McFarlane Law

Your Tax Law Firm

I took an Early Withdrawal from my Retirement Account. Now what?

On a regular basis I get clients who have taken a distribution out of their qualified individual retirement account or retirement plan before reaching 59 ½ years of age (the time when you can take a distribution and be subject to the 10% penalty). They do this before informing their bookkeeper, CPA, or attorney of their intent. This can trigger an additional tax on top of other income tax they may owe.

Early Withdrawals. An early withdrawal normally is taking cash out of a retirement plan before the taxpayer is 59½ years old. The IRS charges a 10 percent penalty on early withdrawals from most qualified retirement plans. There are many complicated exceptions to this general rule. So taxpayers should consult with their tax professional prior to taking a distribution.

For example, the additional tax does not apply to distributions due to an IRS levy of the plan. While the plan may be protected from creditors under state laws, a levy action by the IRS is a contested collection action that needs to be addressed by an experienced tax attorney.

The additional tax does not apply to nontaxable withdrawals. These include withdrawals of contributions that taxpayers paid tax on before they put them into the retirement plan (i.e., Roth contributions that meet time requirements). Other exceptions per IRC §§72(y)(2) et seq. include:

  • qualified higher education expenses;
  • qualified 1st time homebuyer (up to $10,000);
  • amount of unreimbursed medical expenses greater than 7.5% of taxpayer’s AGI (or 10% of AGI after 2012 if under age 65);
  • certain distributions to qualified military reservists called to active duty;
  • if a qualified employee separates from service;
  • and other exceptions that should be discussed with your tax professional.

Rollovers are also a nontaxable withdrawal. A “rollover” happens when a taxpayer takes cash or other assets from one qualified retirement plan and puts the money in another plan within 60 days. A rollover can also happen when they direct their plan administrator to make the payment directly to another retirement plan or to an IRA. The latter is the preferable procedure as the details of the transaction are fully reported to the IRS. The former procedure requires the taxpayer to monitor the 60-day period (no exceptions) and to keep records of the transaction to give to taxpayer’s tax return preparer as the IRS may only have information of one side of the transaction.

Be sure to notify your return preparer and ask questions before you sign your tax return. Best to get the advice up front rather than risk the IRS noticing you and perhaps looking deeper into your returns.

McFARLANE LAW – A Tax Law Firm
T.480.991.0032 / stephen@taxlawaz.com / IRS & ADOR Tax Problem Resolution

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.

Can I object to a denial or rejection of my OIC?

Yes! A taxpayer has the right to object to the denial of an offer-in-compromise application and any other tax assessment or collection action, including the appeal of a proposed Trust Fund Recovery Penalty, the imposition of federal tax liens or levies, or a Revenue Officer's rejection of an installment agreement. But importantly, the appeal must be timely. It must follow IRS procedures and it should be drafted in a manner that will facilitate the resolution of the case. Stephen McFarlane has over 25 years of dealing with the IRS and ADOR procedures, forms, time constraints, and drafting requests for collection due process (CDP) appeals.

If you wish to object or protest a determination of a revenue agent or revenue officer, call McFarlane at Tel. 480.991.0032.

Normally, the OIC Reviewer will call the POA to discuss the Reviewer’s findings and grant the POA and taxpayer the right to present additional documentation or argument prior to issuing their written determination. If there is still an objection, the taxpayer is given a limited period of time to request a Collection Due Process hearing. If this time period is missed, the Revenue Officer can proceed with collection action, including levy, garnishment of wages, summonses, and seizure of assets.

Why Hire a Tax Attorney? [LINK] Putting a layer of insulation between yourself and the Revenue Officer is advisable for many reasons. McFARLANE LAW represents taxpayers in their objections to an administrative agent’s determinations. McFarlane directly negotiates with the Appeals Settlement Officer in order to obtain a reasonable resolution based on the facts and supporting documents.

If resolution is still not reached, McFarlane can represent you before and beyond the administrative appeal levels of the IRS to the US Tax Court or US District Court. McFarlane has years of experience as an Assistant District Counsel Litigation Attorney, and has practiced before the IRS personnel/agents for more than 25 years. He has the important personal relationships and familiarity with policy and procedure to effectively resolve your tax problems. Why hire a marketing tax problem outfit when you can engage a tax attorney who is effective.

Arizona Enacts Tax Amnesty Legislation to Provide a Waiver of Penalties and Interest

On March 12, 2015, Arizona enacted 2015 Senate Bill 1471, which establishes a tax recovery (amnesty) program that will run from September 1, 2015 through October 31, 2015. The program applies to all taxes administered by the Arizona Department of Revenue (except luxury tax and withholding tax). Taxpayers that apply and subsequently comply with the Department’s requirements for participation may receive a waiver of civil penalties and interest for tax liabilities that have been or could have been assessed during the applicable liability period. The applicable liability period is any taxable period ending before January 1, 2014 (for annual filers) and any taxable period ending before February 1, 2015 (for all other filers). Taxpayers that apply waive their rights to appeal liabilities paid during the recovery program. Certain taxpayers are not allowed to participate, including but not limited to, those that are under criminal investigation or those that have entered into a closing agreement with the Department for tax periods included in the recovery application. Please contact attorney Stephen McFarlane of the McFarlane tax resolution law firm at (480) 991-0323 with questions on the Arizona tax recovery amnesty program.

