a phone call to discuss a payment plan and even negotiate an installment payment arrangement. However, the usual scenario is the filing of a Notice of State Lien and a series of bank account levies without warning. You don’t even have administrative rights once you pay the penalties. You must take the EDD to Superior Court for a lawsuit for refund. Most people on the receiving end of a WIRP assessment simply pay it and walk away.
In this article I will discuss several basic ways you may use to reduce or even eliminate a WIRP assessment and salvage this train wreck on your financial wellbeing.
Why Is A WIRP Assessment Issued?
I believe that the intention of WIRP laws was to punish employers who abused the system by going out of their way to deliberately avoid issuing W2s and 1099s or deliberately understating them. I do not believe that a WIRP assessment should be made for clerical errors or in matters involving S corporation distributions that an EDD auditor now wants to classify as wages so the State gets additional monies in the treasury. Unfortunately, WIRP assessments are handed out as a matter of routine without the auditor caring or taking into consideration the economic hardships brought about by imposing these penalties on well-meaning taxpayers.
There are two WIRP assessments. The first comes under section 13052 and is assessed at only $50 per worker per year. The second comes under section 13052.5 and is a huge penalty of 12.3% of gross compensation – and this percentage goes up almost every year. This is especially harsh when it comes to S corporation distributions that are shown on Form K-1 over and above wages paid by the S corporation. Most CPAs tell their clients that they are allowed to take distributions over and above reasonable compensation. These distributions may be tax free or long-term capital gain. No payroll taxes are paid on capital gain income or the return of capital. The EDD takes the position that all distributions should be taxable wages. So the EDD routinely imposes WIRP penalties on these distributions – it is not right and the EDD has no business going where the FTB goes.
Fighting Back Against A WIRP Assessment
The first action you should take in controlling the WIRP train wreck is to ask the auditor or his or her manager to stop collection on the assessment until the agent gives you a breakdown as to what composed the WIRP. I have seen cases, especially in the construction industry, where a 1099 was not given because the payment represented reimbursement for materials and supplies, not services. In reviewing an auditor’s findings I have discovered errors such as an assessment made involving someone who did in fact receive a W2 or 1099. Agents are human and they make human errors.
Some payments do not require the issuance of 1099s such as payments to most corporations. Check the auditor’s report to determine if a WIRP assessment may have been improperly issued under these circumstances.
I recently had a matter where the WIRP was assessed because the taxpayer had poor records. He did not retain copies of W2s or 1099s. What to do? It is almost impossible to get filed 1099s from the IRS. In that event you should contact those who received 1099s and ask them to send you copies. The same advice goes W2 wage earners who attached W2s to their tax returns but kept copies from their accountant. It may involve a lot of digging but there is a lot at stake too. Once copies are submitted to the auditor, he or she is required to reduce the assessment accordingly.
The EDD hands out WIRP assessments too casually, but that’s the way it goes. It is important to question the auditor and demand a breakdown of the elements composing your WIRP assessments. You may be pleasantly surprised to find errors in your favor. Of course it is your responsibility to retain your records and you pay the consequence for sloppy bookkeeping.
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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