Removing An EDD Penalty – Abatements And Reasonable Cause Part I
By Robert S. Schriebman
The EDD has quite an arsenal of penalties. There are at least thirteen different categories of penalties ranging from late filing and late payment penalties to stiff penalties for the failure to issue W2s or 1099s. The EDD auditor who has assessed the penalties may have been incorrect and did not take into account facts and circumstances that would give rise to the removal or abatement of some or all of the penalties assessed. Sometimes penalties are not the result of an audit. They are assessed by Sacramento when quarterly or annual returns are not filed on time or the taxes owed are not totally paid in a timely manner. Often a delinquent account will be assigned to a tax collector whose job it is to collect deficiencies. This article will discuss how to abate penalties with delinquent accounts that have been assigned to the EDD Collection Division.
All requests for the abatement of penalties should be in writing and submitted to the collector in a manner that proves that the abatement request was received by the collector’s office. This can be done by using a company such as Federal Express or via the Post Office using certified or registered mail with a return receipt requested. One of the collector’s jobs is to consider penalty abatement requests. However, be forewarned, most penalty abatement requests are denied, and I am sad to say denied without giving the taxpayer’s request proper consideration.
The EDD publishes an Information Sheet entitled Waiver of Penalty Policy (DE 231J).
The key to the abatement of most EDD penalties is something called “good cause” or “reasonable cause.” These terms are used interchangeably. According to the EDD, good cause exists where the circumstances causing delay are clearly beyond the employer’s control or where the delay is due to some type of mistake or inadvertence. What the EDD is not telling you in its Information Sheet is that the EDD uses the same criteria that the IRS uses in its IRS Manual (IRM), Chapter 20. The focal point of IRS standards is a 1985 U.S. Supreme Court case entitled Boyle v U.S., 469 US 241 (1985). The Boyle case involved reliance upon the advice of a tax professional. The standard for reasonable cause established by Boyle can not be specifically defined. It is rather based upon what a reasonable business person would do or not do under given circumstances. It comes down to the exercise of ordinary business care and prudence. It does not require any super-human action or insight.
According to the EDD, employers are expected to discharge their basic employer responsibilities. Further, they must show that they acted in good faith and acted in a diligent, timely, and prudent manner.
In Part II we will examine Appeals Board precedent decisions that provide guidance to both the EDD collector and the employer-taxpayer. We will also discuss what appeal rights are available to you if and when the EDD turns down your penalty abatement request.
©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.