Source: https://www.robertschriebman.net/Articles/ASK-THE-CALIFORNIA-EMPLOYMENT-TAX-AND-PAYROLL-TAX-ATTORNEY-IS-IT-POSSIBLE-TO-OBTAIN-INNOCENT-SPOUSE-RELIEF-IN-AN-EDD-CUIC-SECTION-1735-ASSESSMENT-PART-1.shtml
Timestamp: 2019-04-22 14:07:04+00:00

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In this 2-part series of articles, I almost feel like a member of the crew of Star Trek as I may be going, "Where no man has gone before." This series of articles will attempt to provide a framework for effectively obtaining innocent spouse relief when the EDD pierces the corporate or LLC veil and issues an assessment against the so-called responsible person individually. Before getting into specifics, allow me to discuss the basics of CUIC § 1735 as well as that of general innocent spouse relief.
There are several articles on this website that go into great detail about CUIC § 1735. But for now it is important that you understand that the EDD does have the right to go after those individuals who own and operate corporations and LLCs. EDD auditors are not particularly concerned about issuing these 1735 assessments. A portion of the audit report requires the auditor to give his/her opinion on whom should be personally assessed if and when the corporation or LLC is no longer in business or unable to pay the corporate/LLC level assessment due to the lack of cash flow or insufficient assets for purposes of seizure. The assessment against the responsible individual is dollar for dollar and dime for dime - exactly what the entity owes plus accruing interest.
A CUIC § 1735 assessment is a true "100% penalty" compared to the IRS version of the Trust Fund Recovery Penalty (TFRP) at only about 60% maximum of the underlining entity assessment. With the IRS you have the "Trust Fund" and "Non-Trust Fund" portions. The individual is not personally liable for the entity non trust fund portion. Nor is the individual personally liable for 940 FUTA assessments. Accrued interest on the TFRP does not begin to run unless and until the individual assessment is made and recorded on the IRS books.
So you see, relatively speaking, that while the EDD payroll tax assessment is usually smaller than the IRS counterpart, percentage wise, the EDD version is much harsher.
I am often asked by clients who have been assessed personally under CUIC § 1735, if it possible to get out of the assessment by arguing that he/she is an innocent spouse. The legal answer is "NO!" Why? Innocent spouse rules cannot be used in EDD matters because these rules, both the IRS and FTB versions, only apply to income tax deficiencies. They do not apply, and cannot be used, as a defense to employment tax exposure.
In this series of articles, I will attempt to show that while the letter of the law regarding innocent spouse relief cannot be used against the EDD, the spirit of innocent spouse relief may be available. This will be shown in Part 2.
CUIC § 1735 assessments, on the other hand, are made not by EDD auditors, but by the assigned EDD collector. Collectors usually have a large case load and do not have either the time or the opportunity to be thorough and accurate. Accordingly, the collector will take the quickest and easiest approach because it is both time and cost effective. The EDD may send out one or two letters to targeted individuals informing them that they are indeed the target of a potential 1735 assessment. The letter asks that the individual so called responsible person to contact the collector to discuss the matter. This is a trap for the unwary! Many people, who do not respond to these contact letters, never get assessed and the collector is too busy or overworked to chase them. Along with the contact letter will usually be a document entitled, "Corporate Questionnaire." Those who complete and sign the questionnaire have signed, in reality, a confession of guilt. Just try defending yourself in a judge hearing and have the EDD introduce in evidence your signed confession.
Again, most selected targets receiving these letters and questionnaire; but not responding, rarely get personally assessed. Having said this, there is nothing to stop the collector from issuing the assessment even when the target does not respond - it's all quite random.
In this Part 1, I discussed the background and the mechanics of assessing the CUIC § 1735 assessment. We also learned that a targeted spouse cannot legally apply IRS and FTB innocent spouse rules to avoid these assessments because these rules of relief do not apply to employment taxes. In Part 2, we will learn that what we cannot do directly, we may do indirectly and provide a realistic innocent spouse defense to EDD employment tax assessments.

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