1. Start with the Notice and the Issue It Raises
The notice usually defines the immediate problem. The first review should identify who issued it, the tax period involved, what liability or information the agency is seeking, and when a response is due.
Useful questions include:
- Did the IRS or California Employment Development Department issue the notice?
- Which quarter or tax year does it cover?
- Does it concern reporting, payment, an audit, an assessment, or collection?
- Is the agency requesting records or proposing a liability?
- Does the notice state a protest, petition, appeal, or payment deadline?
This prevents an employer from treating every payroll tax matter as a simple unpaid balance. A filing problem may require different records and procedures from an assessed liability that has already moved into collection.
2. Separate Federal Employment Taxes from California Payroll Taxes
Federal and California employment tax obligations can arise from the same payroll but remain separate legal and administrative systems.
At the federal level, employers may have obligations involving federal income tax withholding, Social Security and Medicare taxes, and federal unemployment tax. Form 941 generally reports federal income tax withholding and Social Security and Medicare taxes. Filing the return and making the required federal tax deposits are related but distinct obligations.
California employers separately deal with employment taxes administered by the EDD, including Unemployment Insurance, Employment Training Tax, State Disability Insurance withholding, and California Personal Income Tax withholding. Employers generally use DE 9 and DE 9C for quarterly reporting, while DE 88 relates to payroll tax deposits.
Federal and California records should therefore be reviewed separately even when they involve the same employees and payroll periods. A broader payroll tax compliance review may need to account for both systems.
Reporting Errors and Deposit Problems Need Different Records
A reporting dispute may concern wages, withholding amounts, worker treatment, or information entered on a return. A deposit issue instead asks whether the required money reached the taxing authority when due.
Federal records may include Forms 941, amended returns, EFTPS histories, payroll registers, bank records, and payroll-provider reports. California records may include DE 9 and DE 9C filings, payment histories, wage reports, and EDD correspondence.
An amended return does not by itself prove that the corresponding deposits were made correctly or on time. The records should be compared by payroll period so that reporting and payment issues are not confused.
3. Match an Audit or Assessment to Its Review Procedure
An audit, assessment, and collection action represent different stages of a tax matter. The available response depends on where the case currently stands.
An IRS employment tax examination may focus on wages, withholding, deposits, worker status, or other reported information. Once an examination begins, the review should focus on the tax periods and factual issues the IRS has actually placed in dispute. Related IRS audit defense issues should then be evaluated within the periods and factual questions identified in the examination.
California EDD tax matters have a separate administrative process. A petition challenging a general EDD tax determination generally must be filed with the California Unemployment Insurance Appeals Board within 30 calendar days from the mailing date shown on the notice. A jeopardy assessment has a 10-day petition period.
Good cause may allow a late petition in a general tax case. The statutory filing period for a jeopardy assessment is different and cannot be extended on that basis.
The specific notice remains important because different agency determinations can carry different procedures. A deadline from an earlier tax matter should not be assumed to govern a new notice.
4. Check Whether Federal Liability May Reach an Individual
Some unpaid federal employment taxes can create potential personal liability in addition to the employer's tax debt.
Under Internal Revenue Code § 6672, the IRS may impose the Trust Fund Recovery Penalty on a person responsible for collecting, accounting for, or paying over trust fund taxes who willfully fails to do so. The trust fund portion generally includes federal income tax and the employee share of Social Security and Medicare taxes withheld from wages.
Responsibility Depends on Authority, Not Title Alone
A corporate title does not by itself establish TFRP responsibility. The IRS looks at what the person actually could do with the company's finances.
Relevant facts can include authority to direct payments, sign checks, control bank accounts, decide which creditors were paid, authorize payroll, or direct tax payments. More than one person can potentially qualify as responsible.
For that reason, ownership records alone may not resolve the issue. Banking authority, signature rights, payment records, organizational documents, and evidence of actual decision-making can be more informative.
Willfulness Requires Knowledge or Reckless Disregard
Willfulness does not require fraud or an intent to evade tax. It may be established when a responsible person knows that trust fund taxes remain unpaid and nevertheless pays other creditors, or when the person recklessly disregards whether those taxes are being paid.
Using available business funds to pay other creditors after learning that trust fund taxes remain unpaid can therefore be relevant to the willfulness analysis.
If the IRS proposes a TFRP through Letter 1153, a written appeal generally must be made within 60 days of the mailing or personal delivery of the letter. The period is generally 75 days when the letter is addressed outside the United States.
5. Build the File Around the Disputed Tax Period
The case file should combine the operative notices, filed returns, payment histories, payroll records, and any authority records relevant to individual responsibility.
Those materials should answer four practical questions: what was reported, what was paid, when each event occurred, and who controlled the relevant decisions.
That chronology becomes especially important when the agency's account and the employer's payroll records do not match.
6. Choose the Response for the Current Stage of the Case
The appropriate response depends on whether the issue remains a reporting problem, has developed into an assessment dispute, or has reached collection.
An inaccurate filing may require a corrected return and supporting records. An examination may call for documents addressing specific findings. A proposed assessment may create a formal protest or petition deadline. Once a liability becomes final and unpaid, collection procedures can become the central issue.
A broader tax dispute may therefore involve two separate questions: whether the asserted liability is correct and what procedural options remain available.
Federal liens and levies belong to the collection stage rather than the original calculation of the payroll tax. When the IRS has issued a levy-related notice, an IRS tax levy review should address the collection action and any available response rights without confusing those issues with the original return or deposit dispute.
7. A Payroll Tax Case Review Should Follow the Actual Record
San Jose identifies the location of the taxpayer or business, not a separate system of payroll tax law. The controlling questions come from the federal or California notice, the tax period, the asserted liability, any proposed individual responsibility, and the procedural stage of the case.
28 Oct, 2026
