US and Mexican Taxation for American Taxpayers in Mexico

Mexican Taxes on Sale of Mexican Property

2012-01-22T18:59:00.000-08:00

You can pay 28 on the net profit on the sale of Mexican property to the Hacienda or chose to pay 25% on the gross proceeds from the sale. This is not as bad as it seems since your cost basis is adjusted up for inflation over the years that you own the property. Read the details of the Mexican tax on property sales as set forth HERE by Snell Real Estate in Cabo San Lucas.

You do get to claim this tax as a credit against your US tax on the gain (if you owned the property individually or through a fideicomiso) which does avoid double taxation.

If you own the property in your individual name or through a fideicomiso, you can utilize or US tax purposes the $500,000 gain exemption if married (or $250,000 if you are single) on sale if you occupied it for 2 out of the last five years as your primary residence. The primary residence gain exclusion has much tougher requirements under Mexican tax law, but those rules do not apply for US tax purposes.

The surprise arises when you sell your Mexican property that was held in a Fideicomiso and you failed to file the IRS required forms 3520 and 3520A each year. You could incur substantial penalties for failing to file those forms or all of the years you owned the property. Sometimes those penalties can be abated.

Another problem arises when you held your Mexican real estate through a Mexican corporation and you or other US taxpayers owned more than 50% of that corporation. Due to that manner of ownership, it could prevent you from claiming the foreign tax credit for the Mexican capital gains taxes you paid and cause you to pay high US taxes on the gain when it is distributed from your corporation which is often double taxation.

What is the solution? When you purchase property in a Mexican corporation make certain it is the corporation known as SRL de CV. That Mexican entity (and none other) is eligible or US tax purposes to elect flow through status (for US tax purposes only- this election does not affect the Mexican taxes) which means any gains on sales will be taxed at US capital gains rates (if you held the property for more than a year) and you can offset that tax with the Mexican gains tax you paid on sale. It totally avoids any possibility of double taxation. Ask us how.

IRS Used 'Bait-And-Switch' on Tax Amnesty

2012-01-11T16:47:00.000-08:00

This Article from CNBC describes the less than ethical actions (or perhaps straightforward) of the IRS in connection with the 2009 and 2011 Voluntary Disclosure Program. Many taxpayers paid more than they had to pay if they had not entered the program and the IRS took it! The Taxpayer Advocate Office of the IRS whose job it is to monitor the IRS and correct problems, errors and this type of actions included this information in their report to Congress. READ ARTICLE HERE

The IRS has announced a new Offshore Disclosure Program for 2012 and perhaps beyond which will be mostly the same as the 2011 program with some changes which the IRS has stated they will provide further details in the next few weeks. It is not too late to enter the program and perhaps reduce your penalties. With proper representation by an experienced Attorney and CPA, you will be protected from the IRS "Bait and Switch."

IRS Announces Re Activation of the Voluntary Offshore Disclosure Program for 2012

2012-01-10T15:34:00.000-08:00

The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes,

If you have failed to file Forms 3520 and 3520(a) for your Mexican Fideicomiso, or failed to filed Form 5471 for your Mexican Corporation, or failed to report your Mexican Bank accounts as required by the IRS, you may be able to enter this program and eliminate or reduce the extremely high penalties (and possible criminal charges) the IRS can impose if you do not file these forms.

Remember under the US / Mexican tax treaties the IRS can obtain information on all US Gringos that own Mexican corporations, bank accounts or Fideicomisos and compare them with those filed and then assess the huge penalties allowed by US Tax law for not filing these forms. Also under FATCA almost all Mexican banks will shortly start sending the IRS lists of their US depositors. It is now the time to start filing these forms before it becomes more serious and expensive.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

“As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”

The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.

With a few key differences, this OVDI is similar to the 2011 program, through which participating taxpayers could escape potential criminal prosecution by filing missing tax returns and paying tax, penalties and interest. Unlike the prior program, there is no set deadline for taxpayers to apply. It is important to note, however, that the terms of the program could change at any time. For example, the IRS could decide to end the program entirely at any point, or to increase the penalties for all or some of the taxpayers or defined classes of taxpayers.

The overall penalty structure for the new program mirrors that of the 2011 program, except the highest penalty rate is increased from 25 percent to 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. During the 2011 program, the highest penalty was 25 percent. Similar to the 2011 program, some taxpayers will be eligible for 5 or 12.5 percent penalties. Also similar to the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined. Taxpayers who wish to participate must file all original and amended tax returns and include payment for back taxes and interest for up to eight years, as well as pay accuracy-related and/or delinquency penalties.

The IRS is going to release more precise details on the new program within the next few weeks.

Final Form 8938- Statement of Foreign Financial Assets Released

2011-12-30T05:18:00.000-08:00

US Taxpayers residing in Mexico including US Citizens, US Permanent Residents, and US Expatriates may have to file Form 8938 with their US Income tax returns for 2012 to report their foreign financial assets. The estimated time to complete this form is 1 to 3 hours.

Several commentators have estimated that over a Million US Citizens are living in Mexico and less than 1/2 of those individuals are filing their required US tax returns and assets located in Mexico. The IRS now has several offices located in the United States with the sole function is to located individuals who are obligated to file US income tax returns and have not been fulfilling that obligation. The IRS in the past year has begun to audit expatriate taxpayers income returns and compare the information on those returns with information they have obtained from undisclosed Mexican sources.

Every taxpayer with assets located outside the US should review the instructions to this form to determine if they must file it. Read the Instructions to Form 8938 here. Failure to file the Form 8938 when required can result in severe monetary penalties and criminal prosecution.

View the 2012 tax year Form 8938 here.

IRS Issues Explanation of When it will not charge Penalites for filing FBARs (TDF 90-22.1 forms) Late

2011-12-10T09:12:00.001-08:00

FBAR filing requirement

As a United States citizen, you may be required to report your interest in certain foreign financial accounts on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). For information about FBAR reporting requirements, including reporting exceptions, seeForm TD F 90-22.1 and the IRS FBAR Frequently Asked Questions.

How to file an FBAR

For information about how and where to file an FBAR, see Form TD F 90-22.1 and the IRS FBAR Frequently Asked Questions.

If you learn you were required to file FBARs for earlier years, you should file the delinquent FBARs and attach a statement explaining why they are filed late. You do not need to file FBARs that were due more than six years ago, since the statute of limitations for assessing FBAR penalties is six years from the due date of the FBAR. As discussed below, no penalty will be asserted if IRS determines that the late filings were due to reasonable cause. Keep copies, for your record, of what you send.

Possible penalties for failure to file FBAR

If you fail to file an FBAR, in the absence of reasonable cause, you may be subject to either a willful or non-willful civil penalty. Generally, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50 percent of the total balance of the foreign account at the time of the violation. See 31 U.S.C. § 5321(a)(5). Note that this penalty is applicable only in cases in which there is willful intent to avoid filing. Non-willful violations that the IRS determines are not due to reasonable cause are subject to a penalty of up to $10,000 per violation. There is no penalty in the case of a violation that IRS determines was due to reasonable cause. For more information about the FBAR penalty, see Form TD F 90-22.1. For information about the reasonable cause exception to the FBAR penalty, see IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR).

Example 3: Same facts as Example 1, except that the highest balance in Taxpayer’s checking account exceeded $10,000 and, after reading recent press and thus learning of his FBAR filing obligations, Taxpayer filed an accurate, though late, FBAR. The FBAR was accompanied by a written statement explaining why Taxpayer believed the failure to file the FBAR was due to reasonable cause. The IRS will determine whether the violation was due to reasonable cause based on all the facts and circumstances. Taxpayer’s explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case. Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted.

Factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause include reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, that the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account. There may be factors in addition to those listed that weigh in favor of a determination that a violation was due to reasonable cause. No single factor is determinative.

Factors that might weigh against a determination that an FBAR violation was due to reasonable cause include whether the taxpayer’s background and education indicate that he should have known of the FBAR reporting requirements, whether there was a tax deficiency related to the unreported foreign account, and whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return. As with factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause, there may be other factors that weigh against a determination that a violation was due to reasonable cause. No single factor is determinative.

Current IRS procedures state that an examiner may determine that the facts and circumstances of a particular case do not justify asserting a penalty and that instead an examiner should issue a warning letter. See IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR). The IRS has established penalty mitigation guidelines, but examiners may determine that a penalty is not appropriate or that a lesser (or greater) penalty amount than the guidelines would otherwise provide is appropriate. Examiners are instructed to consider whether compliance objectives would be achieved by issuance of a warning letter; whether the person who committed the violation had been previously issued a warning letter or has been assessed the FBAR penalty; the nature of the violation and the amounts involved; and the cooperation of the taxpayer during the examination.

Example 4: Taxpayer is a United States citizen who lives and works in Country B as a computer programmer. Taxpayer has checking and savings accounts with a bank that is located in the city where he lives. The aggregate balance of the checking and savings accounts is $50,000 during the tax year. Taxpayer complied with Country B’s tax laws and properly reported all his income on Country B tax returns. Taxpayer failed to file federal income tax returns and failed to file FBARs to report his financial interest in the checking and savings accounts. After reading recent press and thus learning of his federal income tax return and FBAR reporting obligations, Taxpayer filed delinquent FBARs, reporting both foreign accounts, and attached statements to the FBARs explaining that he was previously unaware of his obligation to report the accounts on an FBAR. Taxpayer also filed federal income tax returns properly reporting all income and no tax was due. The IRS will determine whether the FBAR violation was due to reasonable cause based on all the facts and circumstances. Taxpayer had a legitimate purpose for maintaining the foreign accounts, there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and no tax was due. Taxpayer’s explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case. Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted.

New reporting requirement for foreign financial assets

A new law requires U.S. taxpayers who have an interest in certain specified foreign financial assets with an aggregate value exceeding $50,000 to report those assets to the IRS. This reporting will be required beginning in 2012. Taxpayers who are required to report must submit Form 8938 with their tax return. See Notice 2011-55 for additional information about this reporting requirement under IRC section 6038D.

Mexican Bankers May Give IRS Information on American's Financial Assets in Mexico

2011-11-21T10:13:00.001-08:00

Read below the Reuters story explaining how the IRS is getting foreign bankers to disclose the details of all of their American depositors. This process is likely to be followed in Mexico which has the world's second largest number of American taxpayers living, working and owning property there. Past cases reveal that the IRS will pay substantial whistle blower finders fees to foreign bankers and financial professionals to reveal all data on their American clients. It will only get tougher in the future in Mexico to hide both financial assets and Mexican real estate and business interests. READ ARTICLE HERE

What the article does not state, is the very probable possibility that this Banker is being paid huge whistle blower fees for revealing all of the information on his ex bank clients. Those finders fees are large enough to allow the recipients to retire in luxury for the rest of their lives. Turning Americans with assets abroad into the IRS is extremely profitable. See IRS Form 211 for the form used to turn in Taxpayers in exchange for handsome finders fees.

The IRS has special forms for reporting Mexican corporations, Mexican Fideicomiso Property Ownership, Mexican Bank Account and other Mexican Financial Assets which must be filed with your US tax return. Failure to file those forms or filing them late can result in penalties of $10,000 or more and possible criminal prosecution. The "good old days" of not disclosing your income or property in Mexico and disappearing fast.

Best Mexican Corporate Forms for US Tax Purposes

2011-11-01T17:08:00.000-07:00

Which Type of Mexican Corporation to use?

There are two types of Mexican corporations as listed below. When, as a US Taxpayer, you chose a type for your Mexican business or real estate, the US Tax Consequences can differ and have significant affect on your US taxes. Below we discuss the US income tax consequences of each type of corporation.

1. Sociedad Anonima (S. A.) and Sociedad Anonima De Capital Variable (S. A. De C. v.) are
negotiable stock corporations of two or more persons whose liabilities for acts of the corporation
are limited to their capital contribution.

This type of corporation will always be taxed as a foreign corporation. The corporation will pay taxes in Mexico on its income and if it pays out dividends to you the owner, you will have to pay taxes again on those dividends on your US tax return. Therefore its income is subject to double taxation. You as shareholder do not get to deduct is losses on your US income tax return or claim any foreign tax credits the taxes the corporation pays in Mexico to offset any of its income distributed to you.

If the corporation sells its business or assets, it will pay tax on that gain on its Mexican corporate tax return and when those funds are distributed to you, you will have to report that distribution as income on your US return and cannot claim any tax credits for taxes paid against that income in Mexico unless you make a Section 962 election which will allow you to claim the foreign tax credit, but will subject that income to taxes at the US corporation tax rates (which can be higher than your individual US income tax rate). Form 5471 may have to be filed for this entity depending your ownership percentage.

2. Sociedad De Responsabilidad Limitada (S. De R. L.) and the Sociedad De Responsabilidad
Limitada De Capital Variable (S. De R.L. De C.V.) are nonnegotiable stock limited liability
corporations of two or more persons whose liabilities for acts of the corporation are limited
to their capital contribution.

The tax consequences of this type of Mexican corporation are the same as stated above unless you make an election (which is only permitted for this type of corporation) to treat it for US tax purposes as a a disregarded entity(if you are the only shareholder) or a flow through partnership. This election must be timely made with the IRS. Only a S. De. R. L. can make this election. Mexican attorneys have stated that it is possible to convert to this type of corporation if you erroneously incorporated as a S.A. de C.V.

After the election is filed this type of Mexican corporation is treated for US tax purposes very similar to a US partnership or LLC. All income or losses of the Mexican corporation flow through to your US income tax return and are taxed on it. Any Mexican income taxes paid by the entity can be claimed as foreign tax credits against the US tax on the income that you are taxed on. If it has capital gains, those capital gains will be taxed on your US return the same as US capital gains. The clear possibility of double taxation is avoided when this election is made.

The S. De R.L. often works out best if the corporation owns Mexican real estate that will generate losses while rented out and capital gains when sold. It also works out well when an Mexican operating business will generate losses its early years and later when profits are made the owner expects to pull them all out from the corporation for his personal use.

