Lowering Your Edd Assessment Using Personal Income Tax (PIT) Adjustment Strategies Part I
By Robert S. Schriebman
You have been audited by the EDD. The auditor has issued to you a Proposed Notice of Assessment (PNA). The PNA invites you to attend a hearing with the auditor and his or her supervisor in order to discuss the audit before a final Notice of Assessment is issued. The PNA is composed of three parts – the tax portion, penalty portion, and interest portion. This article will discuss only the tax portion and present strategies for lowering the personal income tax or PIT portion of the PNA.
You might want to take advantage of the pre-assessment conference in order to convince the auditor that the personal income tax portion of the assessment is inaccurate and should be reduced. The purpose of this article is to point you in the right direction toward achieving your goal of convincing the auditor that the PIT portion of the assessment has been overstated.
A WORD OF CAUTION:
I do not recommend attending a pre-assessment conference with the goal of convincing the auditor that the workers reclassified by the EDD as employees should remain as independent contractors. Not only is this usually a waste of time but you often wind up making statements that should not be made, and that may be used against you should you elect to contest the EDD’s assessment on the merits.
The Tax Portion of the PNA Has Four Parts
The tax portion consists of four parts – unemployment insurance (UI); employment training tax (ETT); state disability insurance (SDI); and personal income tax (PIT).
The PIT is usually the largest of the four parts of the tax portion. I have seen the PIT range from about one third of the total assessment to almost seventy-five percent. Sometimes you can reduce or even eliminate the PIT portion by adopting the strategies set forth in this article. In Part I we will discuss the strategies of recalculating the PIT based on worker’s W-4/DE 4 and recalculation of PIT based on single with zero allowances (S-0).
Recalculation of PIT Based on the Worker’s W-4/DE 4.
It is not uncommon for EDD auditors to estimate assessments. This is especially true if the auditor concludes that the employer-taxpayer is not being cooperative, responsive, or providing the documentation needed to complete an accurate examination. Many times I have seen EDD audits covering a three-year period where the auditor estimates the deficiency for one quarter and multiplies that determination by a factor of twelve. The result is a three-year assessment where every quarter has the same estimated liability. The amounts in this method of determination may be huge. This will require you to be proactive and for you to take the initiative in convincing the EDD auditor, as well as his or her supervisor, that the PIT portion of the assessment is not correct and should be lowered.
If your workers have signed a W-4 or DE 4 forms during the time that they have worked for you, you may be able to convince the auditor to re-adjust the PIT portion based upon the EDD’s publication California Employer’s Guide (DE 44) for the year(s) in issue. You must complete and submit a worksheet for each worker. The EDD is now providing schedules of workers’ individual names together with the PNA. If you need prior years withholding schedules they are available on the EDD web site at www.edd.ca.gov/payroll_taxes/Rates_Withholding.htm.
Recalculating the PIT at 2% Single-Zero Exemptions
In the days before the EDD adopted the streamlined PIT abatement declaration process (to be discussed in Part II) I would negotiate a settlement of the audit using a reduced percentage but not allowing for any personal exemptions. If the taxpayer does not supply the EDD auditor with W-2s or other evidence of PIT withholdings the auditor will calculate the PIT portion at 6% maximum. You can not blame a frustrated EDD auditor from assessing the maximum exposure when the taxpayer is perceived to be uncooperative.
If you do not have signed W-4 or DE 4 forms, or your records are otherwise inadequate, you can approach the auditor or the auditor’s supervisor and request that the PIT portion be reduced to 2% single-zero exemptions in the interest of an overall settlement. If the EDD believes they can resolve the audit, close the file, and get it off their desk, so to speak, they may consider this substantial reduction of the PIT portion of the assessment.
In Part II we will discuss the use of EDD form 938P and the new PIT abatement declaration to reduce or even eliminate the PIT portion of your assessment.
©Robert Schriebman 2013.
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.