ASK THE EDD LAWYER – PERSONAL EXPOSURE TO AN EDD CORPORATE LEVEL ASSESSMENT – ‘IT AIN’T OVER TIL IT’S OVER’
By Robert S. Schriebman
The great baseball catcher Yogi Berra was right when he coined the phrase, “it ain’t over til it’s over.” When the EDD conducts an audit of a corporation or LLC, there is also exposure to a personal-level assessment for so-called “responsible persons.” A corporate officer such as a CEO or CFO is always a target if the corporation or LLC fails to pay the assessment. If you are in this position, when do you know that you are no longer facing exposure? When do you know you can exhale?
I recently met with a couple who had a small business corporation who were waiting for years for “the other shoe to drop.” I was pleased to tell them that they no longer faced personal level exposure. I’d like to tell you their story.
CUIC § 1735 and Personal Exposure
There are other articles on this website that discuss in detail CUIC § 1735 and I refer you to those for a more in-depth discussion.
CUIC § 1735 allows the EDD to “pierce the corporate veil” and assess responsible corporate officers and non-officers for corporate level assessments if and when a corporation or LLC fails to pay all or a portion of the EDD assessment. The assessment can come about in several ways, but the two most common are an audit assessment and a self-assessment. A self-assessment occurs when returns are filed but taxes are not paid. The IRS has a similar provision known as the Trust Fund Recovery Penalty or TFRP. This is found at IRC § 6672. The statutes are comparable.
CUIC § 1735 should not be read by itself. You must also be familiar with the statute of limitations on when the EDD can make this assessment. These rules are found at CUIC § 1132. CUIC § 1132 is the only code section in the entire EDD body of law that governs each and every EDD statute of limitations.
Time Is of the Essence
One can have personal exposure under CUIC § 1735, but if the EDD does not issue the assessment timely, the exposure is gone. In other words the EDD does not have an unlimited time to make a personal level assessment. The personal level assessment statute has nothing to do with the virtually unlimited statute of limitations for collecting EDD taxes. This confuses many people. The collection statute is really not a statue at all; rather it is a provision of the California Constitution prohibiting the collection of government debts after 30 years. Unfortunately, people think that the EDD has thirty years to personally assess them for corporate level unpaid deficiencies – not true.
With this in mind, let’s take a look at a case that was recently brought into my office.
The Case of Acme Consulting, Inc. and Fred and Ethel Acme
Acme Consulting, Inc. (Acme) was a small professional consulting business. In 2007 the EDD audited Acme and assessed quarterly payroll taxes for the years 2004, 2005, 2006 and 2007. The bill was approximately $60,000. Acme fell on hard times and filed Chapter 7 bankruptcy. Payroll taxes generally are not dischargeable in bankruptcy. After the automatic stay was lifted the EDD resumed sending bills to Acme. No bills were sent in the name of “Fred Acme, as responsible person for Acme Consulting, Inc.” This fact was very important!
When I met with Fred and Ethel the corporate bill had skyrocketed to $92,000. Fred was kept up at night worrying about having to pay this huge bill.
Because the EDD “Statement of Account” did not list Fred or Ethel as responsible persons it was my belief that in 2018 the statute of limitations for assessing them personally under CUIC § 1735 had long expired. I contacted the EDD’s Taxpayer Advocate and learned that over the years there was no CUIC §1735 assessment issued to Fred or Ethel. The corporation had long been abandoned and had no assets.
In my opinion Fred and Ethel Acme had no personal exposure to Acme’s EDD assessment. They did not have to pay Acme’s tax bill. Needless to say Fred and Ethel were allowed to exhale.
Just because you receive an old EDD corporate level bill does not automatically mean that you are individually responsible for it. Most corporate level assessments are never charged against individual officers or shareholders.
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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