A major incentive to forming a corporation or LLC is that it will shield the individual owners and members from being personally liable for debts that the corporation or LLC incurs. Though this is correct in most cases, especially in the case of a lawsuit against the corporation or LLC, when it comes to a payroll tax debt, being held personally responsible is a real possibility. In this blog we will discuss the personal assessment of a payroll tax debt by the Employment Development Department (EDD), how it differs from the IRS process, and some important information to potentially protect yourself.
If you’re unfamiliar with the IRS process of assessing Trust Fund Recovery Penalties (TFRPs), you may want to start by reading our blog Trust Fund Recovery Penalties And How You Can Be Personally Liable.
The personal assessment of payroll tax debt comes from the trust fund portion of the payroll taxes. The “trust fund taxes” are comprised of income tax and Social Security/Medicare tax, which the employer is required to withhold from it’s employees and pay over to the IRS and state.
The second similarity is who can be held personally responsible. The people who may be held personally liable for these “trust fund taxes” are those that are deemed to be a responsible person, which generally includes decision makers in the business (officers, managers, etc.). The rules regarding IRS and EDD assessment of TFRPs can be found in Internal Revenue Code (“IRC”) § 6672 and CA Unemployment Insurance Code (“CUIC”) § 1735.
The EDD assessment and collection process of a payroll tax debt to an individual can be much more aggressive than the IRS. The reason for this is that several differences exist between the EDD and IRS assessment and collection process.
The first major difference is that while the IRS is only able to assess a responsible person for the trust fund portion of the payroll taxes, the EDD can assess 100% of the tax due to anyone deemed a responsible person. This means that there is no personal protection offered by a corporation or LLC when it comes to a payroll tax debt and the EDD.
The second difference, and a very important one to be aware of, is that the investigation done by the EDD Collections Unit to determine who is a responsible person is very limited. This is drastically different from the IRS’s process where a Revenue Officer (RO) does a fairly thorough investigation into who can be assessed. Because of this, if you have been personally assessed a payroll tax liability by the EDD, there is a good chance that they did so without investigating whether you are in fact a responsible person. In most cases a Notice of Assessment is simply issued and the collection process begins.
The third difference and probably the most important (especially if you have already received the Notice of Assessment) is that there is no collection due process for the EDD. This means that once the assessment has taken place it is open season for collecting the debt from you; bank accounts or wage garnishments can be issued and enforced without warning.
How You May Be Able To Protect Yourself
Being personally assessed for a payroll tax debt can be very stressful but, there are ways to potentially protect yourself before and after the assessment.
You’ll first want to make yourself familiar with the statute of limitations the EDD has to assess someone personally for a payroll tax debt. According to CUIC § 1132, the assessment made by the EDD must occur “within three years after the last day of the month following the close of the calendar quarter during which the contribution liability included in the assessment accrued or within three years after the deficient return or report is filed, or was due, whichever period expires later.”
This statute of limitations can be extended to eight years without good cause for failing to file or report.
If the EDD has made an assessment after the statute of limitations has expired and taken collection action against you, you may have a case.
You also have the ability to appeal the assessment decision. Once you have received the Notice of Assessment (not to be confused with the Notice of Proposed Assessment), you can file a petition with the California Unemployment Appeals Board and the EDD audit office. It is important to note that your petition must be filed within 30 days of receiving the Notice of Assessment and that you must attach a copy of the notice to the petition.
Coming to an agreement for paying the payroll tax liability at the corporate level may prevent the personal assessment process from occurring. If you are to try and settle the payroll tax issue at the corporate level, the amount of time it takes for this process to be completed may actually use up a good portion of the statute of limitations time frame for personal assessment.
Whether it’s the IRS or the EDD looking to assess you personally for a payroll tax debt incurred by a corporation or LLC, it is important to understand why they are looking to make the assessment and the importance of having legal representation. Payroll tax issues can be very complex and the timing for personally assessing someone usually does not occur right away. In the case of the EDD assessing someone personally, it may even be more crucial to hire legal representation given the less stringent investigation process they go through for determining responsible persons and the lack of collection due process.