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

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.

Best Mexican Corporate Forms for US Tax Purposes

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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Everything You Want to Know About 2011 IRS Voluntary Disclosure Program

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.