Sam Brotman, JD, LLM, MBA July 2, 2020 22 min read

EDD Collections Resolutions

California Employment Development Department Installment Agreement

            Under California law, taxpayers have a legal obligation to report and pay contributions  and withholdings when due. If a taxpayer becomes delinquent in  the payment of amounts due, the Employment Development  Department (EDD) will take appropriate action to collect the full  amount immediately. The EDD recognizes that sometimes it is in the best interest of the state and in the interest of a California taxpayer that EDD allows an installment agreement to liquidate over a period of time an amount owed by taxpayer.

            A taxpayer can request installment agreement by phone, by letter or by completing an filing and Installment Agreement Request (DE 927B). Taxpayers must note that installment agreement will not prevent a Notice of State Tax Lien from being filed and that EDD will continue to offset any State agency and federal tax refunds during the payment period. That means that EDD may still take away your potential state or federal tax refund as a payment toward employment tax owed. Any payment from these sources will be really additional payments on top of the payments taxpayer already makes according to installment agreement.

            Installment agreements can be long-term or short-term. A short-term installment agreement may be established during initial contact by EDD if the tax liability is less than $25,000 for an active business or $10,000 for inactive. The taxpayer must indicate verbally during conversation with EDD representative or in writing to EDD that he or she will pay the amount owed to EDD within one year (or 18 months for an audit assessment). EDD staff or their supervisors have the authority to approve short-term installment agreements without engaging into any complicated process. However, installment agreement will not be approved for taxpayers with a history of multiple delinquencies and in cases involving fraud by taxpayer. It is important to keep in mind that the start date for short-term agreement will be no more than 10 working days after a verbal agreement is established during conversation with EDD staff member.

            EDD will establish long-term installment agreement only when a taxpayer is unable to pay the balance due within the time allocated and the amount to be paid by taxpayer is higher than limits for short-term agreement (over $25,000 for an active business and over $10,000 for inactive). Naturally, EDD has higher requirements for long-term agreements than for short-term. To apply for a long-term agreement, a taxpayer will need to submit a written request in which he or she must explain how the tax liability was established, what action has been taken by taxpayer to resolve the liability, how taxpayer plans to keep current on future financial obligations to EDD (this applies only to EDD accounts which are active). Taxpayer must submit financial information on business and on personal assets. For that purpose he or she generally must use a Financial Statement (DE 926B), used for individuals, or Financial Statement for Businesses (DE 926C) for employer who is a business entity. If instead of filling out these forms taxpayer submits own financial statement, EDD will accept it, as long as information in taxpayer's own statement is sufficient to cover everything what is asked for in two mentioned EDD forms.  In addition, a taxpayer must include what is called a good faith payment.

            If entity which enters into long-term agreement is a corporation, LLC or an LLP,  and the remaining balance is more than $10,000 of overall assessable tax liability amount, a form DE 204 must be filed. DE 204 establishes liability of corporate responsible persons in regards to assessed tax liability of the corporation. In any case, EDD will also require written explanation of how the liability was created. EDD also will require financial statements, personal or business, with documentation regarding financial status such as loan denials, tax returns, bank statements, accountant’s financial reports, etc. EDD may require additional supporting documentation regarding financial statement entries. Long-term agreement must be approved by EDD's lead senior tax compliance representative or tax compliance supervisor.

            Sometimes the tax liability (the amount of tax owed), is a result of an audit assessment by EDD and taxpayer is unable to pay full amount owed. In such cases EDD may allow up to 18 months to pay in full with a short-term installment agreement. Even is taxpayer is already in some kind of agreement with EDD, terms of that agreement can be renegotiated. However, EDD looks separately at audit assessment amount and account balance amount. The audit portion of the tax liability can be paid in installments for up to 18 months, and any other amounts (account balance) must follow regular guidelines for short-term (up to 12 monthly payments) and long-term agreements (longer than 12 months).  Short-term agreements may  be negotiated by the auditor as part of their audit but it must be approved by a supervisor. When other liabilities exist or the taxpayer requests a long-term agreement, the  auditor will refer the taxpayer to the compliance representative  assigned to the collection case.

            Do not forget that installment agreement may be accepted by EDD during telephone call. Then agreement will be finalized and a form DE 927 will be sent by EDD to taxpayer for signature. Taxpayer then has to make a first payment and sign DE 927. The amount to be repaid under installment agreement includes not only the balance owed, but also penalties. 

            After an installment agreement is accepted, EDD will notify the taxpayer about approval and should let him or her know about following conditions:

  • All future deposits and reports are to be filed and paid timely to EDD
  • A Notice of State Tax Lien will be filed on all unpaid liabilities
  • EDD will take immediate involuntary collection action if the agreement is not kept, or an unreported improvement in financial condition is discovered
  • EDD will continue to offset any State agency and federal tax refunds
  • A new financial statement must be provided after 12 months
  • The taxpayer must immediately notify the EDD representative when a significant improvement or deterioration in their financial circumstances occurs.

