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Great News for California Business Taxpayers: EDD Amends Burdensome Penalty for "Failure to File Worker Information Returns"

Since 1990, the California Employment Development Department (EDD) has retained the statutory authority to issue penalties for failure to file Forms W-2 and/or 1099. Until this year, effective January 1, 2018, taxpayers assessed the steepest of those penalties, Unemployment Insurance Code section 13052.5, did not have a right to petition the assessment. However, since enactment of Assembly Bill 1695 on July 24, 2017, and effective January 1, 2018, Section 13052.5 is now petitionable before the California Unemployment Insurance Appeals Board.

This is very good news for California business taxpayers. Prior to Assembly Bill 1695, the EDD could assess at approximately 11% to 12% any "unreported wages" for which it had determined a corresponding a W-2 or 1099 was not issued. Following such an assessment, the penalty became immediately due and collectible, even if a timely petition had been filed. (Normally, petitioned amounts are held in abeyance pending judicial determination.)

Originally conceived by the legislature to combat unreported cash payments in the underground economy, this penalty had become a significant problem for California businesses who underwent an EDD audit. The EDD auditors, in many instances, were assessing payments that had never been intended by the taxpayer to be wages and applying Section 13052.5 penalties to those "unreported wage" assessments. Often, these penalty assessments ran higher than the taxes and other penalties. To make matters worse, these penalties were immediately due and collectible, even when the underlying basis was under petition.

Now, the taxpayer can dispute the entire EDD assessment before the California Unemployment Insurance Appeals Board, and if they choose, can engage the EDD in settlement negotiations on the entire amount. Previously, Section 13052.5 penalties were not adjustable through EDD's statutory settlements program.

If you would like to dispute an EDD assessment of your business, contact one of our attorneys today.

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