As a business owner, you are responsible for paying payroll taxes and filing periodic reports in accordance with your obligations. If you do not do so, you risk having a lien recorded against your property by the EDD. The details of tax liens are confusing to many people, but it’s important to understand what a lien is, why they are issued, and what your options are to avoid or discharge the lien.
The Employment Development Department (EDD) is one of the largest state departments in California. Among its broad range of responsibilities is the job of collecting employment related taxes, including unemployment, disability and payroll tax. It also has enforcement powers which allow it to investigate and pursue payment from businesses when it believes that those taxes are being avoided by employers.
If taxes are owed or quarterly statements are not submitted, the EDD sends out an Employer Account Statement setting out the liability and requiring that the oversight be rectified. If you do not file and pay the liability in a timely manner, the EDD can record a State Tax Lien.
The EDD differs from other state organizations in its process. The Franchise Tax Board, for example, may serve a notice requesting a return or payment for taxes, and the Board of Equalization serves Demands for Tax Payments; these carry different obligations from an EDD lien.
A lien is an enforceable document which allows the department to record an interest over both the real and personal property of the debtor in the amount of the unpaid taxes plus any penalties and fines that have accrued to the debt. It does not allow the EDD to seize assets, but acts like a recorded mortgage: the EDD has rights to that property that come before other interests. This means that the taxpayer cannot, for example, sell their house or their car unless the lien is paid in full.
The existence of the lien is a matter of public record, can be viewed by anyone and can seriously affect your personal credit rating. Although the EDD does not directly provide lien information to credit reporting agencies, the information is discoverable with a county search.
The amount of a lien is not adjusted, so if you make a part payment to reduce your liability, the lien amount will stay the same as the whole payment. The lien also continues to exist even if you file for bankruptcy.
A tax liability owed to the EDD differs from your liability to the IRS. It may accrue if you have not paid payroll taxes, or if you have failed to submit a quarterly or annual report on time. If you are deemed to be an employer but did not pay wages in a particular quarter, you must still submit a quarterly report.
If you are paying workers “under the table” in order to avoid paying payroll taxes, you may be investigated for fraud. The EDD is empowered to audit companies suspected of, or reported for, payroll tax fraud.
Penalties include the amount of unpaid payroll tax as well as fines and interest charges and that money can be recovered in the same way as a normal tax liability.
If there is an unpaid liability, the EDD will first send you an Employer Account Statement listing the past due amount and requesting payment in full. If you believe that the amount is wrong, or if you are unable to pay in full, it is important that you contact the EDD as soon as possible to request a revision or a payment plan. If the EDD do not hear from you and the amount isn’t satisfied, their next step is to record a Notice of State Tax Lien.
A copy of the Notice of State Tax Lien is mailed to your registered address and states that the amount of the unpaid tax is a lien on both real and personal property, including subsequently-acquired property, belonging to the taxpayer. A tax lien will remain on your credit record indefinitely until the liability is paid in full and formally removed.
Once removed, the record of the paid lien will remain for an additional seven years. As the lien is detrimental to your credit rating, it is in your best interests to pay the amount and obtain the release even if you are not seeking to sell the property over which the lien is held.
When the EDD receives confirmation that liability has been paid in full, they will mail a Release of Lien to the County Recorder office within 40 days. No record is sent directly to the taxpayer unless one is requested. You may request that a Status of Lien Release notice be sent to you; this will be at your own cost and the money collected in the same manner as the tax.
If you are selling or refinancing real estate, your escrow company will need to pay the lien with certified funds (cash, cashier’s check or money order) and the EDD must be notified in writing or via fax with a demand for a release of the lien. The release must be obtained before the property can change hands.
As with all things that relate to your taxes, prevention is better than cure. Knowing your obligations as an employer and paying your payroll taxes correctly and on time will prevent you from having to deal with the lien process. If you do receive a notice of liability from the EDD, it is essential to deal with it as a priority.
A tax attorney can help you determine whether the notice is correct and if you are obligated to pay the amount; he or she can also advocate on your behalf for a suspension of obligation or a partial payment plan if you are unable to pay. If you don’t take any action, a lien will be recorded and your credit rating affected. The long-ranging consequences of avoiding your tax obligations can be devastating for your business and your personal financial future.
If you are ever worried about your compliance with the EDD or any other tax authority, a consultation with a qualified tax attorney can offer you real peace of mind.
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