The income or loss after the election is filed is included on your personal return if you are the sole shareholder or if there are several US shareholders, the income is reported by filing form 8865. We know Mexican tax law and how to best structure your Mexican business or real estate ownership to achieve he optimum US income tax benefits. www.taxmeless.com

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Mexican Citizens and other nonresidents with Assets in the US are Subject to US estate taxes

2011-10-27T17:12:00.000-07:00

Mexican Citizens and other nonresidents with certain assets located in the United States will cause their estates to have to file US Estate Tax returns on the value of their assets (with some exceptions) located in the USA. The tax is based on the Fair Market Value of their Assets and can be up to 35%. Nonresidents only get an exemption from this tax equal to the first $60,000 value of their US estate. The balance of the estate's assets are subject to the estate tax. Real estate which was owned by a deceased nonresident is subject to this tax. The estate can only deduct the mortgage balance due from the fair market value if the estate agrees to report to the IRS the value an details of the decedents worldwide assets including those in Mexico.

Due to the large chunk this estate tax can take out of a nonresident's estate, it is best to do some advance planning to attempt to reduce it. Email us if you want help. Read more about the nonresident estate tax here

LATEST IRS LETTER CONCERNING IF A MEXICAN FIDEICOMISO OWNER MUST FILE FORM 3520

2011-10-07T10:43:00.000-07:00

The following letter from an IRS Technical Reviewer was Published by Tax Analysts(R) concerning the issue of whether or not a Mexican Fideicomiso must file Forms 3520 and 3520A.

UIL: 6048.00-00
Release Date: 6/24/2011
Date: November 17, 2010
Refer Reply To: GENIN-141622-10 – CC:INTL:B01:* * *
Dear * * *:
This is in response to your request for general information regarding the infor-mation reporting obligations with respect to Mexican fideicomisos that own certain Mexican residential real property on behalf of U.S. persons who are not also Mexican citizens.
Under section 6048(a) and (c) of the Code,¹ a U.S. person who makes a transfer to or receives a distribution from a foreign trust generally is required to report certain information on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Under section 6048(b) of the Code, a U.S. person who is treated as the owner of a foreign trust under the grantor trust rules (sections 671 through 679 of the Code) is required to complete Part II of Form 3520 and to ensure that the foreign trust files Form 3520-A, Annual Information Return of Foreign Trust with U.S. Owner. Section 6677 of the Code imposes significant penalties (up to 100 percent of the gross reportable amount) for failure to comply with section 6048.
The rules for determining whether an entity is classified as a trust for U.S. federal income tax purposes are found in section 301.7701-4 of the Procedure and Administration Regulations. The rules for determining whether an entity that is classified as a trust is a foreign trust are found in section 7701(a)(31)(B) of the Code and section 301.7701-7 of the Procedure and Administration Regulations. Any U.S. person who transfers property to or has an interest in a Mexican fideicomiso that is classified as a foreign trust must comply with section 6048.

This letter provides general information only and does not constitute a ruling. See Rev. Proc. 2010-1, section 2.04, 2010-1 I.R.B. 7. If you would like a definitive determination as to whether a particular fideicomiso is classified as a foreign trust for U.S. federal income tax purposes, you must request a private letter ruling pursuant to the procedures set forth in section 7 of Rev. Proc. 2010-1.

We hope this information has been helpful to you. If you have any questions, please contact * * *, Identification Number * * *, at * * * (not a toll-free call).

Sincerely, M Grace Fleeman - Senior Technical Reviewer, Branch 1 (International)

TRANSLATION OF THE ABOVE REFERENCED LETTER FROM THE IRS:

We’re not telling you that your particular fideicomiso is a trust and we’re not telling you your particular fideicomiso is NOT a trust. All we are saying is that if it IS a trust you have to file Form 3520. In other words, if you wish to be safe you should file form 3520, 3520a because the IRS refuses to state Fideicomisos are not foreign trusts. That refusal is a clear message to taxpayers.

IRS INTERNATIONAL TAX EVASION STATUS

2011-09-15T14:24:00.000-07:00

WASHINGTON — The Internal Revenue Service continues to make strong progress in combating international tax evasion, with new details announced today showing the recently completed offshore program pushed the total number of voluntary disclosures up to 30,000 since 2009. In all, 12,000 new applications came in from the 2011 offshore program that closed last week.

The IRS also announced today it has collected $2.2 billion so far from people who participated in the 2009 program, reflecting closures of about 80 percent of the cases from the initial offshore program. On top of that, the IRS has collected an additional $500 million in taxes and interest as down payments for the 2011 program — a figure that will increase because it doesn’t yet include penalties.
“By any measure, we are in the middle of an unprecedented period for our global international tax enforcement efforts,” said IRS Commissioner Doug Shulman. “We have pierced international bank secrecy laws, and we are making a serious dent in offshore tax evasion.”
Global tax enforcement is a top priority at the IRS, and Shulman noted progress on multiple fronts, including ground-breaking international tax agreements and increased cooperation with other governments. In addition, the IRS and Justice Department have increased efforts involving criminal investigation of international tax evasion.
The combination of efforts helped support the 2011 Offshore Voluntary Disclosure Initiative (OVDI), which ended on Sept. 9. The 2011 effort followed the strong response to the 2009 Offshore Voluntary Disclosure Program (OVDP) that ended on Oct. 15, 2009. The programs gave U.S.taxpayers with undisclosed assets or income offshore a second chance to get compliant with the U.S. tax system, pay their fair share and avoid potential criminal charges.
The 2009 program led to about 15,000 voluntary disclosures and another 3,000 applicants who came in after the deadline, but were allowed to participate in the 2011 initiative. Beyond that, the 2011 program has generated an additional 12,000 voluntary disclosures, with some additional applications still being counted. All together from these efforts, taxpayers came forward and made 30,000 voluntary disclosures.
“My goal all along was to get people back into the U.S. tax system,” Shulman said. “Not only are we bringing people back into the U.S. tax system, we are bringing revenue into the U.S. Treasury and turning the tide against offshore tax evasion.”
In new figures announced today from the 2009 offshore program, the IRS has $2.2 billion in hand from taxes, interest and penalties representing about 80 percent of the 2009 cases that have closed. These cases come from every corner of the world, with bank accounts covering 140 countries.
The IRS is starting to work through the 2011 applications. The $500 million in payments so far from the 2011 program brings the total collected through the offshore programs to $2.7 billion.
“This dollar figure will grow in the months ahead,” Shulman said. “But just as importantly, we have changed the risk calculus. Americans now understand that if they try to hide assets overseas, the chances of being caught continue to increase.”
The financial impact can be seen in a variety of other areas beyond the 2009 and 2011 programs.

Criminal prosecutions. People hiding assets offshore have received jail sentences running for months or years, and they have been ordered to pay hundreds of thousands and even millions of dollars.
UBS. UBS AG, Switzerland's largest bank, agreed in 2009 to pay $780 million in fines, penalties, interest and restitution as part of a deferred prosecution agreement with the U.S. government.

The two disclosure programs provided the IRS with a wealth of information on various banks and advisors assisting people with offshore tax evasion, and the IRS will use this information to continue its international enforcement efforts.

2011 Foreign Earned Income Exclusion (Form 2555)

2011-08-31T14:38:00.000-07:00

For 2011, the foreign earned income exclusion for wages earned while working and living abroad will be $92,900. That is a $1,400 increase from that allowed for 2010. If both spouses work abroad, each can exclude their earned income from US taxes up to that amount. One spouse cannot use the other spouses unused portion of that exclusion.

You can also claim a deduction for foreign rental expenses, utilities and maintenance above a certain amount up to a maximum amount which varies per the country you in which you are living and working.

Everything You Want to Know About 2011 IRS Voluntary Disclosure Program

2011-08-28T20:16:00.000-07:00

The deadline for entering the IRS 2011 Voluntary Offshore Disclosure Program has been extended until September 9, 2011. The procedures for entering the program are complex and must be followed carefully. You can also prior to the previous mentioned date obtain an additional 90 day extension of time to file all of your past tax returns including the special foreign reporting forms such as 5471, 8865, 5472, 3520 and TDF 90-22.1 (FBAR).

You can read all of the details and latest developments concerning the Voluntary Offshore Disclosure Program at our sister blog: www.usexpatriate.blogspot.com . You can read more about the special forms required at our website at www.taxmeless.com.

Remember, if you have failed to file required forms 3520 and 3520A for your Mexican Fideicomiso that means you have until 9/9/11 to file all past forms (if the real property has not produced revenue) without penalty under FAQ 18 in the rule to the program.

You also have until that date to file all past forms for your Mexican Corporation (form 5471) if you have reported all taxable income from that corporation on your personal tax return without risk of penalty.

California's Voluntary Compliance Initiative 2 - For Non Reported Foreign Income

2011-07-08T07:00:00.000-07:00

California's Voluntary Compliance Initiative 2 will run from August 1, 2011 through October 31, 2011. It provides (for those who file amended returns and participate) for reduced penalties and can avoid criminal action by California for those who have participated in abusive tax avoidance transactions or offshore financial arrangements.

What is an offshore financial arrangement?

An offshore financial arrangement (OFA) is any transaction designed to avoid or evade California income or franchise tax through the use of: (a) offshore payment cards, including credit, debit, or charge cards issued by banks in foreign jurisdictions, or (b) foreign banks, financial institutions, corporations, partnerships, trusts, or other entity. This would include interest, dividends, capital gains, rental income, etc. that were not reported on your California tax return solely because those items were located or occurred in a offshore countries.

What is an abusive tax avoidance transaction?
Abusive tax avoidance transaction (ATAT) means a:
• Tax shelter as defined under Internal Revenue Code (IRC) Section 6662(d)(2)(C)
• Reportable transaction as defined under IRC Section 6707A(c)(1) that is not adequately disclosed in
accordance with IRC Section 6664(d)(2)(A),
• Listed transaction as defined under IRC Section 6707A(c)(2),
• Gross misstatement within the meaning of IRC Section 6404(g)(2)(D), or
• Transaction to which the noneconomic substance transaction (NEST) penalty applies under Revenue and
Taxation Code (RTC) Section 19774.

Read More Here. Let us help you amend your current and past returns and enter the program while there is still time to take advantage of its benefits.

IRS Voluntary Offshore Disclosure Program Ends 8/31/11- After That Date Things will get really Bad!

2011-07-07T10:04:00.000-07:00

The IRS 2011 Voluntary Offshore Disclosure Program ends on 8/31/11. Any entry into the program must be made by that date. If you have not been filing your tax return, reporting your Mexican Bank Accounts and Financial Accounts, reporting your Mexican Corporation, Partnership or Fideicomiso this may be the last chance to eliminate or reduce potentially huge penalties, and avoid criminal prosecution.

The IRS has stated any taxpayer who does not come forward by the date, and who is later discovered or attempts to make up for past forms which have not been filed will be subject to the maximum possible penalties and possible criminal prosecution.

The IRS knows that in 2008 only about 100,000 US tax returns were filed by Gringos living in Mexico, but there are over One Million US Citizens living in Mexico. With these statistics in mind, there is little doubt that Mexico will become a big target for the IRS in the very near future. The statue of limitations never runs out on future IRS action if you have not filed a return for any particular year or if you fail to file certain foreign information returns such as those for Mexican Corporations, Fideicomisos, Mexican Financial accounts, etc.

In serious situations such as this, Attorney-client privilege which we can offer our clients is often indispensable.

Read more at our website at www.TaxMeLess.com

Election to Treat Mexican Corporation as a Flow Through For US Taxation if Usually a Good Idea

2011-04-03T17:28:00.000-07:00

If you own a business or real property in Mexico in a Mexican Corporation, you should consider making an election for your US tax return to treat that entity as a flow through entity. Best to do this when it is originally formed, but that can be done at a later date also, though the benefits will not be as great.

Your election has no effect on the taxation in Mexico, but does create benefits in many instances with your US tax return. The Mexican corporations that end in S.R.L, are the only eligible entity to make this election. If your Mexican corporation ends in S.A. de CV, the election cannot be made unless you work with your Mexican accountant and attorney to revise its type of entity classification under Mexican law.

The benefits of electing the flow through treatment is as follows:

You can deduct any yearly losses on your US tax return.
Though your share of the Corporations yearly earnings flow through to be be taxed on your personal tax return, you can claim foreign tax credits for all income taxes paid in Mexico on that income which will offset your US tax on the same income dollar for dollar.
If your corporation has a capital gain, that capital gain will flow through and be taxed to you on your personal return as a capital gain at the lower US tax rates (this is particularly good for corporations that investment in Mexican real estate and ultimately sell it).
You avoid the onerous US Foreign Corporation Subpart F income rules which cause many types of income in a regular Foreign Corporation to be taxed to you whether you receive that income or not and to be taxed at ordinary income rates on your personal tax return. These rules usually prevent individuals from claiming foreign tax credits against that income for taxes paid in by the Mexican corporation on that income.
Assures in most situations capital gains treatment on your US tax return should you sell your stock in the corporation rather than that gain being taxed as ordinary income under the Subpart F rules which is often the situation.

Please contact us if you have Mexican corporation and wish to make this election which again if often very advantageous to US shareholders on with respect to their personal taxes in the USA.

2011 IRS Voluntary Offshore Disclosure Program Penalty Framework

2011-03-08T10:56:00.000-08:00

IRS's Deputy Commissioner for Services and Enforcement has issued a Memorandum carrying the penalty framework to be applied to voluntary disclosure requests containing offshore issues, i.e., the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI). The memo reveals that the penalty framework will be available to anyone that makes a voluntary disclosure after the first disclosure initiative ended in 2009 (the 2009 OVDI). It also opens up the possibility of a refund for those who paid the penalty under the original voluntary disclosure but would have paid less if the new disclosure initiative had applied to them.

