Many of my clients know that California’s Employment Development Department has a well-earned reputation for being a hard-nosed tax agency, much worse than the IRS.  This agency collects California’s State payroll taxes (consisting of the state income, disability, employment training and unemployment insurance taxes). As with any tax authority, the EDD has the right to levy on the contractor’s accounts. However, tax authorities usually ask nicely for payment first. Everyone benefits if both parties can get an installment agreement in place.

Account Levied With Only One Notice

My client is a contractor who owes about $100,000 in unpaid payroll taxes. The EDD recently sent him a collection notice letter.  It said levying on his account was one of many options it could exercise.  The money was due immediately, but the letter gave no other or specific deadline.  Two weeks later, and with no further warning, the EDD took funds from his business’ payroll account without any additional warning.  He couldn’t make payroll as a result.  I was able to get the EDD to return enough money so that my client could pay his workers.  The EDD said we could work out an install agreement that would allow my client to continue his business.  However, the EDD has ignored my calls and faxes, and continues to levy on my clients account.  Is this a deliberate form of punishment?  If so, who does it benefit?  It jeopardizes my client’s businesses viability which, in turn, threatens his ability to repay the state.  Or, is this the result of EDD staff incompetence?

Contrast With IRS Process

When the IRS intends to levy on a taxpayers account, it is required by federal law to send four notices by first-class mail and a fifth and final notice by certified mail.  After the final notice, it must wait 30-days before levying, during which time the taxpayer can file a Collection Due Process hearing request, which automatically stops the levy until after the taxpayer has had their objection heard.

EDD “Process” Is Hit-or-Miss

An IRS-like process is not available to my client in his problems with the EDD.  Neither myself nor my client disagree that he owes back payroll taxes to the EDD.  The EDD views unpaid payroll taxes as an unindicted crime, because the employer is taking the employee’s tax money to fund its own operations. The EDD has the right to enforce the law so strictly that the taxpayer is shut down.  But most EDD and IRS staff understand that no one benefits if the taxpayer cannot own up to the mistake, make amends, and try to continue functioning as an ongoing business. That means keeping current and sticking to a plan to pay the back taxes. If the agency can’t respond to offers to do just that, then it needs more staff, or better staff.

I try to make the government’s job as easy as possible, by giving it everything it could want to grant favor to my client. I still don’t know what else I can do to get the EDD to behave more reasonably, and let my client get on with his business so that he can repay them.

Of course, the biggest take-away for any potential clients is to not to get into this situation in the first place.  Because the EDD is so unpredictable and sometimes draconian in its collection efforts, it is never a good idea to defer payroll tax deposits in order to keep a business afloat.  Yup, I’m telling you to shutter your business if you can’t pay payroll tax, rather than stay open.  Believe me, you don’t want to go through what this client is currently facing.

November 22, 2019

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