Warning to Small Property and Business Owners – your properties or businesses can be taken by the Department of Labor & Industries (L & I) any time without warning (advance or otherwise) by claiming non-compliance of laws they have in place.
RCW 51.48.030 states: Any employer who fails to keep and preserve the records adequate to determine taxes due shall be forever barred from questioning, in an appeal before the board of industrial appeal or courts, the correctness of any assessment by the department based on any period for which such records have not been kept and preserved.
As a member of the Washington Landlord Association and retired engineer, I have managed 13 duplex buildings for my three sons who own them but resided out of state during the three years of the L & I audit period.
In July of 2008, an L & I employee walked through the property complex and prepared an audit report stating that the property had consistently five full-time employees during the three year audit period. She also stated that there were two full-time roofers, two full-time maintenance workers and one manager working full time, 40 hours per week, and 52 weeks per year including 10 legal holidays ¦ for three years.
Based on her number of workers and hours, she came up with an audited premium of $107, 252.34 plus penalties and interest as of 9/8/08 totaling $151,354.24 which today is over $200,000!
The problem is that L & I is totally out of touch with reality. To pay the audited premium of $107,252.34 (assuming their fee is 10% of salaries paid), the rental complex has to generate enough income to pay approximately $1.07 million in salaries plus the L & I 10% premium totaling $1.18 million. Expenses allocated to resident managers (with light maintenance duties) for apartment complexes are in the range of 5% to 10% of total collected incomes. In my case, the complex generated over the three year audit period a total of $405,642. During this same three year period, the auditor claimed my workers made over $1 million dollars by virtue of their premium claim of 10% totaling over $100,000. Who in their right mind would pay out over $1,000,000 in wages and contracts during a period that only generated $405,000???
In addition, the actual $405,000 income must pay the mortgage, taxes, utilities, insurance, etc., often offset by sweat labor and unpaid time of working owners. For example, I did the same thing with two roofing workers exchanging their labor to tear down and re-roof 13 buildings in exchange for 6.5 months of free rents because my sons did not have the cash to pay a roofing contractor to do the work.
During the audit period, our properties were up to 50% vacant while we brought all the units up to code. Because there were no employees during several periods and only a part-time manager on assignment basis (rather than hourly), I did not file an L & I quarterly report during 9 of the 12 quarters of the audit period. Also, my accountant showed me IRS Code Section 119 which states the value of lodging furnished to employees is excludable from IRS, FICA and FUTA taxes.
My sons retained attorneys to file an appeal at substantial cost. Timothy Wakenshaw, Industrial Appeals Judge, ruled to reduce the L & I assessment from approximately $150,000 to $50,000. Since this lower figure was still about 10 times the premiums actually due, my sons filed an appeal. To the surprise of my sons and me, the Board of Industrial Insurance Appeals overturned the decision of Wakenshaw and upheld the original $150,000 assessment. With L & I employees chairing the appeals process, we did not feel we were given full opportunity for an impartial hearing.
My sons can appeal this shocking disposition (going back up 150%) in Superior Court; however, statute requires that my sons put up a court deposit of $150,000 cash before they will hear the case. My sons have spent substantial legal expense; they have no more funds to make the required deposit, let alone more attorney fees. Meanwhile, we face the prospect of garnishments, taking of bank accounts and eventually of properties, in lieu of a rational solution.
The state should institute a program to teach all new businesses and property owners when and how to file quarterly L & I tax reports to meet L & I standards so they don’t become victims of arbitrary assessments.
[Editor’s Note: Are you reporting the proper taxes for your resident manager’s salary?] The Labor Enforcement Task Force of California combats the underground economy in California to create an environment where legitimate businesses can thrive. In this joint effort between state agencies and affected communities, information and resources are shared to ensure hard-working, compliant business owners and their employees have an opportunity for healthy competition. The LETF’s goals are to:
¢ Ensure workers receive proper payment of wages and are provided a safe work environment.
¢ Ensure California receives all employment taxes, fees, and penalties due from employers.]
[Editor’s Note: Be sure to attend Attorney Dale Alberstone’s seminar at next month’s trade show at the Los Angeles Convention Center on October 17th where he will be addressing this issue and other landlord laws regarding resident managers!]
Reprinted with permission of the Washington Landlord Association.