Penalty framework of 2011 Program. The new memo from IRS's Deputy Commissioner for Services explains how IRS personnel should execute agreements to resolve tax liabilities related to offshore issues of taxpayers who make voluntary disclosure requests under the second settlement offer. It applies to all offshore voluntary disclosures received after the close of the 2009 OVDI.

Observation: When the first settlement offer was extended to Oct. 15, 2009, IRS made a point of saying that there would be no further extensions and reiterated that taxpayers who did not voluntarily disclose their hidden accounts by the new deadline faced much harsher civil penalties, where applicable, and possible criminal prosecution (see Federal Taxes Weekly Alert 09/24/2009).

For taxpayers that make voluntary disclosure requests, and fully cooperate with IRS both civilly and criminally, the agreements are to take the following shape:

· All taxes and interest due for 2003—2010 are to be assessed. However, for accounts opened or received within this period, all taxes and interest due starting with the year the account opened or was received are to be assessed. The taxpayer also must file or amend all returns, including information returns and Form TOF 90-22.1, Report of Foreign Bank and Financial Accounts, commonly known as an FBAR.

· An accuracy-related penalty must be assessed on all years (no reasonable cause exception may be applied), and failure-to-file and failure-to-pay penalties also must be assessed, where applicable.

· Instead of all other penalties that may apply, including FBAR and information return penalties, an offshore penalty is to be assessed equal to 25% (or 12.5% or 5% if required conditions are met) of the amount in foreign financial accounts/entities and the value of foreign assets acquired with untaxed funds or producing untaxed income in the year with the highest aggregate account/asset value.

The 25% penalty is reduced to 12.5% if the taxpayer's highest aggregate account balance (including the fair market value of assets in undisclosed offshore entities and the fair market value of any foreign assets that were either acquired with improperly untaxed funds or produced improperly untaxed income) in each of the years covered by the 2011 OVDI is less than $75,000.

The 25% penalty is reduced to 5% if the taxpayer: (a) did not open or cause the account to be opened (unless a new account had to be opened upon the death of the owner of the account); (b) exercised minimal, infrequent contact with the account (e.g., to request the account balance); (c) didn't, except for a withdrawal closing the account and transferring the funds to a U.S. account, withdraw more than $1,000 from the account in any year covered by the voluntary disclosure; and (d) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. tax). For funds deposited before Jan. 1, '91, if no information is available to establish whether such funds were appropriately taxed, it will be presumed that they were. The penalty is also reduced to 5% for taxpayers who are foreign residents and who were unaware that they were U.S. citizens.

The new memo says examiners and their managers have no authority to negotiate different offshore penalty percentages for 2011 OVDI cases.

Refund in the works for some? The new memo says that taxpayers who participated in the 2009 OVDI (whose cases have been resolved and closed with a Form 906 closing agreement) who believe the facts of their case qualify them for the 5% or 12.5% reduced penalty criteria of the 2011 OVDI, but who paid a higher penalty amount under the original settlement agreement, should inform IRS. Upon receipt of this information, the case must be assigned to an examiner to review and make a determination. If a 2009 OVDI case is still open and the facts meet the criteria for the reduced 5% or 12.5% penalty of the 2011 OVDI, the examiner is to assert the reduced penalty as appropriate.

The memo says more guidance will be forthcoming regarding applications of the 2011 OVDI rules to 2009 OVDI cases.

The Memorandum can be viewed on the IRS website at http://www.irs.gov/pub/newsroom/2011_ovdi_field_directive_memo_signed.pdf.

Form 3520A due on 3/15/11 For Your IRS Reporting Requirement for Fideicomisos

2011-03-06T10:15:00.000-08:00

Report your Fideicomiso to Uncle Sam

Form 3520A is due on 3/15/11 to comply with IRS requirements for reporting your Fideicomiso. That form can be extended until 9/15/11 if you file form 7004 by that due date. The related Form 3520 is due on the extended due date of your personal tax return.

If you have a US Corporation or LLC, those returns are due on 3/15/11 also for the 2010 tax year unless you file for an extension. There are now stiff penalties for not filing these returns on a timely basis based on the number of months it is filed late and the number of shareholders or members of the entity.

MEXICO RENTAL INCOME…………….PAYING TAX IS NOW EASIER THAN EVER AND WITH STATESIDE BENEFITS!!

2011-02-22T13:03:00.000-08:00

by Linda Jones Neil

Those who have rental properties in Mexico can now rest easy. SAT, Mexico’s Uncle Sam, has provided a straightforward and relatively simple way to declare and pay taxes on rental income for those foreigners who have long wished to be in compliance but did not know the way to do so.

As of February 2010, SAT eliminated the requirement for a taxpayer identification number (RFC) which had previously been obtained only through extreme efforts,

Now the foreign taxpayer has two options: One to obtain the taxpayer identification number (RFC), file monthly declarations whether there is income or not, and enjoy a deduction of expenses. This is Option One.

Option Two provides for the taxpayer to make a declaration when income is received, pay a flat tax and obtain a receipt to take to the tax authorities in his/her tax residence, for credit or deduction of taxes in the home country.

On any rental the owner, or his/her property managers, are responsible for collecting the IVA tax (the added value tax) which is 11% on the Baja Peninsula and the Yucatan peninsula and 16% elsewhere. Owner or property manager must also collect the state hospitality tax which is 2 to 4% of the rental amount. These taxes must be delivered to the federal and local governments, as applicable.

It is important for the foreign person with rental property in Mexico to make arrangements for payment of these taxes since penalties can be high in Mexico for non-payment and, additionally, these same tax payments and expenses can be deducted or credited against income in taxpayer’s home country.

The next part of the equation for the US taxpayer has been deciding how to declare this income and enjoy the deductions in their US returns.

Don Nelson, Attorney and Certified Public Accountant located in California reports the following regarding tax treatment for U.S. taxpayers:

If the Mexican rental property owned in an individuals name or through a Fideicomiso, all rental income and expenses are reported on Schedule E of the form 1040.
Allowable rental expenses are the same as for a US property.
Management fees, interest, property taxes, utilities, repairs, maintenance, association dues, insurance…ALL are deductible!
Depreciation on a Mexican property is 40 years straight line
Taxpayer can take a Foreign Tax Credit against the US income tax paid on the net rental income for income taxes paid in Mexico on that income.
IVA (added value tax) collected from the renter must be included in rental income, but then deducted out so no double taxation.
The special Vacation Home rules applicable to US rental property occupied part time by the owner is also apply to Mexican rental property.
IN A SALE OF THE PROPERTY, net gain is taxed in the US at the applicable lower capital gains rates and Mexican ISR paid is a credit against that US tax on that profit.

For further information on the Rental Payment Program for Mexican properties, please contact: Lic. Quirino Parra: quirino .parra @settlement -co .com.

For further information on the payment of US taxes when Mexican income is involved, please contact attorney and CPA Don D. Nelson: ddnelson @gmail .com . His website is at www .taxmeless .com.

Author Linda Neil is the founder of The Settlement Company. It is the first escrow company in Mexico, and is dedicated to counseling buyers and sellers, processing the trusts and title transfers of Mexican real estate for foreign buyers and sellers for properties located ANYWHERE in Mexico and, now, for payment of taxes on rental income for foreigners with properties in Mexico.. Ms. Neil is also licensed as a Real Estate Broker in California, is an Accredited Buyer Representative through NAR, and has over thirty five years of hands on experience in all aspects of Mexican real estate. She holds membership in AMPI, NAR and FIABCI and PROFECO Certificate 00063/96.

E-Mail; linda .neil @settlement -co .com Web Site: http://www.settlement-co.com.

IRS Today Announces New Voluntary Offshore Disclosure Program for 2011 for Undisclosed Foreign Assets and Financial Accounts

2011-02-08T13:25:00.000-08:00

The IRS TODAY announced a New 2011 Voluntary Offshore Disclosure Program which will be available through August 31, 2011. It gives taxpayers who are hiding assets abroad, or not disclosing those assets on their tax returns as required by tax law , or those who failed to file the required forms disclosing their assets abroad asecond chance to come out of the closet. The new program will give participants reduced penalties from those they would have paid if they did not enter the program. The new program's penalties however are in many circumstances higher than those charged participants in the 2009 Offshore Voluntary Disclosure Program which ended 10/15/09. Over 15,000 taxpayers participated in the original program and over 3,000 taxpayers have since that time have filed to disclose foreign bank accounts which had not previously been disclosed to the IRS.

Many informal estimates indicate that there are a large number of US Citizens not disclosing their bank accounts, real estate and corporation ownership in Mexico. This program offers the opportunity to reduce your potential criminal and civil penalties if you have not been reporting these assets as required by the Federal Tax Laws.

Read more about the program here. Our firm counseled and represented many clients concerning the previous Disclosure program. Please contact us if you need assistance of an Attorney CPA with this New program.You can discuss your situation and we can help you develop a strategy with the protection provided by the confidentiality of Attorney-Client Privilege.

Fast US Tax Facts for Americans Living and Working in Mexico By Don D. Nelson, Attorney, C.P.A.

2011-02-07T13:02:00.000-08:00

Fast US Tax Facts for Americans Living and Working in Mexico

By Don D. Nelson, Attorney, C.P.A.

If you are a US Citizen you must file a US tax return every year unless your income is less than $ 9,700 (for 2010 and lower for earlier years) or have self employment-independent contractor net income of more than $ 400 US per year. You are taxable on your world wide income regardless of whether you filed a tax return in Mexico.

· As an US expatriate living in Mexico on 4/18/11, your 2010 tax return is automatically extended until 6/15 but any taxes due must be paid by 4/18 to avoid penalties. The return can be further extended until 10/15/10 if the proper extension is filed.

· For 2010 if you are a qualified expatriate you get a foreign earned income exclusion (earnings from wages or self employment) of $91,500, but this exclusion is only available if you file a tax return.

· If your spouse works and lives abroad, and is qualified, she can also get at $91,500 foreign earned income exclusion.

· You get credits against your US income tax obligation for taxes paid to foreign country but you must file a return to claim these credits.

· If you own 10% or more of a Mexican corporation or hold an interest in Mexican property through a Fideicomiso you must file special IRS forms each year or incur substantial penalties which can be greater including criminal prosecution if the IRS discovers you have failed to file these forms.

· Your net self employment income in Mexico is subject to US self employment tax of 15.3% (social security) which cannot be reduced or eliminated by the foreign earned income exclusion.

· Forming the correct type of Mexican corporation and making the property US tax elections with respect to that corporation can save you a significant amount of US income taxes.

· If at any time during the tax year your combined highest balances in your Mexican bank and financial accounts (when added together) ever equal or exceed $10,000US you must file a FBAR form with the IRS by June 30th for the prior calendar year or incur a penalty of $10,000 or more including criminal prosecution. This form does not go in with your personal income tax return and is filed separately at a separate address.

· We understand the Mexican income tax laws and can coordinate your US taxes with those you pay in Mexico to help you achieve the optimum tax strategy.

· In the past several years the IRS has hired more than 2,200 new employees to audit, investigate and discover Americans living abroad who have failed to file all necessary tax forms.

· Often due to foreign tax credits and the the foreign earned income exclusion expats living in Mexico and file all past year unfiled tax returns and end up owing no or very little US taxes.

· Beginning in 2011 a new law is in effect which requires all US Citizens report on a new form filed with their tax returns all of their world wide financial assets if in total the value of those assets are $50,000 or more.

· Income from certain types of foreign corporations are immediately taxable on the US shareholder's personal income tax return.

· If you own investments in a foreign corporation or own foreign mutual fund shares you may be required to file the IRS forms for owning part of a Passive Foreign Investment Company (PFIC) or incur additional, taxes and penalties for your failure to do so. A PFIC is any foreign corporation that has more than 75% of its gross income from passive income or 50 percent or more of its assets produce or will produce passive income.

· The IRS is now matching up your US passport with your US tax records and now knows if you have not been filing all required US tax returns while you are living in Mexico.

· Download your 2010 US tax return questionnaire drafted expressly for Americans living in Mexico at www.TaxMeLess.com or at www.ExpatAttorneyCPA.com

Don D. Nelson, US Attorney, CPA

US Phone: (949) 481-4094, US Fax: (949) 218-6483

Email:ddnelson@gmail.com

Skype: dondnelson

Visit our US – Mexican Tax Blog

We have been preparing tax returns and assisting clients in Mexico with their US/Mexican tax planning for over 20 years.

MEXICAN FIDEICOMISO PROPERTY OWNERSHIP BY US TAXPAYERS – WHAT ARE THE IRS FILING REQUIREMENTS?

2011-02-05T18:04:00.000-08:00

By Don D. Nelson, Attorney at Law, C.P.A.

If you own your Mexican real estate through a Fideicomiso you have a yearly U.S. Tax filing obligation with the IRS. There are two informational forms which must be filed each year by Fideicomisos which have been deemed to be foreign trusts. These filing requirements are set forth below:

• Form 3520A is due on March 15th following the end of each calendar year. The due date of this form can be extended for six months if the extension is filed before the due date.. None of the Banks in Mexico who act as trustee will file this form for your as required by US tax law. Therefore, you must file it yourself since it is you the IRS will penalize if it is not filed. There is a penalty of 5% of the value of the assets in the trust for failing to file this form. This penalty can be waived for resonable cause. The form contains information on the Fideicomiso, its beneficiary(ies), its income and expenses, and the value of its assets, etc.

• Form 3520 is due on the extended due date of your personal tax return. However it is filed separately from your personal return. Failure to file this form can result in a penalty equal to 35% of the value of the Mexican real estate transferred to the Fideicomiso. This penalty is currently waived if you provide the IRS with a reasonable late filing excuse. This form mostly duplicates the same information contained in the form 3520A the addition of other informational items.

• The Fideicomiso must secure a US Federal ID number from the IRS. The ownership of all US owners must be reported.

