ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – COVID-19 ECONOMIC WOES AND PERSONAL EXPOSURE TO UNPAID EDD CORPORATE LEVEL PAYROLL TAXES
By Robert S. Schriebman
No one needs to be lectured on the harsh economic realities brought about by the COIVD-19 pandemic. The new economy is going to cause significant problems for small and medium size businesses when it comes to payroll tax compliance. This is perhaps why both the White House and the IRS have partnered on the deferral on employment tax deposits and payments through December 31, 2020. For further information you can read the IRS’ press release 2020ARD 15-2 published on August 3, 2020. While a deferral will be helpful, there will be plenty of companies unable to meet this extended deadline and will not be in payroll tax compliance as we go into 2021. Corporate and LLC non-compliance and payroll tax deficiencies are certainly going to expose company officers and others to personal liability for the non-payment of these payroll taxes.
One of the elements of personal liability is willfulness. Both the IRS and the EDD have the burden of identifying those persons responsible but in addition to responsibility the government must prove that the non-compliance was willful. Will those persons charged with individual liability be able to blame the downturn in business brought about by the COVID-19 pandemic with and the resulting economic depression or recession it has generated?
An issue that is also tandem to that of willfulness, is whether an economic downturn will constitute grounds for the abatement of interest that accrues on most personal level assessments. The interest accrues at the corporate or LLC level and is socked-to the responsible individual as well. While IRS payroll tax compliance has been deferred, EDD compliance has not. EDD collectors and auditors have been furloughed and away from their desks for many months causing delays in the issuance if assessments. However, interest accrual has not been deferred.
The recent case of Robert Victor Mirolla, decided by the Office of Tax Appeals (OTA), may be a watershed case that will instruct the EDD and CUIAB judges of the viability of the economic downturn defense when it comes to the issue of willfulness.
The Mirolla Case
Mirolla owned and operated ALA Corporation. He began doing business in 1968 but ran into financial problems in 2010 as a result of the 2008 recession. His company filed for Chapter 11. It did not survive, and the company had to file Chapter 7 a few months later. Mirolla fell behind in the company’s payment of sales taxes collected but not remitted to the then SBE (now CDTFA). In the meantime, he paid his employees as well as rent, utilities, etc. He ran up deficiencies in taxes of over $482,000 plus interest and late payment penalties over $71,000. The CDTFA charged Mirolla personally with corporate level sales tax deficiencies. He admitted being the president of ALA and the responsible officer for sales tax compliance. This was his first mistake. However, he defended himself stating that his actions were not willful and his non-compliance was primarily due to the downturn in the economy.
The government, whether the IRS or the EDD, has the burden of proving both the issues of responsibility and willfulness. Mr. Mirolla admitted responsibility as the president and CEO of ALA. He did not admit that his actions were willful.
Traditionally, there are three elements for proving willfulness:
- The first requirement for willfulness is knowledge.
- The second requirement for willfulness is that the individual had the authority to pay the taxes or caused them to be paid.
- The third requirement for willfulness is the ability to pay the tax when due, but the responsible person chooses to use those funds to pay other creditors instead of timely remitting the taxes to the government.
Mirolla argued that the letter and spirit of the law, relating to the element of willfulness, means exhibiting a blatant disregard for the law and an evil intention to avoid the payment of taxes. Judge Jeffrey Angeja shot him down. The failure may be willful even if it was not done with a bad purpose of motive.
To establish that the element of willfulness was met, Judge Angeja stated that as president and CEO Mirolla met the first requirement of knowledge and the second requirement that he had the authority to pay the taxes or cause them to be paid. Further, the fact that Mirolla collected sales tax and then paid his employees, rent, utilities and other creditors, established all of the elements of willfulness.
Mirolla’s next argument was that ALA was the victim of a severe downturn in the economy and that the company did everything in its power to pay the taxes and keep the business alive. Again, Judge Angeja disregarded the argument. An economic downturn does not represent reasonable cause to give Mirolla a pass. ALA collected sales tax from its customers and used those funds to pay creditors other than the timely remittance of sales tax. (See also Ashlan Park Center LLC v. Crow (2015) 233 Cal.App.4th 1274.)
Whether Relief of Interest Is Warranted
Accruing interest is mandatory on all tax assessments including assessment by the EDD. There are laws providing for the relief or abatement of interest, but under very rare and limited circumstances. Examples include occurrence of a disaster, or unreasonable error or delay on the part of the government. Mirolla argued that it took over six years for him to have his day in court. He felt that was unreasonable, but his argument was not successful. Judge Angeja stated that a six- year timetable was not a significant delay in due process. There is a maxim in law that justice delayed is justice denied.
In my opinion, Judge Angeja’s decision in the Mirolla case was harsh. We are in the middle of terrible economic times and these times are going to negatively impact many businesses, large and small. It seems that the element of compassion is nowhere to be found in the OTA’s decision making process.
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. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
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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