ASK THE EDD LAWYER – PROTECTING YOURSELF FROM AN EDD CUIC § 1735 ASSESSMENT – PART 1
By Robert S. Schriebman
This is part 1 of a 2 part series.
A recent case here in the office brought home the importance of protecting yourself from being a target of personal liability for unpaid corporate or LLC payroll tax deficiencies. Section 1735 of the California Unemployment Insurance Code (CUIC) allows the EDD to ignore the corporate or LLC entity and issue an assessment against so-called responsible persons who handled the day-to-day business affairs of the company. There is a difference between the EDD version of this assessment and the IRS counterpart under IRC § 6672. The IRS version carries an exposure of approximately 60% of what is owed by the entity; the EDD version is 100%. And that 100% includes every dime of tax, penalties and accruing interest.
There are ways you can protect yourself against being assessed by the EDD. This article will discuss some of the basic strategies in light of the recent case of Charles D. Shaffran, Sr. v. Commissioner T.C. Memo 2017-035, 113 T.C.M. 1153 (Feb. 2017). Even though the Shaffran case involved an IRS assessment there are valuable lessons to be learned in avoiding the EDD’s 1735 assessment.
The Matter of Charles D. Shaffran, Sr.
Charles was retired from the Ford Motor Company, and like many retired senior citizens was looking for something to do with his time. His son and a partner owned and operated a restaurant in Florida, known as Sunset Charlie’s. He often sat around the restaurant and occasionally did odd jobs. One year his son, Carlos, took a vacation for a couple of weeks. Charles agreed to operate the restaurant and pay for supplies. Charles signed 3 checks even though he was not authorized to sign checks and his signature was not on the bank signature cards.
Unknown to Charles, his son and the partner had not paid IRS payroll taxes and were accumulating a substantial deficiency. IRS Revenue Officer Kane (RO Kane) paid a visit to the restaurant and decided to assess the trust fund recovery penalty (TFRP) against the partners and Charles for many quarters of unpaid payroll taxes. It was clear that the son and the partner ran the day-to-day business affairs of the restaurant, but what about Charles? He signed only 3 checks during a two-week period. Should he be liable for everything?
Charles was “thrown-under-the-bus” by RO Kane who took a shotgun approach when making her TFRP assessments. It seems that RO Kane was under severe time pressure and had to make quick decisions without having accurate evidence. However, RO Kane became the sole judge, jury, and executioner of Charles’ fate.
Charles took the IRS to the US Tax Court where a sympathetic judge threw out the assessment against him. Charles was lucky. Most judges have zero tolerance for those who do not pay over payroll taxes.
Lessons Learned From Charles’ Experience
There are many similarities between the IRS and EDD versions of personal payroll tax assessments. IRS assessments are done by trained and experienced Revenue Officers. EDD assessments, while recommended during the audit process, are, in reality, assessed by EDD collectors. These collectors do almost no investigation as to the facts or realities of business operations. Sometimes they will send out a questionnaire for the targeted individual to complete and return. Most of the time, however, there is very little to no investigation at all. The EDD collector will simply issue a Notice of Assessment designating “Jones as Responsible Person for ABC, Inc.”
An investigation by either the IRS or the EDD to determine the targeted individual often results in a “finger pointing” contest where corporate officers or other targets point the finger of blame at someone else. When this happens the tax collector does not bother to fully investigate all the facts. In order to protect the revenue, the collector will determine that anyone signing checks, or making basic business decisions will be charged and assessed.
In my experience in handling both IRS and EDD responsible person assessments, it is very important to find persons within the company who will testify on your behalf that you did not control the day-to-day fiscal affairs of the company.
I am reminded of a case in which a bright young man, a recent MBA graduate, was given the title of CFO together with check signing authority. He had a nice corner office and a fancy German luxury car, all courtesy of the boss. But things were not as they appeared. The president of the company, a real crook, was stealing corporate funds out the back door for his personal pleasures – big time! The corporation ran up millions of dollars of unpaid payroll taxes. Eventually both the IRS and the EDD got wind of things. The IRS conducted an investigation; the EDD did not. Because our young friend signed checks and made minor fiscal decisions he was assessed both the TFRP and the CUIC § 1735 assessments. Our young man came out well, only because other employees were able to give testimony that his control over funds was limited.
In part 2 we will discuss other ways of protecting yourself from these types of assessments by making certain that your rights to due process of law have not been violated.
When you own and operate a single shareholder corporate or a single member LLC, and you are the person who controls the day-to-day business affairs of your company, it is very difficult to protect yourself from personal exposure to the TFRP or the CUIC § 1735 assessments. When there are more than one person running things, the proposed tax assessments will always turn into a finger-pointing contest.
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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