• If you the property you own in your Fideicomiso has been your primary personal residence for 2 out of the past 5 years, and you filed jointly with your spouse, the first $500,000US ( $250,000US if you are singled) can be exempt on your US tax return. You can claim a foreign tax credit for taxes paid on your sales gain in Mexico against your US tax on any gain on the sale in excess of the exemption amount.

• If the property in your Fideicomiso is a rental, you must report the income and expenses on of the rental on your US tax return. You must depreciate the value of the improvements and structure on the property over a 40 year period. Keep in mind that you must also file and pay income and IVA taxes on your rental income in Mexico or risk problems with the Hacienda.

In the past year several attorneys have written articles analyzing the IRS foreign trust filing requirements and have expressed their opinion that a Fideicomiso is not a foreign trust and should not have to file Form 3520 and 3520A. That is good theory, but does not reflect the position of the IRS. Unfortunately the Fideicomiso document is worded as a foreign trust, holds title to the property in your behalf, and is administered by the Mexican Bank trustee. The IRS has never issued any pronouncement in writing that exempts Fideicomisos from filing the forms. Representatives of the IRS have indicated that it does not have any plan to exempt Fideicomisos from filng these forms. Therefore, if you chose not to file you are at risk of being assessed the high penalties for nonfiling as set forth previously.

If you own your Mexican real estate through a Mexican corporation you are required to file Form 5471 each year with your US income tax return. This form reports various information on the shareholders, income and expenses, and assets and liabilities of the corporation and the property it holds. Failure to file this form on filing it late can result in a $10,000 per year penalty. If you have a reasonable excuse for late filing that penalty is currently usually waived, though this policy may change in the future.

___________________________________________________________________________

Don D. Nelson is a U.S. Attorney and C.P.A. who has been assisting US Citizens who live, work or own property in Mexico with their US tax return filing requirements and tax planning for over 20 years. He is a recognized US international and expatriate tax expert. In the past six years he has assisted a large number of Americans file their Fideicomiso US Tax Forms and has been to date very successful in helping all of them avoid any penalties for filing past years or filing late.

No need to visit his office. All services and return preparation is provided to clients by phone, email, fax and the internet. Contact him if you need assistance filing the required Fideicomiso US Tax forms. Most accoutants and tax preparers do not understand these forms or know they exist. Since the forms are not filed with your personal tax return, they can be prepared and filed separately from that return. Our if you wish, we can prepare all of your US and state income tax forms.

Visit Don' websites at www.TaxMeLess.com & www.ExpatAttorneyCPA.com Email: ddnelson@gmail.com US Phone (949)481-4092.

For the lastest developments and news concerning US and Mexican taxes visit his blog at www.us-mexicantax.blogspot.com

IRS Releases Inflation Adjusted Foreign Housing Expense Deduction Limits

2011-02-04T08:15:00.000-08:00

The IRS has provided the inflation-adjusted limitations on foreign housing expenses for 2011 (Notice 2011-8).

Under IRC § 911(a), a qualified individual can elect to exclude from gross income his or her foreign earned income and housing costs. Section 911(c)(1) provides a formula for determining the excludible amount of the individual’s foreign housing costs. Generally, under section 911(c)(2)(A), a qualified individual will be limited to maximum housing expenses of $27,870 in 2011.

Expats can deduct foreign housing
expenses

However, the IRS can adjust the maximum limitation based on geographic differences in housing costs relative to housing costs in the United States, and since 2006 it has issued annual notices adjusting the limitation for qualified individuals who live in countries with high housing costs compared to U.S. housing.

Notice 2011-8 provides a table of more than 400 foreign locations for which the IRS is allowing an increased limitation on housing expenses. Some of the highest limitations for 2011 are for Bermuda ($90,000 for the full-year limitation); Hong Kong ($114,300); Paris ($84,800); Tokyo ($118,500); and Moscow ($108,000).

In locations where the amount has increased from the amount in 2010 (listed in Notice 2010-27), the notice also allows taxpayers who incurred housing expenses in 2010 to elect to apply the 2011 limitation amount to the 2010 year.

US IRS TAX RULES YOU MUST FOLLOW WHEN RENTING OUT PROPERTY IN MEXICO

2011-01-30T07:41:00.000-08:00

US IRS TAX RULES YOU MUST FOLLOW

WHEN YOU OWN AND RENT OUT PROPERTY IN MEXICO

By Don D. Nelson, Attorney, CPA

When you are renting out your real property in Mexico, as a US Citizen or permanent resident, you must not only comply with all Mexican tax requirements but you must also comply with the Internal Revenue Service's US income tax return filing requirements. The rules are almost the same as those for rental property located in the US, but with some variations.

· If you own the Mexican rental property through a Fideicomiso, or outright in your individual name, you report all of your rental income and expenses on Schedule E of your Form 1040. All of the allowable expenses are the same as for US property.

· Expenses you can deduct include management fees, interest, property taxes, utilities, repairs, maintenance, association dues, insurance, depreciation, and other miscellaneous expenses.

· Unlike property located in the US, you must depreciate the property (amount allocatable to the structure) over a 40 year period rather than shorter times sometimes allowed for US property.

· You can take a credit against your US federal income tax for income taxes paid to Mexico on your net rental income after deducting all expenses. That credit is limited to the amount of US Federal tax you paid on that rental income on your tax return. Any unused foreign tax credit can be carried over to future year. Most states do not allow any credit for income taxes paid foreign countries. That credit can be taken for Mexican income taxes and any income tax imposed by a State in Mexico. That state tax income is 3% in Baja California Sur. Some states in Mexico have no income tax.

· Any IVA or occupancy tax collected from the renter should be included in your rental income, but then you can deduct out those taxes so you do not have to pay any tax on those items. IVA in the Baja California is 11% and 16% in much of the rest of Mexico.

· The same restrictions and limited allowable deductions for “vacation homes” apply when you have occupied the property yourself part of the time and rented it out to third parties at other times.

· When the property is sold (if it is held in your individual name or in a Fideicomiso) your net gain is taxed in the US at the applicable lower capital gains rates, and you can claim a credit against your US tax on the sale for Mexican capital gains taxes paid on that profit to Mexico.

If the property was used for the 2 years during the previous 5 years prior to sale as your personal primary residence (you must actually live in it full time during that period), you may be able to exclude up to $500,000 of the gain from your US income taxes under the exclusion allowed for sales of personal residences. If the property was rented out part of that time, some of the gain on sale will be subject to US income tax.

If your Mexican property is held through a Mexican corporation, there can be adverse US tax consequences while renting out the property and upon sale on your US tax return. With the proper type of Mexican corporation, certain elections with the IRS can be made for US tax purposes which will negate almost of these US tax problems. These elections are only made for US tax purposes and do not in any way affect the way your Mexican corporation is taxed under Mexican law.

Other US Tax Forms That May be Required:

Form 3520/3520A: If you own your Mexican rental (or personal residence or second home real property) through a Fideicomiso, you must file these forms each year to avoid extreme penalties. These forms are filed separately from your personal return. The first form is due on March 15^th following the end of the calendar year and the other form is due on the extended due date of personal tax return.

Form 5471: If your Mexican real estate is held in a Mexican corporation, you must file this form each year if you own 10% or more of the shares (actually or constructively) in the corporation. This form is due on the extended due date of your personal return. The IRS can impose a $10,000 per year penalty for filing this form late or not at all.

Form TDF 90-22.1: This form reports your ownership in foreign bank and other financial accounts. It would include any accounts where your property manager or accountant is using to collect rents or pay Mexican taxes and rentals. If the highest total of all of your foreign financial and bank accounts when combined together equal or exceed at any time $10,000 US per year, you must file this form to report details of all accounts. It is filed separately from your tax return and is due on June 30^th following the end of each calendar year. The due date cannot be extended. The IRS can impose a $10,000 penalty for filing the form late or not at all.

Mexico Also Taxes Rental Income: Mexico imposes income taxes, IVA and other taxes on all rental income derived by Landlords from renting properties in Mexico. You must pay these taxes even if you do not live in Mexico. The rules are complex and failure to comply with those rules can result in serious monetary and other problems with the Mexican taxing authorities. We recommend you contact a Mexican accountant, or rental property tax expert to learn what it takes to be in legal compliance with those Mexican tax laws. The Settlement Company at www.settlement-co.com has an excellent service helping those who own Mexican rental property comply with Mexican rental tax laws and returns.

	Our other Expatriate Tax Blog with latest worldwide news:
	www.usexpatriate.blogspot.com Skype address: dondnelson

Wall Street Journal Reports Ten Ways to Avoid an IRS Income Tax Audit

2011-01-26T05:48:00.000-08:00

The Wall Street Journal has reported 10 ways to avoid a tax audit. The most useful is to report your business income in a corporation or LLC which can avoid the use of a schedule C on your personal tax return. It states that using a schedule C to report your business income can result in your chance of being audited being 10 times higher using a corporation. Read here for other tips and recommendations.

US Estate Planning if you Live and Work In Mexico

2011-01-23T18:44:00.000-08:00

You cannot ignore estate planning if you wish your US and and Mexican assets passing to the heirs you desire. You need to take the necessary steps to keep the costs and taxes at a minimum. If you are a US expat living in Mexico, that means you have to put the necessary documents in place in Mexico and in the USA. The laws of both countries governing testate succession must be coordinated.

The US imposes its estate and gift taxes on your no matter where you live in the world and no matter where your assets are located in the world. Mexico currently has no estate taxes but they are talking about changing that.

The US side of the process involves Wills, Trusts, Powers of Attorneys and Health Care Directives. These documents will direct the disposition of your Assets located in the USA. It may also involve a program of gifting in order to keep your US taxes down. In Mexico you may need a Mexican Will and must take steps to make certain your Fideicomiso passes your Mexican real estate to the proper heirs. You will need a Mexican attorney or accountant to help you with these documents.

If you do it right, you can save tens of thousands of dollars in probate fees,and often a lot more in estate taxes. We have been doing estate planning for over 30 years. Read more and download your estate planning questionnaire here. After you fill it out, send it to us and we can help you implement a plan that achieves your personal wishes.

Even Mexicans who are not US Citizens or residents, need to do US estate planning if they have real estate, corporations, or other assets located in the US. Proper advance planning also saves a lot of costs your heirs will have to incur if it is not done in advance.

New Estate Tax Law Rules - For US Expats and Residents

2011-01-12T15:19:00.000-08:00

We want to apprise you of the estate and gift tax changes in the recently enacted 2010 Tax Relief Act. Remember if you are a US Citizen no matter where you live in the world and no matter where you live in the world you are subject to US estate taxes on your worldwide assets. In some situations you can claim a credit for an estate taxes which must be paid in foreign countries against your US estate taxes. Before the new law, there was no estate tax for 2010, but some beneficiaries could have faced higher taxes because there were less favorable income tax basis rules. Also, under the prior law, estate and other transfer taxes were scheduled to rise substantially for post-2010 transfers.

Overview of the new law. The 2010 Tax Relief Act provides temporary relief. Among other changes, it reduces estate, gift and generation-skipping transfer (GST) taxes for 2011 and 2012. It preserves estate tax repeal for 2010, but in a roundabout way: estates wanting zero estate tax for 2010 must elect that option, along with the less favorable modified carryover basis rules that were set to apply for 2010. Otherwise, by default, the estate tax is revived for 2010, with a $5 million exemption, a top tax rate of 35%, and a step-up in basis. Also, for estates of decedents dying after Dec. 31, 2010, a deceased spouse's unused exemption may be shifted to the surviving spouse. However, these generous rules are temporary—much harsher rules are slated to return after 2012.

Lower rate and higher exemption for 2011 and 2012. For estates of individuals dying in 2009, the top estate tax rate was 45% and there was a $3.5 million exemption. The top rate was to rise to 55% for estates of individuals dying after 2010, and the exemption was to be $1 million. For 2011 and 2012, the 2010 Tax Relief Act reduces the top rate to 35%. It also increases the exemption to $5 million for 2011 with a further increase for inflation in 2012. But these changes are temporary. After 2012, the top rate will be 55%, and the exemption will be $1 million.

Special tax saving choice for 2010. The 2010 Tax Relief Act allows estates of decedents who died in 2010 to choose between (1) estate tax (based on a $5 million exemption and 35% top rate) and a step-up in basis, or (2) no estate tax and modified carryover basis. Basis is the yardstick for measuring income tax gain or loss when an asset is sold. With a step-up in basis, pre-death gain is eliminated because the basis in the heir's hands is increased to the date of death value of the asset. On the other hand, with a modified carryover basis, an heir gets the decedent's original basis, plus certain increases, which can be substantial. Even so, if the decedent had a relatively low basis and significant assets, some pre-death gain may be taxed when the heir sells the property. These concerns factor into the special choice for 2010. The executor should make whichever choice would produce the lowest combined estate and income taxes for the estate and its beneficiaries. This would depend, among other factors, on the decedent's basis in the assets immediately before death and how soon the estate beneficiaries may sell the assets.

Gift tax changes. Years ago, the gift tax and the estate tax were unified—they shared a single exemption and were subject to the same rates. This was not the case in recent years. For example, in 2010, the top gift tax rate was 35% and the exemption was $1 million. For gifts made after Dec. 31, 2010, the gift tax and estate tax are reunified and an overall $5 million exemption applies.

GST tax changes. The GST tax is an additional tax on gifts and bequests to grandchildren when their parents are still alive. The 2010 Tax Relief Act lowers GST taxes for 2011 and 2012 by increasing the exemption amount from $1 million to $5 million (as indexed after 2011) and reducing the rate from 55% to 35%.

New portability feature. Under the 2010 Tax Relief Act, any exemption that remains unused as of the death of a spouse who dies after Dec. 31, 2010 and before Jan. 1, 2013 is generally available for use by the surviving spouse in addition to his or her own $5 million exemption for taxable transfers made during life or at death. Under prior law, the exemption of the first spouse to die would be lost if not used. This could happen where the spouse with resources below the exemption amount died before the richer spouse. One way to address that was to set up a trust for the poorer spouse. Now, the portability rule may make setting up a trust unnecessary in some cases. But there still may be other reasons to employ credit shelter trusts. For example, a credit shelter trust may protect appreciation occurring between the death of the first spouse and the death of the second spouse from being subject to estate tax. Such a trust also can protect against creditors. Plus, the transferred exemption may be lost if the surviving spouse remarries and is again widowed.

