The Misrepresentation Penalty and How to Avoid it


Over the years, I’ve been seeing more and more assessments from L&I that include misrepresentation penalties. The misrepresentation penalties are perhaps the strictest penalties that can be assessed against a business and typically have the effect of at least doubling the tax assessed. I’ve seen a $10,000 assessment become a $70,000 assessment with the misrep penalty applied. I’ve seen assessments of a couple hundred thousand exceed half a million dollars after the penalty has been applied.

Invariably the penalty is assessed when a business has been through multiple audits, and the same deficiencies continue to show up. L&I theorizes that the business has been repeatedly told what the law requires, and is being willful in ignoring the requirements of the law. Thus the penalty is meant to either be a final wake-up call, or to deal the business a fatal blow. One misconception that business owners have is that an audit that does not result in a substantial fine is not one that should provide basis for the application of a draconian penalty. Thus a business may believe that it is in the clear if it has had only small assessments. Wrong. The amount of the assessment isn’t the key factor (thought it perhaps plays a role). All that is necessary is that you’ve been educated (as L&I sees it), and that you are intentionally ignoring what you’ve been told.

So after an audit, it is important to carefully consider how to proceed on a going-forward basis. Must L&I be heeded? Can its findings be disregarded on the basis they were in error? Can you adjust your practices so you’re able to show that you heeded the lessons learned in the audit and you changed your practices?  Bottomline, where the misrep penalty can be put into play (i.e. after that first audit), you can ill afford to bury your head in the sand and continue with business as usual.

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