ASK THE EDD LAWYER – HOW TO AVOID A PROBLEMATIC EDD ASSESSMENT
By Robert S. Schriebman
July 1, 2015
The month of June 2015 brought with it several examples of problematic and frustrating EDD assessments. These assessments were problematic for my clients and frustrating for me in my efforts to resolve them by obtaining the best possible results for my clients. In this article I will present to you the type of EDD assessment you never want to get, but unfortunately, is becoming all too common. My clients are given big EDD bills that cannot have short-term positive result.
Alpha Corporation (Alpha) is a California corporation. Beginning 2012 through March 2015, Alpha employed two corporate officers, three administrative employees, and engaged ten outside workers treated as independent contractors. There were no written agreements between Alpha and its outside contractors. The EDD audited Alpha for the period beginning April 1, 2012 and ending March 31, 2015. My law office did not represent Alpha during the audit.
The EDD Assessment
In mid June 2015, Alpha received the following EDD Notice of Assessment. The audit covered the period beginning April 1, 2012 and ending March 31, 2015.
|Unemployment Insurance (UI)||$10,000|
|Employment Training Tax (ETT)||1,000|
|State Disability Insurance (SDI)||3,000|
|Personal Income Tax (PIT)||10,000|
|Worker Information Return Penalty||4,000|
|Additional Worker Information Return Penalty||20,000|
|Total Amount Due||$50,000|
Why is this assessment different from the standard EDD Notice of Assessment? This assessment contains two “Worker Information Return” penalties. These penalties are problematic for both the employer and his or her lawyer, as will be explained shortly.
First Things First – An Initial Approach
As a tax lawyer handling any type of EDD audit assessment, my first priority is to see if I can reduce the potential tax bill to my client. Therefore, I look to take advantage of available EDD practice and procedure.
When I met with the President of Alpha I asked him two basic questions:
- Did Alpha file quarterly payroll tax returns for the periods beginning with the second quarter of 2012 (beginning April 1, 2012) and the first quarter of 2015 (ending March 31, 2015)? The answer was “No”!
- Did Alpha issue W2s and 1099s for the years 2012, 2013 and 2014? The answer was “No”!
Can The PIT Portion Be Removed From Alpha’s Assessment? – Problem Number One
Around the middle of 2010, the EDD implemented a program for removing the personal income tax (PIT) portion from a potential assessment if certain conditions were met. The removal or abatement of the PIT portion is accomplished by the signing of a one page Declaration. The Declaration is essentially a check-the-box form that is simple to complete. The PIT portion can be removed at any time, even after A Notice of Assessment has been issued. But, there are conditions.
The PIT portion can be removed if the employer can establish that W2s and 1099s were timely issued to workers and timely filed with the IRS. In Alpha’s case, however, the corporation failed to issue W2s and 1099s for each year in issue. Therefore, Alpha is stuck with the PIT portion unless its matter can be settled or a favorable decision is handed down by an Administrative Law Judge (ALJ). However, any reduction of the PIT will only apply to those workers getting 1099s and to admitted wage earners receiving W2s. So it looks like Alpha’s efforts are doomed to failure.
Bottom Line: I am not able to abate in full or remove any portion of the PIT with a simple one page Declaration.
Can The Worker Information Penalties Be Removed Or Reduced? – Problem Number Two
Worker Information Penalties are a major headache for the employer and its attorney. These penalties are assessed pursuant to CUIC §§13052 and 13052.5. Both penalties are assessed because the employer failed to timely issue W2s and 1099s. CUIC § 13052 is a penalty of $50 per worker per year. CUIC § 13052.5 is a very complex piece of law that basically penalties the employer about 12% of gross wages per worker per year.
As bad as the numbers are, another punishment to the employer is a complete absence of prepayment due process. When the EDD makes an assessment involving only the “basic four” (UI, DI, ETT, PIT) the assessed employer can challenge the assessment without first having to pay it. Not so when it comes to Worker Information Penalties; they must first be paid and then they can be challenged. If you fail to promptly pay these penalties, your matter will be turned over to an EDD collector who is free to file a Notice of State Tax Lien and levy on the employer’s bank account.
However, the challenge to Worker Information Penalties is tricky because you simply cannot file a basic petition. You must file a Claim for Refund in a timely manner. If your refund claim is denied, or deemed denied by operation of law, you may then file a petition with the CUIAB. (Board). If the Board does not act quickly enough on your petition, you may file a lawsuit for refund in the Superior Court. These are very expensive avenues to pursue.
Bottom Line: Worker Information Penalties are expensive on several levels. You can have an EDD collector in your face. The attorney’s fees to challenge these penalties can be substantial.
Can the Officers Of Alpha Avoid Personal Exposure To The EDD Assessment? – Problem Number Three
Individuals, regardless of whether or not they are corporate or LLC officers, may be held personally liable for unpaid entity-level EDD assessments. These individuals are known to the EDD as “responsible persons.” Pursuant to CUIC § 1735, the EDD has the right to assess responsible persons for every penny owed by the corporation or the LLC. The determination to go after a targeted responsible person is usually left to the assigned EDD collector.
I have written several articles posted to this website that explains CUIC § 1735 assessments and the assessment process. Please check them out.
Bottom Line: It is very important to attempt to challenge most EDD assessments so as to minimize the risk of a potential CUIC §1735 assessment. The EDD goes after a targeted responsible person by serving them with a separate Notice of Assessment specifically naming the targeted responsible person. A typical Notice of Assessment is headed as follows:
“John A. Doe, as responsible person for Alpha Corporation”
Best Avenue – File a Petition On The “Basic Four”
The “basic four” consists of the following categories of employment and withholding taxes:
- Unemployment Insurance (UI)
- Disability Insurance (DI)
- Employment Training Tax (ETT)
- Personal Income Tax (PIT)
The “basic four” are common on most EDD assessments. Even though the Notice of Assessment contains Worker Information Penalties that cannot be administratively petitioned unless they are paid in full; the “basic four” may be petitioned without having to pay them first.
Bottom Line: The “basic four” categories of employment and withholding taxes must be timely petitioned by filing a Petition with the CUIAB (Board). Failure to timely file a Petition will result in the basic four becoming due and payable. A timely Petition allows you to challenge these assessments without first having to pay them. Therefore, filing a timely Petition is a must even if the Notice of Assessment also contains Worker Information Penalties.
Conclusion – How Can You Avoid Alpha’s Problems?
20-20 hindsight is always spot on. You cannot change the past. If you failed to timely issueW2s and/or 1099s to your workers, you cannot go back and file them in the middle of an audit so as to avoid Worker Information Penalties. The time to be proactive is now. Make sure you timely issue W2s and 1099s to all workers starting with the 2015 year. It is worthwhile, and a smart investment, to hire the services of a CPA, Enrolled Agent, or a well-known payroll tax compliance service company such as ADP, Paychex, etc. When the EDD auditor knocks at your door you will have peace of mind in knowing you did things the right way. You may not avoid an assessment on the “basic four” but you will avoid harsh Worker Information Penalties.
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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