Conclusion. The estate tax relief in the new law is substantial, but it is temporary. Estate planning to reduce taxes remains an important consideration. Even if taxes are not a concern because an estate is below the exemption level, it is important to have a proper estate plan to ensure that the needs of intended beneficiaries are met. Please schedule an phone appointment (we do use skype) with us to discuss how you and your family can make the best use of the new estate and gift tax rules.

Forms 3520 and 3520A Still Due for Fideicomisos Which Hold Title to your Mexican Real Estate

2011-01-06T05:21:00.000-08:00

Though many commentators have written articles stating that Mexican Fideicomisos should not have to file the Foreign Trust US Tax Forms 3520 and 3520A, the IRS has not in writing or any other manner accepted that position. They apparently do not plan on making any announcement on the status of Fideicomisos. Their refusal to take a position clearly indicates that the Form should be filed. A Fedeicomiso is worded like a foreign trust and does hold title to Mexican real estate on behalf of the real owner. It is administered by a Mexican Bank which acts as a Trustee. The IRS obviously likes the fact the these Forms will keep them fully informed of all of the real estate owned by US Gringos in Mexico and therefore force those Gringos to report any income made from those properties. Failure to file these forms can result in a $10,000 per year penalty. The Form 3520 A is due on 3/15 unless the due date is extended.

If you own non residential property through a Mexican Corporation, you must file Form 5471 each year or risk the same high penalty. This form is due on the extended due date of your personal tax return.

All rental income earned by your Mexican property must be reported on your US tax return but if it is held through a Fideicomiso you can claim a foreign tax credit for the taxes you pay on that income in Mexico.

New Form 8938 Required to Report Foreign Financial Assets For Tax Years Beginning after 3/18/10

2011-01-03T08:02:00.000-08:00

For tax years beginning after 3/18/10 you must now file form 8938 to report your foreign financial assets if the total value of those assets equals or exceeds $50,000 in that taxable year. The final form and instructions defining those foreign financial assets which are included have not yet been released .

Summary of Tax Law Changes Just Made by Congress & 2010 US Expat Year End Tax Planning

2010-12-26T15:39:00.000-08:00

See our Summary of the Tax Law Changes and reductions just made by Congress effective for 2011 here

And for Year End Tax Planning Ideas for 2010 click here

2010 Year End US Income Tax Planning Ideas for Expats and Residents

2010-11-11T14:36:00.000-08:00

Its now time for you to take steps to try to reduce your 2010 US Income tax burden. We have now published our invaluable annual tax planning letter. Read or download it now! Click Here to Reduce you Taxes for 2010

Remember, at the Internal Revenue Service, the Revenue comes before the Service

2010-10-26T11:56:00.001-07:00

YOU MUST NOTIFY THE IRS OF YOUR ADDRESS CHANGE WHEN YOU MOVE ABROAD TO AVOID PROBLEMS

2010-10-24T19:10:00.000-07:00

When you move to Mexico or other foreign countries you MUST notify the IRS of your new address. The IRS is not responsible to keeping its records up to date with your new address, you are! You should notify them using Form 8822. If you fail to notify them of the address change, any notices they send to your previous address are deemed received under the law, and various time limitations, assessments, etc. , may expire even though you are not receiving the IRS notices.

One client who failed to notify the IRS of her new address was erroneously assessed a large sum of money and only learned about it many years later when the IRS took levied and took all of the money out of her bank account. It was very expensive and time consuming to finally convince the IRS of their error and get her money refunded. The problem would have never happened if a Form 8822 had been filed. The error could have been corrected immediately when the initial erroneous assessment was made.

Due to poor mail delivery in many countries, it is wise in some situations to keep using a US mailing address of a friend or relative, so your IRS notices will be delivered to a competent person who can then forward the mail by fax, email or a private delivery service.

Estate Planning for US Citizens Living in Mexico or Owning Assets in Mexico

2010-10-24T13:03:00.000-07:00

If you have assets in Mexico or in Mexico you need to plan your estate carefully. You most likely need to do a will in Mexico which provides for the disposition of your asset in the event of your death. You also need to determine what type of taxes (inheritance or transfer tax) you heirs may occur upon your death. In Mexico failure to do a will or trust could result in your assets being distributed under that Mexico law and could result in people inheriting the property other than those you would prefer. If you own real estate in a Fideicomiso, you can have that document drafted to provide who will receive ownership in the event of your death. Mexico may honor your US will or trust but if it often easier often have specific instruments drawn up in Meixco that comply with local law by a local attorney to avoid potential problems and expense later if Mexico later does not or has difficulties honoring a US will or trust.

Remember, if you have done a power of attorney appointing someone to handle your affairs, it Mexico that document may expire upon your death. So do not rely on that to handle the disposition of your foreign assets.

Of course, you must also prepare to US will or living trust (which avoids probates and a lot of expense and time) to cover the disposition of your US assets and which also states the disposition of your foreign assets the same as a foreign trust or will you have had prepared.

The US will impose its estate tax on your worldwide assets, though it will allow a credit in most situations for any foreign inheritance tax you had to pay on assets located outside of the US. Until Congress amends the law, starting in 2011 all estates in excess of $1 million will be subject to US estate tax. If you are married special provisions can be inserted in your US will or trust to secure estate tax savings.

Expatriates Elgible For Additional 2 Months Extension of Time to File Their Tax Return Beyond 10/15

2010-10-18T22:33:00.000-07:00

All taxpayers are generally entitled to an automatic 6-month extension of time to file their returns by filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, also available en español, with the Internal Revenue Service.

In addition to this 6-month extension, taxpayers who are out of the country (as defined in the Form 4868 instructions) can request a discretionary 2-month additional extension of time to file their returns (to December 15 for calendar year taxpayers).

To request this extension, you must send the Internal Revenue Service a letter explaining the reasons why you need the additional 2 months. Send the letter by the extended due date (October 15 for calendar year taxpayers) to the following address:

Internal Revenue Service Center
Austin, TX 73301-0215
USA

You will not receive any notification from the Internal Revenue Service unless your request is denied for being untimely.

The discretionary 2-month additional extension is not available to taxpayers who have an approved extension of time to file on Form 2350 (for U.S. citizens and resident aliens abroad who expect to qualify for special tax treatment).

Most Current IRS Position on Filing Form 3520 & 3520A for Fideicomisos (foreign trusts)

2010-10-18T10:46:00.000-07:00

The IRS has never in writing or in any other manner exempted Mexican Fideicomisos from filing forms 3520 and 3520A which are required of foreign trusts. The Fideicomiso documents are worded like foreign trusts and they due hold title to real property in Mexico on behalf of the property owner. The Trustee of a Fideicomiso is a Mexican Bank.

Today in an off the record phone conversation a knowledgeable IRS representative stated that currently they do not plan to ever publish anything that would exempt Fideicomisos from filing those forms. There are huge monetary penalties not filing those forms or for filing them late (though currently if you file late they have been in almost all situations waiving those late filing penalties).

Therefore, though there are several articles being circulated written by aggressive attorneys that conclude in theory that Fideicomiso's should not have to file Forms 3520 and 3520A, the IRS has not concurred with those conclusions. Any Fideicomiso beneficiary that does not file these required forms each year, is doing so without the concurrence of the IRS and is in grave danger of incurring huge civil penalties.

Mexican Fideicomisos and Filing Forms 3520 and 3520A each year.

2010-09-22T09:59:00.000-07:00

In Mexico Fideicomisos hold title to certain real property owned by non-Mexicans citizens. A Mexican bank is designated as the Trustee and the wording of the Fideicomiso document is clearly that of a trust. The IRS has never made a written pronouncement or ruling that excludes Fideicomisos from the requirement that they file annually Forms 3520 and 3520A. Penalties for not filing these forms or filing them late are huge and can be up to 15% of the value of the property in the trust.

A Texas attorney recently has been widely circulating a written opinion she wrote and a copy of her email alleging that Mexican Fideicomisos may not be foreign trusts and may not be required to File Forms 3520 and 3520A. Her email cites a situation where the IRS informally agreed that her client did not have to file Forms 3520/3520A or pay any penalty for not filing.

We have checked with an IRS representative who directly deals with these issues. They stated it is very unlikely that in the near future the IRS will ever issue any written ruling or opinion that Fideicomisos do not have to file these foreign trust reporting forms or are not foreign trusts.

Informal decisions made by the IRS by law cannot be cited as authority by other taxpayers by law. The law also states written private letter rulings in almost every circumstance cannot be cited as authority by other taxpayers. Therefore reliance on a privae attorney's written opinion or an informal decision by the IRS can be very risky and will offer no protection in the event you fail to comply with currently accepted IRS filing requirements. Filing the 3520/3520A form also would be significantly cheaper than going to Court to fight the IRS on this issue when you cannot even cite the informal decision as authority.

Until the IRS (if ever) declares in writing that Fideicomiso's are exempt from the foreign trust filing requirements or are not foreign trusts, all owners of property in Mexico which hold their title through Fideicomiso's should continue to file Forms 3520 and 3520A each year to avoid being assessed large monetary penalties by the IRS.

Treasury Inspector General Finds 10% of Foreign Earned Income Exclusions claimed in 2008 Are Invalid or Erroneous

2010-09-01T12:41:00.000-07:00

TIGTA Finds Significant Loss in IRS Revenue Because of Erroneously Claimed Foreign Earned Income Tax Exclusions

WASHINGTON - The Internal Revenue Service (IRS) lost an estimated $90 million in revenue for Tax Year 2008 because of erroneously claimed foreign earned income tax exclusions, according to a report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).

The foreign earned income tax exclusion allows a taxpayer to exclude up to $91,500 of foreign earned income. A taxpayer qualifies for this exclusion if he or she has foreign income and a home in a foreign country. An eligible taxpayer designates this status by filing Form 2555 (Foreign Earned Income) with the IRS.

TIGTA conducted a performance audit to assess the IRS's ability to ensure the accuracy of these exclusions. TIGTA reviewed 231,277 tax returns from Tax Year 2008 and found that 10 percent (23,334) of taxpayers claiming the exclusion either failed to qualify for the exclusion or inaccurately computed the exclusion. The income erroneously excluded totaled $675 million. The estimated tax avoided totaled $90 million.

"This is very troubling. Over five years, the estimated revenue loss to the IRS could total more than $450 million," said J. Russell George, Treasury Inspector General for Tax Administration. "Improvements must be made to reduce erroneously claimed foreign earned income tax exclusions," he added.

TIGTA made seven recommendations to the IRS in this report, and the IRS agreed with four of the seven recommendations.

To review the report, including the scope and methodology, go to: http:www.treas.gov/tigta/auditreports/2010reports/201040091fr.pdf.

New Foreign Account Tax Compliance Act (FATCA) reporting requirements

2010-08-05T09:11:00.000-07:00

The new Foreign Account Tax Compliance Act (FATCA) requires that taxpayers report all foreign financial assets if the aggregate current fair market value of all such assets equal $50,000 or more. Foreign financial assets include foreign bank accounts, brokerage accounts, stocks, bonds, and ownership in foreign entities such as foreign corporations, partnerships, trusts, and LLCs. The IRS has the ability under the new law to define almost any asset located outside the US as a foreign financial assets required to be reported under this law. They will in the future be issuing regulations defining the type of assets they have determined are included under this new law.

These items will either be reported on an attachment to your US tax return or the IRS is most likely to create a new tax form to attach to your return for the reporting. For each such asset you must state full information including account numbers, name and address of financial institution or stock issuer, and the highest value of the foreign asset during the tax year.

If you meet the aggregate $50,000 in value threshold, you will have to report all the information on each asset regardless of the percentage you own or its small value. All other foreign asset reporting forms such as FBARs, Form 5471, 8865, 3520, 3520A, etc must also still be filed if required.

The minimum penalty for failing to report this data begins at $10,000 and can go up from there depending on the circumstances. This is generally effective for tax years that begin after 3/18/10.

Fideicomiso US Income Taxation Under New 2010 HIRE ACT INVOLVING FOREIGN TRUSTS

2010-07-31T12:01:00.000-07:00

A widely distributed article recently published by some attorneys contains some dire warnings about the adverse income tax consequences of the new foreign trust provisions in the HIRE-FATCA Act passed early in 2010 with respect to Fideicomisos (which the IRS currently requires file Forms 3520 and 3520A because the IRS currently holds Fideicomisos to be foreign trusts). The conclusions in this article are most likely not correct if the Fideicomiso has no income and contains property held for investment or held for personal use by the beneficiary (not a rental property). The IRS has not at this time ( nor is it likely to in the near future) issued any regulations further explaining the effect of the provisions of the new law on Fideicomisos and foreign trusts. What the regulations or further guidance may say is pure speculation. The general principles of trust taxation which are most likely to apply are stated in the next paragraph.

Under general trust tax law involving income and distributions from trusts to beneficiaries, unless the trust generates taxable income, the mere fact that personal use of foreign trust real property by a beneficiary is treated as a distribution to that beneficiary, will not cause the personal use to be taxed to the owner or beneficiary of the Fideicomiso because distributions from trusts are only taxable to the extent of the trusts DNI (Distributable Net Income).

You must keep in mind that until the IRS issues further guidance and regulations on this new law, you cannot be certain they will not "twist" its interpretation of the new changes in a manner which is not consistent with prior long standing us trust tax principles. Therefore some uncertainty will exist until then.

