Backup withholding on offshore accounts?

Anyone got an answer for this? Essentially I have foreign based accounts and I am wondering if the IRS can touch these accounts? I also have a follow-up question. I filed my 2004 tax return late but filed the return and received a refund before Christmas 2006. Subsequently I received a CP-541 notice dated Jan 1st 2007 for the 2044 tax period. I called the IRS and was told I could disregard the letter and that the account was "satisfied". Later of course I received letters from bank telling me backup withholding was in place, what I should have disregarded was being told to disregard the IRS notice! I called them again but they are refusing to do anything, on the grounds that the 2005 return is also late (although I have received no other communication about this return). Do I have an argument for rescinding the backup withholding because the notice very specifically refers to 2004 (and should not have even been sent out), and is there some IRS termininology I can use to make this argument?

I'm still not quite sure what you're asking. I assume that if there's a treaty provision the offshore institution would honor a backup withholding request or IRS levy. Without such a treaty provision it would depend solely on the laws of the country in question. As you probably know, none of this affects the taxability of your income from these accounts.

Sorry, the backup withholding rules are incredibly complex (you can thank the banking industry), and I don't know the answer to your question. I do know that you can make all the arguments you want, but the easier course of action would be to start filing your returns on time. The backup withholding order will be rescinded after you've been compliant for a period of time that escapes me.

-- Phil Marti Clarksburg, MD

I simply have some accounts (UK and UK Channel Islands) which I know do not submit 1099s. I declare the interest (and also file TDF 90-22.1 forms) so the IRS knows of these accounts. If they don't file 1099s it seems unlikely to me they would undertake backup withholding, but who knows what any treaties might say.

Thanks for the reply anyway.

I would like to file the missing return but it is going to be quicker and easier to write a letter now than file the return anytime soon. Apart from being complex, I recently found that most of my 2005 income might be recharacterized as a capital return and this will not be resolved soon. That's a subject is probably best left for another post. I was trying to find out if there was any IRS terminology I could use to make the point that the 2005 return was not relevant to the reason the backup withholding was implemented (or maybe it is relevant?).

Getting off the BWH program requires full compliance & remedy of the root cause, as well as current compliance file the 2005 & 2006 as soon as practical, On 10/15/2007 the annual SWEEP of the master file will verify that your in full compliance, and you will be dropped from the BWH program on 1/1/2008, at which point your bank will be able to stop the W/H. There are solutions to STOP the process sooner, --IF-- you are in a HARDSHIP situation.

My point is that I am already in compliance with the terms of the notice. In any case they said the notice had been sent out in error, and that it had a "stop put on". Interesting that I have only received notices from a couple of banks, nothing from my brokerage account and no withholding this month either.

The IRS appears to have resolved this issue, and approved my request to stop backup withholding. I wrote a polite letter to them stating the the backup witholding notice had already been 'satisfied' before the notice had been sent out and that the agent I spoke to told me that a 'stop' had been put on the notice. I have not received any more notices from banks indicating that backup withholding had been imposed. It is almost as if the IRS got partly through the process of send these notices out and then stopped.