We have talked about how tax liens are handled by the Franchise Tax Board and the Board of Equalization in past blog posts. Now we would like to take up the final taxing authority you deal with as a business owner in the state of California: the Employment Development Department, or EDD.
First, here is a definition of what this agency is responsible for.
Defining the Employment Development Department
The Employment Development Department (EDD) is the largest tax agency in California and the largest state department. It is responsible for administering and collecting payroll tax, unemployment, and state disability insurance for California employees. The collection offices are often based locally and contact customers, vendors, and other third parties.
What can it do? The EDD can levy bank accounts, redirect incoming accounts receivables, file liens, and seize assets.
What Is the Difference Between EDD Liens and Other Tax Liens?
All taxing agencies, from the IRS to the Franchise Tax Board can issue tax liens. However, the EDD will accept payment in cash, which the other agencies will not do. That’s a big plus for business owners.
On the minus side, the EDD also files a state lien in every instance of an approved installment agreement with the agency. Any refunds you are to receive from any other state agency will automatically be applied to your unpaid payroll taxes. Furthermore, the EDD has the right to place a lien on any employer who does not submit required payroll taxes. However, it cannot issue a lien for non-payment of income tax or sales tax.
What Are the Liens Against?
The EDD places liens against:
“…all property rights and rights to property whether real or personal, tangible or intangible, including all subsequent acquired property and rights to property belonging to the taxpayer.”
In other words, pretty much anything and everything you own. The EDD can issue a Notice of Levy on credits or personal property of any delinquent account, active or inactive.
The EDD’s Lien Process
First, the EDD sends out Employer Account Statements when employers owe past due payroll tax or do not submit quarterly or annual reports when they are due. Then, if the employer does not file and pay liabilities, he or she become subject to a state tax lien.
The lien encumbers all property; not just your business or bank accounts but so-called intangible property, meaning property with no physical existence. This includes:
- Patents and patent applications
- Notes and other debt instruments
- Lease agreements
- Other instruments of property ownership
You will be unable to sell or otherwise dispose of any property for funds to pay your past due taxes.
How to Deal with the Situation
The absolute first thing to do is to contact the EDD at once if you cannot pay the liability in full. Then begin looking into obtaining a commercial loan or other means to pay the tax debt, before the EDD issues a lien.
The California Unemployment Insurance Code does not provide for installment payment agreements. However, if you can show that immediate and full payment of payroll taxes would create a financial hardship and there is no other method of payment available, you can request an installment agreement with the EDD.
A hearing officer will determine if any withholding order should be upheld, modified, or released.
Payment can be made using cash, Cashier’s checks, or money orders. Be aware that if you fail to adhere to all terms of an installment agreement and do not submit all future returns and payments on time, collection actions can and will be initiated immediately. There is no waiting period.
The installment agreement may also be canceled if the EDD discovers you withheld pertinent information.
Disputing a Lien
If you wish to dispute the lien, you must speak with an EDD representative, a supervisor, and an office manager before you can appeal actions to the California Unemployment Insurance Appeals Board (CUIAB). If you do not speak with each of these individuals, the CUIAB will not listen to an appeal.
Prepare to dig out tons of documentation. EDD requests often include years or specific periods where the workers in question were not employed with the company. If you did not keep good records, you are unlikely to be able to prove your case.
The EDD has the authority to levy significant liabilities, which can cripple a business or drive it into insolvency. It has very aggressive deadlines and can issue levies on most financial institutions.
Consequences of Non-Payment
What can happen if you do not pay? The EDD will file liens and seize any property or money it can find belonging to you. The EDD can:
- File liens against real or personal property
- Issue a Notice of Levy to financial institutions and/or other parties
- Issue warrants to seize and sell business or personal assets, except for your primary residence
- Issue Earnings Withholding Orders for Taxes
- File criminal charges
- Redirect accounts receivable
Anything except for your primary residence can be used to enforce or fulfill payment of past-due taxes, interest, and penalties.
Release of Lien
Here is how you can get the Employment Development Department to release any liens it has against your property.
- You can pay in full: Once you have done so, put together a demand for release in writing and send it by mail or fax to the EDD in Sacramento, CA. You must include the name, address, phone number, employer account number, lien certificate number, and whether the response should be mailed or faxed back to you.
- You can request a partial release: A partial release will require the escrow company to make payment on the lien with certified funds after it notifies the EDD in writing or via fax of a demand for a release of lien on the property under consideration.
- You can request relief: If an account is both inactive and out of business, an Offer in Compromise may be granted. After all, there is nothing left there to collect.
The IRS, Board of Equalization, Franchise Tax Board, and the Employee Development Department are all authorized to issue a lien against various types of property to enforce payment of past-due taxes. Although each agency has slightly different processes, requirements, and restrictions, most activities you can undertake to dispute a lien or request its release are fairly similar.
Something else that is similar is the incredible stress you are under as you try to resolve the issue. In our next post, we will wrap up our discussion of tax liens with how an experienced and knowledgeable tax attorney can take some of that stress away.