TDF 90-22.1 FOREIGN FINANCIAL ACCOUNT REPORT DUE 6/30/10 - STREET ADDRESS TO USE FOR DHL, FED EXP OR UPS DELIVERY

2010-06-27T09:36:00.000-07:00

The following street address should be used to file TDF 90-22.1 (FBAR) form when the US mail is not available for delivery. These private delivery services will not deliver to the PO Box shown delivery address shown on the form's instructions.:

IRS Detroit Computing Center
Attn: FBAR Mailroom
4th Floor
985 Michigan Ave.
Detroit, MI 48226
(313) 234-1062

This form must be filed immediately. If it does not arrive by 6/30/10, you may incur a $10,000 late filing penalty. The fine can be greater if you do not file at all and also might include criminal prosecution. When in doubt whether you owe the form to the US Treasury, best to file just to be certain there are no problems since it does not cause any additional income tax cost, and is only a reporting form.

Due Date of FBAR Filing Fast Approaching

2010-06-14T12:46:00.000-07:00

The deadline for filing Report of Foreign Bank and Financial Accounts,Form TD F 90-22.1 (FBAR) for calendar 2009 is fast approaching. These reports are due by June 30th each year. Unlike the rule for tax forms, FBAR must be received by Treasury on or before the June 30th date to be considered timely filed. Therefore, one should plan accordingly and file the FBAR in sufficient time in advance of the due date. No extension of time to file is permitted.

Penalties can be severe. Persons who are required to file the FBAR and who do not do so by June 30th are subject to a penalty. For a willful violation the penalty can be as high as the greater of $100,000 or 50% of the amount in the foreign account. For a nonwillful violation that is not corrected and for which there is no reasonable cause, the penalty can be as high as $10,000.

Several IRS pronouncements should be considered when working on 2009 FBARs, including Announcement 2010-16 and Notice 2010-23. You can link directly to

FAST US INCOME TAX FACTS FOR AMERICANS LIVING AND WORKING IN MEXICO

2010-04-18T00:40:00.000-07:00

· If you are a US Citizen you must file a US tax return every year unless your income is less than $ 9,350 (for 2009 and lower for earlier years) or have self employment-independent contractor net income of more than $ 400 US per year. You are taxable on your world wide income regardless of whether you filed a tax return in Mexico.

· As an US expatriate living in Mexico on 4/15, your 2009 tax return is automatically extended until 6/15 but any taxes due must be paid by 4/15 to avoid penalties. The return can be further extended until 10/15/10 if the proper extension is filed.

· For 2009 if you are a qualified expatriate you get a foreign earned income exclusion (earnings from wages or self employment) of $91,400, but this exclusion is only available if you file a tax return.

· If your spouse works and lives abroad, and is qualified, she can also get at $91,400 foreign earned income exclusion.

· You get credits against your US income tax obligation for taxes paid to foreign country but you must file a return to claim these credits.

· If you own 10% or more of a Mexican corporation or hold an interest in Mexican property through a Fideicomiso you must file special IRS forms each year or incur substantial penalties which can be greater including criminal prosecution if the IRS discovers you have failed to file these forms.

· Your net self employment income in Mexico is subject to US self employment tax of 15.3% (social security) which cannot be reduced or eliminated by the foreign earned income exclusion.

· Forming the correct type of Mexican corporation and making the property US tax elections with respect to that corporation can save you a significant amount of US income taxes.

· If at any time during the tax year your combined highest balances in your Mexican bank and financial accounts (when added together) ever equal or exceed $10,000US you must file a FBAR form with the IRS by June 30th for the prior calendar year or incur a penalty of $10,000 or more including criminal prosecution. This form does not go in with your personal income tax return and is filed separately at a separate address.
· We understand the Mexican income tax laws and can coordinate your US taxes with those you pay in Mexico to help you achieve the optimum tax strategy.

· In the past year the IRS has hired more than 800 new employees to audit, investigate and discover Americans living abroad who have failed to file all necessary tax forms.

· Often due to foreign tax credits and the the foreign earned income exclusion expats living in Mexico and file all past year unfiled tax returns and end up owing no or very little US taxes.

· Beginning in 2010 a new law is in effect which requires all US Citizens report all of their world wife financial assets if in total the value of those assets are $50,000 or more.

· Income from certain types of foreign corporations are immediately taxable on the US shareholder's personal income tax return.

· If you own investments in a foreign corporation or own foreign mutual fund shares you may be required to file the IRS forms for owning part of a Passive Foreign Investment Company (PFIC) or incur additional, taxes and penalties for your failure to do so. A PFIC is any foreign corporation that has more than 75% of its gross income from passive income or 50 percent or more of its assets produce or will produce passive income.

· The IRS is now matching up your US passport with your US tax records and now knows if you have not been filing all required US tax returns while you are living in Mexico.

· Download your 2009 US tax return questionnaire drafted expressly for Americans living in Mexico at http://www.taxmeless.com/07_Expat_Questionnaire__v2.doc

NEW LAW IN FORCE WITH RESPECT TO FOREIGN TRUSTS AND MEXICAN FIDEICOMISOS

2010-03-31T08:50:00.000-07:00

Provisions In New Tax Law related to foreign trusts & Mexican Fideicomisos

Clarifications with respect to foreign trusts. Under present law, a U.S. person is treated as the owner of the property transferred to a foreign trust if the trust has a U.S. beneficiary. Under current Treasury regulations, a foreign trust is treated as having a U.S. beneficiary if any current, future or contingent beneficiary of the trust is a U.S. person. Notwithstanding this requirement, some taxpayers have taken positions that are contrary to this regulation. In order to enhance compliance with this regulation, the Act codifies this regulation into the statute. This provision is effective on Mar. 18, 2010. The Act also clarifies that a foreign trust will be treated as having a U.S. beneficiary if (1) any person has discretion to determine the beneficiaries of the trust unless the terms of the trust specifically identify the class of beneficiaries and none of those beneficiaries are U.S. persons or (2) any written oral or other agreement could result in a beneficiary of the trust being a U.S. person. As a final clarification, the Act clarifies that the use of any trust property will be treated as a payment from the trust in the amount of the fair market value of such use.

Presumption with respect to transfers to foreign trusts. For transfers of property after Mar. 18, 2010, the Act provides that if a U.S. person directly or indirectly transfers property to a foreign trust (other than a trust established for deferred compensation or a charitable trust) IRS may treat the trust as having a U.S. beneficiary unless such person can demonstrate to the satisfaction of IRS that under the terms of the trust, (1) no part of the trust may be paid or accumulated during the year for the benefit of a U.S. person, (2) that if the trust were terminated during the year, no part of the trust could be paid to a U.S. person (3) and that such person provides any additional information as IRS may require with respect to such transfer.

Minimum penalty with respect to failure to report on certain foreign trusts. Under pre-Act law, a taxpayer that fails to file an information return with respect to certain transactions involving foreign trusts (e.g., the creation of a foreign trust, the transfer of money or property to a foreign trust, or the death of a U.S. owner of a foreign trust) is subject to a penalty of 35% of the amount required to be disclosed on such return. If IRS uncovers the existence of an undisclosed foreign trust but is unable to determine the amount required to be disclose on such return, it is unable to impose a penalty. The Act strengthens this penalty by imposing a minimum penalty of $10,000 on any such failure to file. This provision applies to notices and returns required to be filed after Dec. 31, 2009. Notwithstanding this minimum penalty, in no event may the penalties imposed on taxpayers for failing to file an information return with respect to a foreign trust exceed the amount required to be disclosed on the return.

Just Enacted HIRE ACT contains many offshore and international tax provisions

2010-03-21T21:49:00.000-07:00

To pay for the hiring incentives in the recently enacted “Hiring Incentives to Restore Employment Act” (the 2010 HIRE Act), Congress passed several offsetting revenue raisers, including a comprehensive set of measures to reduce offshore noncompliance by giving IRS new administrative tools to detect, deter and discourage offshore tax abuses. Here is a brief overview of the new offshore anti-abuse provisions.

Increased disclosure of beneficial owners

Reporting on certain foreign bank accounts. The Act imposes a 30% withholding tax on certain income from U.S. financial assets held by a foreign institution unless the foreign financial institution agrees to disclose the identity of any U.S. individual with an account at the institution (or the institution's affiliates) and to annually report on the account balance, gross receipts and gross withdrawals/payments from such account. Foreign financial institutions would also be required to agree to disclose and report on foreign entities that have substantial U.S. owners. Congress expects that foreign financial institutions will comply with these disclosure and reporting requirements in order to avoid paying this withholding tax. These provisions are effective generally for payments made after 2012.

Reporting on owners of foreign corporations, foreign partnerships and foreign trusts. The Act requires foreign entities to provide withholding agents with the name, address and tax identification number of any U.S. individual that is a substantial owner of the foreign entity. Withholding agents are to report this information to the U.S. Treasury Department. The Act exempts publicly-held and certain other foreign corporations from these reporting requirements and provides the Treasury Department with the regulatory authority to exclude other recipients that pose a low risk of tax evasion. Any withholding agent making a withholdable payment to a foreign entity that does not comply with these disclosure and reporting requirements is required to withhold tax at a rate of 30%. These provisions are effective generally for payments made after 2012.

Extending bearer bond tax sanction to bearer bonds designed for foreign markets. Bearer bonds (i.e., bonds that do not have an official record of ownership) allow individuals seeking to evade taxes with the ability to invest anonymously. Recognizing the potential for U.S. individuals to take advantage of bearer bonds to avoid U.S. taxes, Congress took a number of steps in the 1980's to eliminate bearer bonds in the United States. First, they prevented the U.S. government from issuing bearer bonds that would be marketed to U.S. investors. Second, they imposed sanctions on issuers of bearer bonds that could be purchased by U.S. investors. The Act extends many of these sanctions to bearer bonds that are marketed to foreign investors and prevents the U.S. government from issuing any bearer bonds. These provisions apply to debt obligations issued after the date which is two years after the new law's enactment date.

Foreign financial asset reporting

Disclosure of information with respect to foreign financial assets. The new law requires individuals to report offshore accounts and other foreign financial assets with values of $50,000 or more on their tax returns. Individuals who fail to make the required disclosures are subject to a penalty of $10,000 for the tax year; an additional penalty can apply if Treasury notifies an individual by mail of the failure to disclose and the failure to disclose continues. These provisions apply for tax years beginning after the new law's enactment date.

Penalties for underpayments attributable to undisclosed foreign financial assets. For tax years beginning after the new law's enactment date, the Act imposes a penalty equal to 40% of the amount of any understatement that is attributable to an undisclosed foreign financial asset (i.e., any foreign financial asset that a taxpayer is required to disclose and fails to disclose on an information return).

New 6-year limitations period. For returns filed after the new law's enactment date as well as for any other return for which the assessment period has not yet expired as of the new law's enactment date, the Act imposes a new six-year limitations period for omissions of items from a tax return that exceed $5,000 and are attributable to one or more reportable foreign assets. The Act also clarifies that the statute of limitations does not begin to run until the taxpayer files the information return disclosing the taxpayer's reportable foreign assets.

Other disclosure provisions

New reporting rule for PFICs. Effective on the new law's enactment date, activities with respect to passive foreign investment companies (PFICs) are subject to a new reporting rule. Unless otherwise provided by IRS, each U.S. person who is a shareholder of a PFIC must file an annual information return containing such information as IRS may require. A person that meets this new reporting requirement could, however, also have to meet the new reporting rule requiring disclosure of information with respect to foreign financial assets (see above). It is anticipated that IRS will exercise its regulatory authority to avoid duplicative reporting.

Electronic filing. For returns the due date for which (determined without regard to extensions) is after the new law's enactment date, the Act creates an exception to the general annual 250 returns threshold for electronic filing: IRS will be permitted to issue regs requiring filing on magnetic media for any return filed by a financial institution with respect to any taxes withheld by it for which it is personally liable. Thus, IRS will be authorized to require a financial institution to electronically file returns with respect to any taxes withheld by the financial institution even though the financial institution files less than 250 returns during the year.

Provisions related to foreign trusts

Clarifications with respect to foreign trusts. Under present law, a U.S. person is treated as the owner of the property transferred to a foreign trust if the trust has a U.S. beneficiary. Under current Treasury regulations, a foreign trust is treated as having a U.S. beneficiary if any current, future or contingent beneficiary of the trust is a U.S. person. Notwithstanding this requirement, some taxpayers have taken positions that are contrary to this regulation. In order to enhance compliance with this regulation, the Act codifies this regulation into the statute. This provision is effective on the new law's enactment date. The Act also clarifies that a foreign trust will be treated as having a U.S. beneficiary if (1) any person has discretion to determine the beneficiaries of the trust unless the terms of the trust specifically identify the class of beneficiaries and none of those beneficiaries are U.S. persons or (2) any written oral or other agreement could result in a beneficiary of the trust being a U.S. person. As a final clarification, the Act clarifies that the use of any trust property will be treated as a payment from the trust in the amount of the fair market value of such use.

Presumption with respect to transfers to foreign trusts. For transfers of property after the new law's enactment date, the Act provides that if a U.S. person directly or indirectly transfers property to a foreign trust (other than a trust established for deferred compensation or a charitable trust) IRS may treat the trust as having a U.S. beneficiary unless such person can demonstrate to the satisfaction of IRS that under the terms of the trust, (1) no part of the trust may be paid or accumulated during the year for the benefit of a U.S. person, (2) that if the trust were terminated during the year, no part of the trust could be paid to a U.S. person (3) and that such person provides any additional information as IRS may require with respect to such transfer.

Minimum penalty with respect to failure to report on certain foreign trusts. Under pre-Act law, a taxpayer that fails to file an information return with respect to certain transactions involving foreign trusts (e.g., the creation of a foreign trust, the transfer of money or property to a foreign trust, or the death of a U.S. owner of a foreign trust) is subject to a penalty of 35% of the amount required to be disclosed on such return. If IRS uncovers the existence of an undisclosed foreign trust but is unable to determine the amount required to be disclose on such return, it is unable to impose a penalty. The Act strengthens this penalty by imposing a minimum penalty of $10,000 on any such failure to file. This provision applies to notices and returns required to be filed after Dec. 31, 2009. Notwithstanding this minimum penalty, in no event may the penalties imposed on taxpayers for failing to file an information return with respect to a foreign trust exceed the amount required to be disclosed on the return.

