If you own a business in California, you have an obligation to set aside and pay state and federal payroll taxes. If you fail to pay the required payroll taxes, you run the risk that the state of California will place a lien against your business’ assets. Should this happen to you, it is important to know exactly what a lien is, how and why they are used, and what you can do to have the lien released or avoid having one placed against your business in the first place.
The California Employment Development Department (EDD), is the state agency that is charged with the task of collecting all state employment-related taxes. As you would expect, the EDD also has the power to enforce the state’s various employment/payroll tax statutes. The EDD can investigate any business it suspects is not paying the correct amount of payroll taxes, as well as audit any business to ensure that they are tax compliant.
In general, all California businesses are required to pay payroll taxes and file returns on a periodic basis, usually quarterly. When these returns are not filed or the taxes are not paid, the EDD will notify the business owner of the lapse and demand the return be filed and taxes paid. If the payment and proper returns are not filed within the period specified in the notice, the EDD can issue and record a tax lien against the business. The Notice of Tax Lien states that the amount of unpaid tax is a lien on all real and personal property. The recording of a Notice of Tax Lien must take place within 10 years of the date the lien arose. The recorded lien is valid for 10 years and may be extended in 10 year increments.
The EDD’s tax lien is a perfected and enforceable state tax lien on all property and rights to property, whether real, personal, tangible or intangible, including all subsequently acquired property and rights to property belonging to the taxpayer.
The lien does not allow the EDD to seize a business’ assets. What it does do is place the EDD’s interest in the business’ assets before any other person’s interests. If the business sells any real or personal property, the EDD’s interest is paid first out of the proceeds to satisfy the amount of the lien. A recorded tax lien is a matter of public record filed with the county Recorder’s Office in the county where the business is located. It can be viewed by anyone with an interest in or curiosity about the business. Therefore, even though the EDD does not report the existence of the lien to credit reporting agencies, it may negatively impact a business’ credit rating and credit reports. In addition, paying only a portion of the lien amount will do nothing to remove the lien from the public record. It will remain in place until the entire amount owed is satisfied.
When the EDD determines that a business has a payroll tax liability, it will initially send that business an Employer Account Statement (DE 2176). This statement will itemize the entire tax liability and demand payment. If you receive an Employer Account Statement, it is essential that you take the matter seriously. If you believe that the amount the EDD claims you owe is incorrect or if the amount is, in fact, correct but you are unable to currently make a payment, it is imperative that you contact the EDD. The worst possible course of action is to ignore the Employer Account Statement. In such a case, the EDD will proceed to record a state tax lien against your business.
As mentioned, a Notice of State Tax Lien will be recorded in the county where your business is located. A copy of the Notice will then be mailed to you. The Notice states the amount of the lien and that it is against both real and personal property of the business now owned or acquired subsequent to the recording of the lien. As stated, the lien will remain in place until such time as it is satisfied or formally removed by the EDD.
Even when the lien is removed, its existence will remain on your business’ credit report for seven years. This fact alone demonstrates the importance of dealing with a tax lien as soon as possible or avoiding one in the first place.
Within 40 days after receiving funds sufficient to satisfy the lien, the EDD will mail a Release of Lien to the Recorder’s Office in the county where the tax lien was originally recorded. No notice or record of this mailing will be sent to your business. You have the option to obtain a copy of the Release of Lien at your own expense.
If you attempt to sell or refinance property while the lien is still in place, your title company will need to first pay the lien. Once the lien has been paid, a demand for a Release of Lien can be made on the EDD. However, no transfer of money or property from the refinance or sale of the property will occur until the Release is obtained.
In the end, the best way to deal with an EDD tax lien is by avoiding one in the first place. Make sure that you know your EDD payroll tax and reporting obligations ahead of time. If you are unsure of your obligations, consult with a payroll tax specialist before a potential default occurs. While inadvertent mistakes can occur, ignorance of your payroll tax obligations will do nothing to forestall a lien being placed on your business and its assets.
If you do receive a Notice of State Tax Lien from the EDD, take the matter seriously. This is where an experienced California payroll tax attorney or professional can help. We can guide you through the state tax lien process, using our extensive knowledge of California payroll/employment tax laws and regulations to help you achieve the best possible results. Contact us today for a free and confidential consultation.