A year following the sale the IRS decided to audit because sale of his Mexican property was not reported on his US. No one has ever determined how they found out about that sale, but they did have a lot of information on it. X could not blame his accountant because he never told him about the sale. The auditor told X he thought he should report the sale to the IRS Criminal Investigation Division but continued to conduct the audit of his return. X had many problems in that audit:
- He did not have support for the cost of all improvements he made to the property and thus reduce his capital gain.
- Due to the helpful Mexican Notary, he had paid only a small amount of capital gain taxes in Mexico and therefore had only a small amount of foreign tax credits to offset the $389,000 plus in US taxes, interest and penalty assessment resulting from the audit.
- He had never filed the required form 3520 and 3520A which are required to be filed when you are a beneficiary and grantor of a foreign trust such as the Fideicomiso's which Mexico requires when foreigners own property along the coast in Mexico.
- He did not have any explanation why the sale was not shown on his US tax return.