            If EDD denies installment agreement, it must contact the taxpayer and explain the denial. If taxpayer defaults on payments under the installment agreement, then EDD can go ahead and resume collection efforts. EDD considers following events as a default by taxpayer:

  • The taxpayer fails to send the payment
  • The payment is not timely
  • The payment is less than the amount agreed upon
  • A check is returned by the bank for non-payment
  • An active taxpayer fails to file required tax forms on a timely basis without just cause
  • An active taxpayer fails to submit a timely Payroll Tax Deposit DE 88 (DE 88)
  • An active taxpayer fails to submit an Interim Contribution Return (DE 2858) when specifically required as a condition of the agreement
  • The taxpayer provided false, inaccurate, or incomplete information
  • Taxpayer fails to inform EDD that their financial position has improved. If the taxpayer voluntarily provides updated financial information, the terms of the agreement may be simply renegotiated
  • A taxpayer fails to pay current taxes by the due date, incurring additional liability after the agreement is negotiated

            Please note that if EDD finds that you have resources to pay the liability, then you generally must make arrangements to pay the entire amount owed within 30 days. The EDD will ask the following questions to determine whether you can pay everything at once without installment agreement: Do you have sufficient money of your own to pay this liability? Can you borrow the money from other sources to pay the liability? Are there other resources available to pay the liability which will not force the closure of your business? If answer to at least one of these questions is “yes”, then EDD will require that you must make arrangements to pay the entire amount within 30 days.

California Employment Development Department's Offer in Compromise Program

            California Employment Development Department (EDD), like FTB, offers its own Offer in Compromise Program. Article 8, Sections 1870-1875 of the California  Unemployment Insurance Code (CUIC) governs the  EDD's Offer  in Compromise program. This law permits the EDD  to receive applications for Offers in Compromise that  may enable a qualified tax debtor to eliminate an  employment tax liability at less than full value.

            A business must be inactive and inoperative to qualify for EDD's Offer in Compromise. An owner, partner or an individual assessed under Section 1735 of the CUIC may apply for offer in compromise. If business is still active and operative, then taxpayer may apply if he or she no longer holds controlling interest or is not associated with the business that incurred the liability.

            Only non-disputed, final tax liabilities will be considered for compromise. Liabilities currently under  petition or bankruptcy will not be considered by EDD. An applicant must not have access to income sufficient to pay more than the accumulating interest and 6.7% of the outstanding liability annually. Here is example provided by EDD, based on a liability of  $5,000, which is provided as a guideline only:

Liability of $5,000  

    Annual Interest* x 7%

 

$350.00

Liability of $5,000   x 6.7%

 

 

$335.00

 

Total    $685

 

            Based on this example, the applicant must NOT have access to annual income sufficient to pay

more than $685 annually or $57 per month. The applicant must not have prospects of increased income or assets which allow payment within a reasonable period and must not have assets which, if sold, would satisfy the liability. The amount offered by applicant must be more than what the EDD  could expect to collect through involuntary means within four years of the time the offer is made. Offer in Compromise can not be obtained for liabilities assessed for fraud (Section 1128 of the CUIC) or where the employer has been convicted of a violation of  the CUIC.                  

            The Offer in Compromise Application (DE 999A) can be obtained by visiting local Employment Tax Office listed in the California Employer’s Guide (DE 44) and on the EDD website at

www.edd.ca.gov/Office_Locator/. Applicant can also  download the form on the EDD website at

www.edd.ca.gov/Payroll_Taxes/Forms_ and_Publications.htm.      

            To fill out the form applicant will need social security number and EDD number.   Applicant will need to provide reasonable offer and explain why offer should be accepted by EDD. Additionally, the form requires full financial disclosure, including information about community property.  The application must be accompanied by cash, cashiers check or money order equal to amount offered. If applicant cannot pay the full amount at the time of offer, EDD may permit to pay the agreed amount in

installments within no more than five-year period. When applicant submits payment with application, in the event an offer is not accepted, the amount will either be applied to the liability or refunded, at the discretion of the applicant submitting the offer. A determination by the EDD that it would not be in the best interest of the State to accept partial payment in satisfaction of a tax liability will not be subject to administrative appeal or judicial review. A separate application must be submitted for each EDD account to be compromised.

            Once applicant-taxpayer satisfies the compromise agreement, EDD will notify him or her, in writing, that the terms of the compromise agreement have been fulfilled and all liens filed or recorded, or both, against the individual’s interests have been released. EDD then will provide the taxpayer with a copy of the statement on file and the statement will be retained bny EDD for one year from the date of the issuance.

            Once the terms of the compromise agreement are fulfilled, including payment of the amount offered, the liability will be considered satisfied in full and all tax liens filed or recorded, or both, will be released. Submission of an offer per se does not automatically suspend collection action on a liability. Should there be any indication that applicant filed the offer only for the purpose of delaying collection or that application will negatively impact EDD's ability to collect the tax, collection efforts will continue. If the EDD has previously agreed to an installment plan, those payments must continue. Should collection action occur after an acceptance of an Offer in Compromise by the EDD, applicant may receive a refund or have the funds applied to the agreed amount.

            Please note that EDD may review compromise records once a year during annual audit. Also it is important to keep in mind that offer in compromise may be subsequently rescinded (canceled) by the EDD if applicant:

  1. Concealed from any officer or employee of the EDD (and of the State in general) any property belonging to the estate of the individual liable with respect to the tax.
  2. Received, withheld, destroyed, mutilated, or falsified any books, document, or record.
  3. Made any false statement relating to the estate or financial conditions of the individual liable with respect to the employment tax.
  4. Failed to pay any tax liability owed the EDD for any subsequent, active business in which the

individual who previously submitted the offer in compromise has a controlling interest or association.

            The EDD will notify the individual who previously submitted the Offer in Compromise in

writing of the rescission of any offer, reasons for rescission, and the amount of liability that is due and payable.             

                                   

                                                           

 

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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