Dividend equivalent payments

Dividend equivalents treated as dividends. For payments made on or after the date that is 180 days after the new law's enactment date, the Act treats a dividend equivalent as a dividend from U.S. sources for certain purposes, including the U.S. withholding tax rules applicable to foreign persons. A dividend equivalent is any substitute dividend made pursuant to a securities lending or a sale-repurchase transaction that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources within the U.S. or any payment made under a specified notional principal contract that directly or indirectly is contingent upon, or determined by reference to, the payment of a dividend from sources within the U.S. A dividend equivalent also includes any other payment that IRS determines is substantially similar to a payment described in the preceding sentence. Under this rule, for example, IRS may conclude that payments under certain forward contracts or other financial contracts that reference stock of U.S. corporations are dividend equivalents.

When You Buyer or Sell Mexican Real Estate Consider Adding an Arbitration Clause to Your Contract

2010-02-22T23:00:00.000-08:00

Linda Neil, a Mexican real estate expert, recently pointed out in her article in the Gringo Gazette that Mexico has changed it laws to allow for arbitration and mediation of disputes between parties to a contract for the purchase of real estate in Mexico. Articles 1415 to 1463 of the Mexican Commercial Code provides guidelines. It is now possible to avoid the uncertainties of the Mexican Courts. This will allow parties to a contract to resolve their disputes with much greater speed than ever possible in the Mexican Courts and perhaps with more certainty in the final decision, not to mentioned significantly lower costs in legal fees, etc. If both the Buyer and Seller are US residents, it may be possible to agree that the mediation or arbitration will be held in the United States using the American Arbitration Association or another recognized arbitration organization.

Next time you buy or sell, tell your agent you need an arbitration and mediation provision put in the contract. Since so many real estate transactions in Mexico often result in problems, it is a good decision. Agents who tell you that you must follow their standard contract are not correct. You can always make changes or add additional provisions.

Sale of Primary Residence in Mexico -US and Mexican Tax Rules

2010-02-19T14:23:00.000-08:00

For US tax purposes, if you home in Mexico is your primary residence (this is subject to documentary proof on audit) for 2 out of the 5 past years (from date of sale) up to $500,000 in gain is not subject to taxes if you file a joint return, and $250,000 is tax free if you file as single. Any gain above those amounts are subject to taxes at capital gains rates. You can claim a credit for any Mexican capital gains taxes you paid on the sale against any US tax you pay as a result of the sale.

For Mexican taxes, to claim the unlimited exemption from taxes on the sale of your personal residence you first must have lived as your primary residence it for five years prior to the date of sale and be a Mexican citizen or hold an FM2 visa. You must also have documentary proof that it was your primary residence for that period of time. Such proof would include phone bills and utility bills; passports showing entry and exit dates from Mexico, etc. You cannot have two primary residences for either Mexican or US tax purposes.

You cannot get the exclusion from Mexican tax if you only hold an FM3, even though you have lived in your home full time for the 5 years. You must convince the Mexican Notary that your really did live in the property being sold as your primary residence for at least five years. The Notary makes the final decision whether to exempt you from taxes or not.

You should consult with a Mexican accountant, contadore (CPA) or tax abagado (attorney) if you wish to take advantage of the personal residence tax exemption to learn the steps required to qualify. Do not wait until the last minute when it is too late!

Therefore, it is possible to qualify for the gain exclusion on your US tax return though you may not qualify for Mexican tax purposes.

Fideicomiso US Tax Compliance Update - Don't Miss the 9/23/09 deadline!

2009-08-29T22:03:00.000-07:00

Under the IRS Offshore Voluntary Disclosure Program if a Fideicomiso Beneficiary has failed to file Form 3520A and 3520 (when required) they have until 9/23/09 to file those forms for the past six years without penalty if the property held by the Fido has produced no income during those past six years. Though the IRS has not been clear, it has implied that after that date if someone files their past unfiled forms 3520 and 3520A forms they may impose the $10,000 late filing penalty for each year whether or not the Beneficiary has a reasonable excuse for late filing. The same rules hold true for Fido Beneficiaries that have reported all of their income from the Fideicomiso, but failed to file the Forms 3520 and 3520A.

If you had unreported rental income from the Fido property and did not file those forms you must talk with an international tax expert to determine if you should enter the Voluntary Offshore Disclosure Program or risk the potentially bigger penalties of not entering the program. 9/23/09 is the deadline to take action or risk being assessed the tremendous penalties that the IRS can impose for not filing these forms.

US Fideicomiso Taxation

2009-08-22T14:51:00.000-07:00

If you own property in Mexico in a Fideicomiso you must file Forms 3520 in its initial year of existence and in its final year of existence. You must file form 3520A for each year that it exists. That form was designed to be filed by the Trustee Bank, but none of them will do it, so therefore under IRS rules you as the beneficiary must file the form. These forms are filed separate your from your personal tax return. These forms must be filed even though your income is too low to require you to file a US tax return.

Failure to file these forms can result in monetary penalties. If the property in the fideicomiso generates no income (your house) or generates income and you have reported it on your US tax return if you attach a late filing excuse the penalties will be waived. If it generates income you did not report on your US tax return you may want to consider the IRS VOLUNTARY OFFSHORE DISCLOSURE PROGRAM which will end on 9/23/09 which could reduce your penalties for non filing and will stop any criminal prosecution for violating US tax law.

More information is at: http://www.taxmeless.com/page11.html

If you own property in a Mexican corporation you must file form 5471 with your yearly US tax return whether or not it makes income or you are required to file a US tax return. We will discuss this in a separate blog post.

If you wish assistance with these forms or with the Offshore Disclosure or forms 5471 contact me. I have over 20 years experience in Mexican - US taxation and other international tax matters. I do spend a great deal of time in Mexico and understand its business, real estate and taxes.

IRS Crack Down on Secret Offshore Banks is Causing Taxpayers to Come Forward to avoid Criminal and Civil Charges.

2009-08-15T10:14:00.000-07:00

The IRS is actively pursuing individuals living abroad who have not reported on their tax returns hidden assets such as foreign bank accounts, foreign corporations, trusts (fideiciomisos) and other foreign financial activities in the proper manner. Click on the title to his article to read more about the most recent developments and the criminal and civil penalties that may result.

One of the of first individuals to plead guilty is from Malibu California. He had over many years built up a foreign bank account to approx. $1 million but had never filed the TDF 90-22.1 form to report it to the IRS. Most experts feel is is only a matter of time before the IRS starts getting list of US account holders from banks everywhere in the world including Mexico.

The IRS Voluntary Offshore Disclosure Progam ends on 9/23/09. Read more about it on our Sister Blog at www.usexpatriate.blogspot.com and at www.TaxMeLess.com

THE MEXICAN CORPORATION – THE VEHICLE FOR BUSINESS DEALINGS IN MEXICO “XYZ Company, S.A. de C.V.” – What does all THAT mean?

2009-08-14T03:45:00.000-07:00

by Linda Neil

The Sociedad Anonima de Capital Variable, translated literally is an anonymous society of variable capital. This is equivalent to the U.S. corporation in which there are stockholders. In Mexico it is governed by the Law of Mercantile Societies. More and more, foreigners are forming Mexican mercantile corporations which end with the initials, “S.A. de C.V.”, to do business and to achieve their financial goals in Mexico. The SadeCV is similar to the “Inc.” of the United States and Canada.

Another version of a corporate entity is the Limited Liability Company which has become more common in recent years. The Mexican counterpart is the SRLde CV, the Limited Responsibility company with variable capital.

While there are differences between the S.A. de C.V. and the S.R. L. de C.V., for our purposes here, both are included under the term “corporation” in this article.

As of December 1993, the corporation formed in Mexico is considered as “Mexican” even though all shareholders may be foreign persons.

When should a corporation be formed? It will make sense if the shareholders wish to perform services or sell goods for profit, build a hotel, or if they wish to develop a property for resale in lots or condominiums. The corporate entity permits the principals to obtain working papers and to obtain working papers for other foreigners who provide services not easily obtained in the local job market. Care must be taken, however, to set up the financial reporting system, to obtain invoices for all pre-operating expenses and to have an accountant who is knowledgeable to make the required declarations in Hacienda, México’s version of Uncle Sam or Revenue Canada.

The minimum capital investment in a Mexican corporation is $50,000.00 Mexican pesos Evidence of this capital contribution must be in cash or in assets which equal the total amount of the start up capital. It is important to make the declaration of all assets which are to be included from the start up of the corporation. Do not select the minimum amount just because it is the minimum. If you do it may later be difficult to establish the true amount of initial capital invested. Once the initial capital is established, additional investment may be added by making a declaration before a Notary Public, without requesting permission to do so from the government. This is the Variable Capital portion of the equation.

It is important to include in the corporate charter a statement of purpose (objecto social) that is very general. It should mention all activities that may be of interest to the shareholders; better to have an ample charter, permitting many business activities, rather than to have it limited to one activity. It is also a good idea to include export and import of all types of merchandise and technology in the charter. This makes bringing equipment and or supplies in from another country simpler.

A minimum of two shareholders is required to form a corporation. These shareholders will be required to sign the corporate charter before a Mexican Notary Public. If they come into Mexico as tourists to sign the documents they should obtain an FM-3 or FMN document at their local Mexican Consulate prior to coming so they may perform a business activity (signing the document) in a legal manner. Once the corporation has been formed it is necessary to obtain a federal tax registration number for the corporation and the administrator or board of directors must obtain the FM-3 permit to work in the activities of the corporation.

If the corporation includes or is composed of foreign stockholders it will include a clause in which the foreigners promise to be considered as Mexicans in the eyes of the law and not to invoke the aid of their government in the event of a dispute.

Administration of matters of the corporation may be either through a sole administrator (administrador unico) or through a board of directors. A Comisario must be appointed. This is the person responsible for the accounts and tax payments and should be a Mexican accountant. The comisario does not need to be a shareholder. The duties of the administrators, whether sole administrator or board of directors need to be clearly defined. Will they be able to enter into lawsuits? Obligate the corporation for loans? Hire and fire personnel?

Generally it is wise to provide a list of five names, in order of preference, for the corporation for submission for the permit for incorporation. The first name which has not been used previously by another company will be designated. Upon confirmation of the name, the corporate documents must be prepared and signed before a Notary Public within ninety days or the authorized name will become invalid and the process must be begun again. Together with the name request, permission to incorporate, where foreigners are involved, must be obtained from SECOFI, the Secretary of Industry and Commerce.

Upon completion of the corporate document, it must be recorded in the local registry of Business and Commerce, the National Foreign Investment Registry and the business enrolled in the local Chamber of Commerce or Industry Chamber. Monthly declarations must be filed with tax authorities. Additionally, the corporate accountant must file an annual statement with the National Foreign Investment Registry regarding the business activity for the previous year. If the corporation is used for property development or is not active, the Mexican accountant will probably charge about $600. Dlls. per year to do the required filings. If the corporation is active the accounting charge may be $300. to $500. Dlls. per month, or more.

Copyright, December 2004 Consultores Phoenix, S.C., reproduction prohibited without permission http://www.settlement-co.com

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NOTE: The US owners or US residents who own foreign corporations, LLCs and Trusts (Fideicomisos) are required to file special tax forms with their US income tax returns for each year. Failure to file these forms can result in penalties or $10,000 or more per year. See our website at www.taxmeless.com to learn more about these forms and requirements.

EJIDAL PROPERTY….. Is it a bargain? Or a problem?

2009-08-14T03:19:00.000-07:00

by Linda Neil

EJIDAL (EEEE-heee-doll) properties were established in Article 27 of the Mexican Constitution of 1917 as an outcome of the revolution and represent probably 50% of all the land in Mexico.

After the revolution hundreds of millions of acres from the original Spanish land grants were expropriated by the government and classified as "ejidal" properties. The state retains ownership of these lands and the peasants, or farmers, have the right to use them, to live on and to grow their crops on them. The rights of usage pass from father to son, but ejidal properties cannot be sold as private property.

In Baja California Sur alone, there were 100 ejido groups occupying 5 million 375 thousand hectares, according to the Ejidal Census made in 1991 by INEGI, the federal government statistical bureau. Only six other states in the entire country have more ejidal land.

The average amount of land for each ejido in BCS is 53,758 hectares. That's about 134,395 acres for each ejido or almost 210 SQUARE MILES of land for each ejidal group!

Per decree published on February 26, 1992 in Diario Oficial, Mexico's Official Newspaper, certain ejidal lands can now be converted to private property through a process known, in Spanish, as the PROCEDE, (the procedure).

This is a seven step process that may take as much as five years to accomplish, and consists of the following:

1. Resolution within the ejido. A two-thirds majority must decide to convert parcel lands to private property. This does not pertain to human settlement or communal property, also a part of ejidal land. This pertains only to the individual parcels.

2. Mapping, allowing for streets, gardens, other donated lands, human settlements and communal lands

3. Allotment of a parcel to each ejiditario (farmer).

4. Application to Agrarian Reform, Mexico City

5. Approval by the Agrarian Reform

6. Transfer of parcels to the individual ejiditarios.

After this process is completed and registered with the Agrarian Reform, the ejiditario who wishes to sell to an outsider must first notify other family members, those who have worked the property for more than one year, then other ejiditarios in the group, neighbors, and the ejidal government before completing a sale to the outsider. These parties have the right of first refusal and notifications must be made following a specific procedure.

ONLY after all correct notifications have been made does the EJIDITARIO receive a deed. ONLY then may he in turn transfer in fee simple to third parties, nationals or foreigners. If the property is in the restricted zone ONLY then can an ejidal property be acquired by a foreigner, PROVIDED the Secretary of Foreign Relations will grant a permit for same.

THIS IS FOR PROPERTIES WHERE THE EJIDAL group agrees in an assembly to convert its parcel property to private property.

