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The EDD’s CUIC Section 13052.5 Penalty

Written by: Robert S. Schriebman
Certified Specialist in Taxation Law by the State Bar of California, Board of Legal Specialization

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.


If your practice involves representing clients before the EDD, you need to know about Penalty Section 13052.5 of the California Unemployment Insurance Code (CUIC). This is a penalty for failure to furnish either a W-2 or a 1099 to a person who performed personal services. This penalty is very harsh and very expensive for your client. Although it has been around since 1990, the EDD has not assessed it until recently. It can come as an unpleasant surprise and take you unaware.

What makes this penalty so harsh is the fact that there is absolutely no prepayment due process afforded to the taxpayer. Due process basically means that you have a right to notice and an opportunity to be heard before the proposed penalty becomes final, due and payable.

Here is an example of how this penalty can take you and your client by surprise: Recently I received a call from a troubled practitioner. She was involved in settlement negotiations with the EDD on a petition she had filed with the California Unemployment Insurance Appeals Board (CUIAB). The audit assessment had been completed months before the CUIAB petition was filed. The purpose of the petition was to challenge the auditor’s proposed assessment. There was no Section 13052.5 penalty in the original assessment.

As the settlement negotiations were progressing toward an acceptable resolution the original auditor, long after the audit was completed, decided to assess the penalty under CUIC Section 13052.5. The penalty was huge; almost as much as the proposed settlement amount itself. In other words, it almost doubled what the taxpayer thought the original settlement was going to be! The proposed penalty soured the settlement negotiations.

It is important that you know about the impact of CUIC Section 13052.5 and learn the techniques to use to abate or reduce the penalty.

The Burden Of Cuic Section 13052.5

The EDD, like most taxing agencies, has the usual assortment of penalties for failing to timely file returns or pay taxes. It also has negligence as well as civil and criminal fraud penalties. These standard penalties all have in common basic due process procedures – if you disagree with the auditor’s position, you may file an administrative appeal without first having to pay the penalty.

Not so with CUIC Section 13052.5. You have absolutely no prepayment appeal rights at all! The penalty, once assessed, can not be waived. To attempt to waive a waivable penalty, the taxpayer or his or her representative must submit a written request that explains why good cause or reasonable cause exists and the reason(s) for his or her noncompliance. The terms “good cause” and “reasonable cause” are used interchangeably and are based on normal business care and prudence. However, you can not use “good cause” or “reasonable cause” to abate this penalty.

The penalty under CUIC Section 13052.5 can not be waived once assessed. One’s only recourse is to first pay the penalty and thereafter file a formal written claim for refund. If the claim is denied, and it usually is, one must go through an expensive and lengthy administrative appeal process. When administrative remedies are exhausted, without success, one may have his or her day in the Superior Court. All of this is prohibitively expensive and much money has to be at stake to make this laborious process worthwhile. The bottom line – the EDD may keep your penalty money leaving you to the motto, “There is not enough justice to go around.”

How Much Does Cuic Section 13052.5 Cost?

The amount of the penalty is not set forth in Section 13052.5. It is found by reference to R&T Code Section 17041. Under the R&T Code, the amount of the penalty is determined based upon the unreported remuneration for personal services, multiplied by graduated rates with the maximum rate of 9.3% adjusted for inflation. This can be a lot of money! This is especially burdensome and troubling because you have no prepayment appeal rights and the penalty can not be waived. Also, the penalty is usually not imposed during the initial audit assessment; the one you may appeal before the Board. It is brought to your attention afterwards either by a supplemental assessment or issued by the agent during settlement negotiations. This comes as a most unpleasant surprise to both the EDD Settlement Officer and the representative. Here is the problem you and your client are facing: You can not appeal this penalty – you can not contest its merits before an Administrative Law Judge (ALJ). You are essentially “dead in the water” as far as your basic due process in concerned. When the penalty is proposed during settlement negotiations, it may be a real deal killer.

How To Fight Back

My motto is “Do not be passive when it comes to penalties – Fight Back!” Here are a few suggestions on how to fight the EDD’s proposed CUIC Section 13052.5 penalty:

First: Focus on the Big Picture.
Remember what the penalty is all about – the failure to furnish either a W-2 or a 1099 form to a person who performed personal services. Therefore, you must be prepared to prove W-2s or 1099s were issued. Here you must be very careful. EDD auditors tend to issue blanket gross assessments of this penalty without breaking it down to apply only to workers who did not receive either a W-2 or a 1099. If you can prove that your client had 100 workers but issued W-2s or 1099s to 90 workers, the penalty should only apply to those 10 workers who did not receive the required year-end compliance.

Second: Look at the Internal Revenue Code (IRC).
CUIC Section 13052.5 refers to the reader to IRC Section 6041(A) for elaboration and federal guidelines for what constitutes remuneration and compliance under the law. Subsection (a) states in substance, that if any service recipient engaged in a trade or business, receives $600 or more per calendar year, that recipient must make a return according to the forms or regulations prescribed by the Secretary of the Treasury. If you comply with IRC Section 6041(A), you should have a safe harbor against the application of Section 13052.5.

Third: Demand of the EDD a Specific Breakdown.
Demand of the EDD a specific breakdown as to how and to whom the penalty was computed. This will help you “do the math” and make certain the penalty is accurate and as low as possible. Do not assume that the EDD auditors’ calculation of the penalty is correct. Review R&T Code Section 17041 and apply the graduated rates to the wages subject to the penalty. You could come up with a much smaller penalty amount.

Fourth: Ask that the Penalty be Withdrawn.
The CUIC Section 13052.5 penalty can not be appealed or waived, but it may be withdrawn or rescinded. Argue good faith. Your client may have had good faith reasons for not issuing a W-2 or a 1099. It is not uncommon for an EDD auditor to assess this penalty when an employer issued 1099s but failed to issue W-2s because the EDD concluded the workers were employees, not independent contractors. You may have valid reasons why your client issued those 1099s. There may have been an IRS ruling, or a court decision in your client’s favor supporting your client’s business practices. Your client may have treated workers as independent contractors because of prevailing business practices in the community.

Fifth: Take Advantage of the Pre-Assessment Conference Offered by the EDD.
During an audit, the EDD usually issues a “Proposed Notice of Assessment” offering you and your client a conference prior to issuing a final Notice of Assessment. The “Proposed Notice” is issued several weeks before the “Final Notice.” The proposed notice offers an informal conference with the auditor and his or her supervisor. This may be a good time to discuss the merits of the assessment as well as to determine what penalties will be assessed along with the taxes. There will (usually) be penalties attached to the assessment. Will CUIC Section 13052.5 penalties be assessed as well? If so, the informal conference may be the ideal time to convince the EDD that the penalty is improper or should be withdrawn. You may also be able to resolve the entire proposed assessment during this conference. At this conference you may elect to bring your client’s W-2s and 1099s to show compliance with both CUIC Section 13052.5 and IRS 1041(A).