More … Pursuant to this legislation, the amnesty will apply to income tax, transaction privilege tax, telecommunication services excise tax, county excise taxes and any other privilege excise tax administered by the department of revenue (including city transaction privilege tax for those cities whose taxes are administered by the department), severance tax, use tax, tax on water use, jet fuel excise and use tax, car rental surcharge, and hotel tax, but will not apply to withholding tax or luxury tax. The covered amnesty period for annual filers will be any taxable period within the statute of limitations ending before Jan. 1, 2014. The covered amnesty period for all other filers will be any taxable period ending before Feb. 1, 2015. The amnesty will apply to both unestablished liabilities and liabilities that have been established and assessed in relation to the applicable covered period.

To qualify for the amnesty, a taxpayer will be required to submit an application using a form to be promulgated by the department, with which the taxpayer will be required to remit the amount of tax due. Additionally, a taxpayer must attest that:

  • The taxpayer is not a party to any criminal investigation or to any criminal administrative proceeding or criminal litigation that is pending on Jan. 1, 2015, in any court of the United States or of Arizona for failure to file or failure to pay, or for fraud with respect to, any tax imposed by any law of Arizona that is required to be collected by the department.
  • The taxpayer was not the subject of a past tax-related criminal investigation, indictment or prosecution that resulted in a conviction, a guilty plea or a plea of no contest.
  • The taxpayer has not been convicted of a crime relating to any period or assessment of a tax that is the basis of the penalty or interest with respect to which amnesty is sought.
  • The taxpayer is not a party to a closing agreement with the department for the tax periods included in the amnesty application.
  • The taxpayer’s application for amnesty includes an amount of unpaid tax (the statute is not clear if taxpayers are required to include the entire amount of tax when submitting their application).

A taxpayer granted amnesty will receive waiver of civil penalties and interest, and may not be subject to administrative, civil or criminal action for failure to comply with its tax requirements for the taxable periods covered by its amnesty application.

Do You Have Employment and Payroll Tax Issues?

Employment & Payroll Tax Liability and the Trust Fund Recovery Penalty – not an easy workout!

Sometimes small-business owners face a difficult choice: pay employment taxes or use the money to keep the doors open. Unfortunately, despite your best intentions to get caught up on payroll taxes, a difficult economy may make that impossible. This can lead to significant tax debt that threatens your business and can even turn into a personal liability against you and your spouse.

As a business owner with W-2 employees, you are required to withhold employment taxes from your employees' wages. S whether you use a payroll processing company or do payroll reporting yourself, if you fail to pay the employment taxes you have withheld from your employees’ wages to the government, and the taxes are left unpaid after notice and demand, the IRS can assess you personally for the taxes due from the business. This is called the Trust Fund Recovery Penalty (TFRP), or the "100 Percent Penalty." It effectively allows the IRS to take tax collection action against your personal assets (including liens, levies, garnishment of spouse's wages, seizure of assets, etc. from you personally, even though the business owes the debt and it is a separate entity). The ADOR can also assert personal liability for a business payroll tax liability, but they need to institute a court proceeding and obtain a judgment prior to collecting against the owners, officers, or other such “responsible persons.”

Comfort Level Tip: If you receive a notice or letter or business card on your door, DO NOT IGNORE the communication! Contact Stephen McFarlane for a free consultation and analysis of that communication as there are time limits and procedures to meet or you lose objectio9n or appeal rights. See our blog, “I received a Notice from the IRS!! What do I do now?!?” [LINK] And remember, once your business tax issues are hung as laundry on the neighborhood line, you will receive phone calls from the unscrupulous marketing outfits claiming to “resolve your tax issues.” Often they pretend to be the IRS! The IRS does not contact you by phone or email. If you receive harassing calls or emails, hand up and call McFarlane at 480.991.0032.

More … Any owner, officer, or anyone with signature authority on checks will become personally liable as a "responsible person." I have had to defend office managers who might have signed a payroll check in the owner’s absence; or a quiet investor/owner who has had no interaction with the business at all. If a “responsible person” is found to have “willfully failed to turn over the taxes,” (and these are all legal terms with their own strange definitions and interpretations), that person will be assessed the TFRP. If assessed the TFRP, the taxpayer will be held "jointly and severally" liable for the total amount of taxes due — meaning that the IRS can collect 100 percent of the tax liability from any responsible person who has been assessed the TFRP. The IRS will collect their taxes and let the parties fight out whom will be liable to whom.

If a Revenue Officer is proposing to assess the TFRP against you, it is important to immediately contact our employment tax lawyers to assess your case as time is of the essence. If you miss your appeal deadline, you forego your ability to argue your case administratively with the Office of Appeals.

At McFARLANE LAW, PLC, in Scottsdale, Arizona, our employment and payroll tax attorneys have extensive experience analyzing your facts to provide a clear level of liability, and then provide options to resolve the matter once and for-all time. For over 25 years, Stephen McFarlane has helped owners and officers of small and medium-sized businesses deal with employment & payroll tax issues, and has successfully

obtained relief for business owners, officers, and other "responsible persons" who have potential trust fund recovery penalty problems. If tax authorities have begun collection actions against your business (or you personally), our employment and payroll tax attorneys can help you seek relief while negotiating a payment plan with the tax authorities.

We offer a free initial consultation to discuss your case and map out a strategic workout for your case.

Please call Arizona and Washington Licensed Attorney, Stephen McFarlane, MBA, JD, LLM (Tax) at 480.991.0032. He knows tax law!

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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