What about the ejidal group who chooses NOT to convert its parcel land to private property? Can it be used by outsiders?

Article 45 of the law states that ejidal properties may be the object of any type of contract in association or use contract made by the ejidal group, or by individual ejiditarios on common lands or parcel lands. Contracts made with third parties may be granted for a term up to thirty years and can be renewed.

Under the Mexican Civil Code the maximum lease for residential property is ten years. Thus it can be said that the ejidal properties have an important advantage over private RESIDENTIAL property when it comes to leasing.

There is, however, a substantial difference between OWNERSHIP and LEASING. It is important not to confuse the two.

OWNERSHIP, even in the prohibited zone, where ownership is a PERSONAL right of use and enjoyment, permits indefinite usage through multiple renewals (every fifty years) of trust permits, and a clear-cut right to rent those rights, to sell those rights, and to collect a profit therefore. Annual costs under a trust (fideicomiso) are limited to bank administration fees and property taxes and the owner has full rights to all improvements on the land.

LEASE RIGHTS from an ejidal group can be for a maximum term of thirty years and can be renewable. The annual lease cost, however, is often a monthly or annual payment and, while it may be fixed for the first lease term, (up to thirty years) costs upon renewal are not usually negotiated for the following lease term, and may be increased to any amount that the leaseholder, the ejido, requests. Failure to pay the amount requested by the holder of the lease means that lessee (the tenant under the lease) must vacate the property and, of course, must leave behind ALL improvements affixed to the property.

In a rental situation, the tenant never owns the improvements and the amount of the rental will probably be determined by market conditions. Copyright, 2004, 05, 06, 07, 08, Consultores Phoenix, S.C. Reproduction prohibited without permission.

about the author:

LINDA NEIL is the founder of The Settlement Company, which specializes in real estate transfers and escrows. Licensed as a California real estate broker, she has pursued her profession in Mexico for over thirty years. Her skills in negotiating contracts between parties from three distinct cultures have placed her services in demand as a consultant and for speaking engagements on Mexican law and customs in Mexico, the United States and Canada. She has been widely published on the subject of real property in Mexico. Memberships; FIABCI, AMPI and NAR. Linda is a former member of the National Advisory Council of AMPI and has served as AMPI Coordinator for the state of Baja California Sur.

For reprints or further information, please contact

The Settlement Company: in Mexico: 01-800-627-5130

International: 1-877-214-4950 or 011-52-612-123-5056

FAX: (011-52) 612-123-5056

E-mail info@settlement-co.com, website: http://www.settlement-co.com

SEPTEMBER 23RD ----- IMPORTANT DEADLINE FOR U.S. TAXPAYERS

2009-08-14T03:01:00.000-07:00

by Linda Neil

U.S. taxpayers are required to file certain reports with the U.S. government if they own property in Mexico, have a business in the country, or are shareholders in Mexican corporations. Uncle Sam, U.S. tax watchdog, has instituted a voluntary disclosure program for those people who may have omitted reporting in the past. This program is designed to limit penalties that may be imposed on those U.S. taxpayers who have failed to make the required declarations previously.

A tax specialist, familiar with the law and reporting requirements in both the U.S. and Mexico can provide details. However, the most common issues that need to be addressed are the following:

Property owned in trust (fideicomiso): Under Mexican law, any residential property located in the “restricted” zone when foreigners are involved, must be placed in a Mexican bank trust, fideicomiso. The “restricted zone” is an area 50 kilometers (approximately 30 miles) wide along all the Mexican coastlines and 100 kilometers (approximately 60 miles) from the Mexico U.S. and Mexico-Belize borders.

Under the U.S. regulation section 6048 (b) Taxpayers must report ownership interest on Form 3520-A yearly and on form 3520 initially and if there are any changes. The penalty for failing to file these information returns is five percent of the gross value of trust assets determined to be owned by the U.S. taxpayer.

Bank and Financial Accounts: U.S. taxpayers must annually report direct or indirect financial interest in a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign accounts exceeded $10,000.00 USD at any time during the year. This report of Foreign Bank and Financial Accounts is commonly known as an FBAR, and the penalty can be as high as the greater of $100,000. USD or 50% of the total balance of the foreign account if the failure is deliberate omission. (Sec.31 U.S.C. 5321(a)(5). Nonwillful violations are subject to a civil penalty of not more than $10,000.00 USD.

Shares of Stock or Interests in Mexican Corporations and/or partnerships: Generally shareholders or partners with a 10% or greater interest in the partnership or corporation must inform the IRS of same through Forms 5471 or 8865. Failure to file can be quite costly.

As in most countries the U.S. tax regulations are complicated, especially when dealing with properties or assets located outside the United States. Accountants, tax advisors and tax preparers do not always know the rules regarding filings for international assets nor the ramifications of failure to file. For this reason it is highly important that the US taxpayer consult with experts in these bi-national transactions. For further information on these matters you may wish to contact and consult with attorney and accountant Don D. Nelson. (dondnelson@yahoo.com). Mr.Nelson is a property owner in both countries and has been preparing US declarations and US tax filings for international clients for over thirty years.

TAX OBLIGATIONS IN MEXICO:

Any foreigner with real property or business income in Mexico must also plan to pay taxes in Mexico. The good news! When paid with the proper receipts, certain of these taxes can become a CREDIT or a DEDUCTION in the country of tax residence!

For example:

Property Taxes: are due and payable every two months, or can be paid in one annual payment, usually with a substantial discount, during the first two months of each calendar year. Property taxes are based upon the value declared by the property tax office where the property is located and are generally relatively low in comparison with rates in the U.S. and Canada.

On-going taxes on business income: If you have a Mexican corporation or partnership, no matter what the activity, a monthly declaration must be filed for IVA taxes (Added Value Taxes) and for Impuesto Sobre La Renta which, in this case, is more like an income tax. A local Mexican accountant should be hired to review the accounting procedures and to prepare and file the monthly declarations. The monthly tax payments are generally considered as provisional and an annual declaration will show either a refund or a payment due. These taxes can also be a credit or a deductible expense in a home country, depending upon how the companies are established. An attorney-accountant with international expertise in this will be an important advisor to help avoid double taxation on profits. Again you may wish to consult Mr. Don Nelson: dondnelson@yahoo.com.

Impuesto Sobre La Renta when a property is sold: is a capital gains type of tax. For foreigners who are tax residents of another country, the tax is calculated in two ways:

1. It is a flat amount of the total selling price; without deductions, or

2. It is a percentage of the difference between selling price and the tax basis shown in the seller’s deed, less allowable deductions.

This calculation should be made both ways. The good part of this is that it is the LOWER of the calculations which shall be due and payable from seller proceeds. The Mexican Notary Public drafting the deed generally makes these calculations and the seller needs to confirm that it is the LOWER of the two figures which will be paid. The Notary Public should also provide the seller with a copy of the tax payment for use with the tax authorities in seller’s tax residence country.

Impuesto Sobre La Renta when income is received from a rental of Mexican property:

All income received from Mexican property is taxable in Mexico, regardless of the nationality of the owner. Thus, the US or Canadian citizen who rents a condominium or home regularly, or occasionally, through a property manager or via internet, is obligated to file declarations MONTHLY. Failure to declare income can cause very high penalties. The good news… taxes paid are credits or deductions in taxpayer’s home country. For additional information on this very important filing, please contact Lic. Quirino Parra at: info@settlement-co.com.

Important Deadline. 2009. Copyright, 2009, Consultores Phoenix, S.C. Reproduction prohibited without permission.

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about the author:

LINDA NEIL is the founder of The Settlement Company, which specializes in real estate transfers, escrows,and consultations. Just added as a new service, Settlement will now prepare monthly tax declarations, file them and perform additional essential landlord accounting services.

For reprints of this article or for further information on tax paying services, please contact The Settlement Company® at 01-800-627-5130 if in Mexico; or 01-877-214-4950 or 011-52-612-123-5056 if calling from outside Mexico. E-mail is info@settlement-co.com, and website: http://www.settlement-co.com

Copyright, 2009, Consultores Phoenix, S.C. Reproduction prohibited without permission

US Tax Return Filing Requirements for Fideicomisos

2009-02-01T21:36:00.000-08:00

It is possible that you along with a large number of US Citizens who own real estate in Mexico are in violating the U.S. Tax law each year when you file their your US returns. That occurs when you fail to file the special forms which are required if you are the beneficiary of a Fideicomiso which is the Mexican trust that owns real estate on behalf of foreigners. A Fideicomiso is required own the property when you are a foreigner and located near the ocean. It is a foreign trust in which you as the property owner are the beneficiary and a Mexican bank acts as the Trustee.

Form 3520A is suppose to be filed by the trustee of your Fideicomiso (the Mexican bank which charges you the annual fee to administer your Fideicomiso) . However, they do not in fact file that form since it is not required by Mexican tax law. Some banks have been reported to want $1,000US or more to look into filing the form and then stated they would want an additional fee if they had to fill it out. If that form is not filed in a timely manner each year (it is due on March 15^th following the end of the calendar year) or filed late the penalty is 5 % of the value of the property held in the trust. You will be the taxpayer penalized by the IRS if this form is not filed and therefore, the IRS recommends you file it to avoid having to pay the large penalty. This form reports the information on the income of the trust (if any) and the value of its assets and your contribution to the trust and information on the trustee, the beneficiary and other related information.

Form 3520 must also be filed by you the taxpayer not later than the extended due date of your tax return. It needs to be filed in the year the Fideicomiso comes into being and in years there are distributions or dissolution of the Fideicomiso. Therefore it is not always filed. However, when the form is required to be filed the penalty for not filing it or filing it late is 5% of the value of the trust assets (your real estate). This form reports the name and address of the you, the trustee, when the trust was formed and other details of the trust. The first time is form is filed a copy of the Spanish fideicomiso document is attached to it.

The IRS has not excluded US taxpayers owning property through Mexican Fideicomisos from filing both Forms 3520 and 3520A. They are studying whether they should exempt Fideicomisos from the form but to date no decision has been made. A representative has stated it is a low priority issue. Therefore, you still are required to meet the filing requirements until they state otherwise.

Many US Citizens have said they do not file the form since the IRS could never find out they owned real property in Mexico. Those people are failing to take into consideration the Mexican-US tax treaty which provides for an open exchange of information between the two countries and the fact that when fideicomiso is created it is registered in Mexico with a copy of your U.S. Passport. Starting several years ago your passport is now connected with your social security number. In addition, as more banks in Mexico are acquired by U.S. Banks it becomes more probable that information on these fideicomisos will leak back to the IRS.

An IRS spokesman has orally indicated that if a late filing taxpayer attaches a “reasonable explanation” for the late or previous non filing of these forms, the penalties will be waived. So far that statement appears to been honored for those who have filed late, but it cannot be predicted when the IRS may change this informal policy of waiving the penalty. The IRS also has not defined what is acceptable as a “reasonable explanation.”

An IRS Tax auditor's job is to collect tax money to finance the government. That usually takes a lot of time and effort and reviewing tedious accounting records. Forms such as the 3520 and 3520A which provide for large penalties if filed late or not at all are an IRS auditor's dream. They can collect large penalties for non filing or late filing without conducting a tedious audit. This clearly sets forth a good reason to make certain these forms are filed when each year as required.

Most accountants are not familiar with the 3520 and 3520A forms since they are not involved in international taxation and have no training in that area of tax law. It is best to find an experienced tax expert to assist you with this form or to file any past forms not yet filed.

There is one other tax hurdle that relates to property ownership and your US taxes. If your real property is a commercial or rental property, Mexican law allows you to own it through a Mexican corporation. If that is the manner in which you do hold title to your Los Cabos real estate, each year with your US income tax return you must file Form 5471. Failure to file that form or filing it late can result in a penalty of $10,000 per year.

Copies of all forms and directions can be found on the web at www.irs.gov .

US Taxation of Mexican Corporations

2009-02-01T21:09:00.000-08:00

If you, a US Citizen, own your Mexican real estate or small business through a Mexican corporation you have a U.S. Tax filing obligation with the IRS each year. This form is generally required if you own 10% or more of the stock or equitable interest in the foreign corporation.

The form is due yearly on the extended due date of your US. Income tax return. It is filed with your personal return and includes information on the foreign corporation's ownership, formation, income and expenses, and assets and liabilities. Usually it will not result in any additional tax due with your personal return, but that is possible if it has Subpart F income.

In most situations (unless the flow through election is made as explained below) the form 5471 does not result in any additional tax on your US tax return. However, if the foreign corporation has a sufficient amount of investment income, income from the sole owners personal services, or income from reselling goods made by an affiliate in the US, its income may become immediately taxable to you the shareholder. Subpart F income is complex which means a careful analysis of the sources of the corporations income must be made to determine if it is immediately taxable to its shareholder. If another owner of the foreign corporation files the form, you just need to identify data on that owner in an attachment to your tax return.

If the corporation owns real estate, and possible for other reasons, it is advisable that it is formed a a Sociedad de Responsibilidad Limitada (SRL). You as the owner of the SRL can make an election for US income tax purposes to treat it as a flow through entity on the US return of its owner. (This is the same as the treatment of an LLC or partnership for US tax purposes.) This means all of its income or losses flow through to you on your personal tax return and becomes a part of your US taxable income each year. It also allows you to take a foreign tax credit on your personal return for any taxes the foreign corporation pays in Mexico on its income. This election also stops any possibility of double taxation or converting capitals gains into ordinary income on your US income tax return.

If the IRS discovers you filed late or you should have been filing this form and did not the penalty is $10,000 per year for each unfiled form. There is a tax treaty between Mexico and the U.S which allows both countries access to the other countries records. Your US passport is included with other documents in the bureau where your Mexican corporation is is registered in Mexico.

We recommend to you that you file this form each year if you have the requisite stock ownership in a Mexican Corporation. Failure to file could result in extreme IRS penalties if they discovered you failed to file.