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McFarlane Law

A Tax Law Firm - 480.991.0032

Tax Controversy with IRS over Foreign Bank Accounts or Assets

Should you receive a letter from your Swiss bank, you need to seek experienced tax counsel to handle your tax controversy. The IRS (through the Dept of the Treasury) is continuing its efforts to pry open the time honored Swiss bank secrecy practices and force the Swiss banks to reveal their U.S. clients. The IRS suspects that thousands of wealthy "U.S. Citizens" (defined under Title 31 to include permanent residents with "Green Cards" and naturalized citizens) are evading billions of dollars in taxes by using Swiss and other countries' private banks. Further, those U.S. Citizens who thought they might have escaped detection by moving their accounts to smaller, more parochial, little town banks, are not now sheltered either, as the IRS is now looking into those smaller banks as well. It is understood that Switzerland is trying to craft a deal with the United States that would cover its entire banking industry of some 355 banks. It is unclear how many American clients of Swiss banks (having ownersip or even mere signature authority over private banking accounts) have gone undeclared to U.S. tax authorities.

The effort to force compliance of the foreign account and asset reporting laws is fairly recent, but gained a huge publicity coup in 2009 when the major Swiss bank, USB, succumbed to the Dept of the Treasury's pressure to disgorge 4,500 account names. The Dept of the Treasury is now conducting an ever widening criminal investigation into scores of Swiss banks, and today Credit Suisse, AG, Switzerland's second largest bank, is in the news.

As a result, Credit Suisse has begun notifying its U.S. clients that it intends to turn over their names to the U.S. Internal Revenue Service; this with the help of Swiss tax authorities. Credit Suisse's notification by letter says the handover of names and account details will take place soon. It was unclear how many U.S. clients had been sent the letter. The letter says that the IRS request covers accounts maintained at any time over the period from Jan. 1, 2002, through Dec. 31, 2010. The U.S. Citizen can either consent to or oppose the handover of their bank information.

The U.S. has a tax treaty with Switzerland to govern the tax treatment of each respective countrys' citizens that reside in each other's countries, work there, or hold assets there. The interpretation of the provisions of the tax treaties are often in dispute. The fact that the Swiss tax authorities have ordered Credit Suisse to provide it the requested data to hand over to the IRS represented "a further erosion of longstanding Swiss bank secrecy."

Should you require consultation or assistance in communicating with the IRS, we can help. Before you try to resolve any tax controversy yourself, seek experienced legal tax advice. The first communication must be properly approached, as these issues are criminal in nature and you need to preserve your rights and options.

What is the difference between a proposed asseessment and an assessment and why does it matter?

Reduction or Elimination of Penalties -when can I request a reduction and what is the effect if the IRS or ADOR has only proposed assessment vs. after an assessment has been made?

An “assessment” is the entry of an unpaid tax liability on the books of the IRS. Before assessment, the liability (be it tax, penalty, interest) is only “proposed.” What if the tax, penalty and interest is not yet assessed and you wish to object to the proposed assessment? What if the tax, penalty and interest has been assessed and you wish to remove or reduce that assessment? The two matters are treated differently by the IRS.

Before you are assessed tax, penalty and interest, a taxpayer is given the adjustments proposed by the revenue agent (exam function). The taxpayer is allowed the opportunity to object or protest the proposed assessment of tax, penalty, and interest. With the IRS, the examining revenue agent will issue either a 30-Day Letter (giving the taxpayer 30 days to furnish the revenue agent further information and documents), or issue a statutory notice of deficiency (IRS-known as a “SNOD” or a “90-Day Letter” in IRS parlance). This gives the taxpayer either 30 or 90 days to object to the revenue agent’s findings and present more evidence, or file an appeal (with either the Office of Appeals (30-Day Letter) or US Tax Court (90-Day Letter)). The ADOR has a similar procedures and issues a Notice of Proposed Assessment (an “NPA” or “30-Day Letter” in ADOR parlance) prior to their Notice of Assessment (whoops! Too late to object to the revenue agent).

As you can see, the request procedures are more complex than merely asking the IRS or ADOR agent or officer to remove or reduce the penalty. They also are time sensitive and a taxpayer can lose their rights to object very easily. Understand that collection/”revenue officers” are commissioned with collecting the tax (“revenue agents” are an exam function-they audit). Revenue Officers cannot and will not reduce the amount they are told to collect – they do not have that authority. However, there are special separate units that review requests and make determinations that are reviewable by an administrative appeals process. Because the procedures are somewhat complex, and the case important to the argument, it is essential to engage an attorney who has done dozens of these cases. That attorney is Stephen McFarlane of McFARLANE LAW, PLC, Arizona’s premier tax litigation and tax problem-solving law firm. Do you owe taxes? Call McFARLANE LAW, PLC@ 480.991.0032.

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