If an 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 if the 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 agreements may be accepted by the EDD during the 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.
To learn more about taxes and the California Employment Development Department, read the Ultimate Guide to the Employment Development Department (EDD) Collections.