There are certain types of people that will go to great lengths to save money. I’m not talking about eating a strict diet of ramen noodles and taking the bus when you could afford to drive – I’m talking about tax avoidance.
There is a clear line between saving money and breaking the law, and it is not just “the little people,” who are expected to pay their taxes.
It is not just income earned legally that is taxable, either. In fact The word “lawful” was removed from the 16th Amendment in 1916, making income earned through illegal activities also subject to tax. Of course, business owners must pay their employment taxes too.
Tax avoidance comes with tough consequences. The easiest way to avoid most of them (such as going to jail) is to pay the government back. If you are short on funds, one way that this can be accomplished is with an offer in compromise.
The California Employment Development Department (EDD), like the 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 the business is still active and operative, then the taxpayer may apply if they no longer hold controlling interest or are 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 the EDD. An applicant must not have access to income sufficient to pay more than the accumulating interest and 6.7 percent 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 percent
Liability of $5,000 x 6.7 percent
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 the 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 the 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/. Applicants can also download the form on the EDD website at https://edd.ca.gov/Payroll_Taxes/Forms_and_Publications.htm
To fill out the form, the applicant will need a Social Security number and the EDD number. The applicant will need to provide a reasonable offer and explain why the offer should be accepted by the EDD.
Additionally, the form requires full financial disclosure, including information about community property. The application must be accompanied by cash, a cashier’s check or money order equal to the amount offered.
If the applicant cannot pay the full amount at the time of offer, the EDD may permit the taxpayer to pay the agreed amount in installments within no more than five-year period.
When the applicant submits payment with the 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.
If the Offer in Compromise is Accepted or Rescinded
Once the applicant-taxpayer satisfies the compromise agreement, the EDD will notify them 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.
The EDD then will provide the taxpayer with a copy of the statement on file and the statement will be retained by the EDD for one year from the date of the issuance.
Submission of an offer per se does not automatically suspend collection action on a liability. Should there be any indication that the 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, the applicant may receive a refund or have the funds applied to the agreed amount.
Please note that the EDD may review compromise records once a year during the annual audit. Also, it is important to keep in mind that offer in compromise may be subsequently rescinded (canceled) by the EDD if the applicant:
- 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;
- Received, withheld, destroyed, mutilated, or falsified any books, document or record;
- Made any false statement relating to the estate or financial conditions of the individual liable with respect to the employment tax, and
- 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.
If you need assistance filing an offer in compromise with the California EDD or any other tax matter, give Brotman Law a call. We know California and federal tax law better than most attorneys, CPAs and CFOs. A one-hour consultation with my firm could save you a lot of uneasy days and a ton of cash.