AMERICANS MUST FILE SPECIAL US TAX FORMS TO REPORT FIDEICOMISO'S OR RISK HIGH PENALTIES

As you know, properties along the Coast of Mexico owned by Americans must hold title through Fideicomisos which are foreign trusts. This means certain special tax forms must be filed each year with the IRS to report your Fideicomiso holdings. Though a few tax commentators have written learned articles saying Fideicomisos are required to file these forms, the IRS has never so stated in writing and the IRS has further stated it does not intend to exempt Fideicomiso owners from filing these forms forms.

These forms do not result in any additional tax, but are informational only. Starting in tax year 2011, you may also have to file Form 8938

Failure to file these forms in a timely manner, or filing the required forms late can result in the IRS imposing penalties up to 35% of the value of the real property held in the Fideicomiso. The IRS has stated that if a late filing excuse is attached penalties may be waived. In fact they have waived penalties in the past though it is not certain how long this will continue into the future.

• Form 3520A is due on March 15^th, but can be extended if an extension is filed by that date.

• Form 3520 must also be filed for your fideicomiso. This six page form is due on the same day as your personal tax return but is mailed to a separate address.

We have prepared hundreds of Forms 3520 and 3520A for our clients in Mexico over the past ten years. If you want to prepare the forms yourself, we also offer a review service so you can be assured you prepared them correctly. Let me know how we can help.

Click here to download our Fideicomiso/3520/3520A Tax Organizer. After you fill it out, return it to us by fax or email and we can provide you with a fee quote. (File is in msword format for easy completion)

We will be in  Los Cabos and La Paz to assist our clients  there from March 16th thru May, 2012.  Please email or contact us for an appointment.

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

Kauffman Nelson LLP

Dana Point, CA 92629 USA

US Phone: 949-481-4094 US Fax 949-218-6483 Skype: dondnelson

Email: ddnelson@gmail.com

Websites: www.TaxMeLess.com www.expatattorneycpa.com

Blogs:  www.USExpatriate.blogspot.com

Quick Expat Tax Facts for Gringos Living and Working in Mexico

· If you are a US Citizen you must file a US tax return every year unless your income is less than $ 9,500 (for 2011 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 and required to report it regardless of whether you filed a tax return in your country of residence.

· As an US expatriate living in Mexico on 4/15, your 2011 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 10/15/12 if the proper extension is filed. You may even be able to get a further extension until 12/15if you send the IRS the proper letter.

· For 2011 if you are a qualified expatriate you get a foreign earned income exclusion (earnings from wages or self employment) of $92,900, but this exclusion is only available if you file a tax return.

· If your spouse works and lives in Mexico, and is qualified, she can also get at $92,900 foreign earned income exclusion. A foreign housing deduction or exclusion is also available if you earn in excess of the foreign earned income exclusion. This amount varies by country.

· You get credits against your US income tax obligation for the taxes paid to Mexico or another foreign country on that same income but you must file a return to claim those credits.

· If you own 10% or more of a  Mexican  corporation, LLC or partnership or are a beneficiary of a Foreign Trust such as a  Fideicomiso in Mexico, 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 or independent contractor income  is subject to US self employment tax of 15.3% (social security) which cannot be reduced or eliminated by the foreign earned income exclusion unless you work in one of the few countries the US Social Security Administration has a social security agreement with and pay social security to those countries. Mexico does not have a social security treaty with the U.S.

· If at any time during the tax year your combined highest balances in your  Mexican bank and financial accounts such as brokerage accounts, cash surrender value of foreign life insurance policies, foreign pensions, etc. (when added together) ever equal or exceed $10,0US 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 to a different address.

· In the several past year the IRS has hired more than 2,000 new employees to audit, investigate and discover Americans living abroad who have failed to file all necessary tax forms. Mexico has a treaty with the US for complete exchange of all tax information between the two countries.

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

· Beginning in 2011a new law is in effect which requires all US Citizens report all of their world wide financial assets if in total the value of those assets are $50,000 (and this may vary depending on your filing status) or more on form 8938.  Read more about the rules here.

· Income from certain types of foreign corporations are immediately taxable on the US shareholder's personal income tax return.  If your corporation only provides your personal services to customers you may have a Foreign Personal Holding Company which would cause all income to be immediately taxable to you. Income may also be immediately taxable when the income is from investments, rents, etc. This is call “Subpart F” income.

· If you own investments in a foreign or Mexican corporation or own a 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 knows if  you  have not been filing all required US tax returns while you are living  Abroad.  The IRS will shortly start matching up information received from Foreign Banks with US tax returns and required FBAR forms. If you have not been reporting, now is the time to start.

· Download your 2011 US tax return questionnaire prepared expressly for Americans living in  Mexico HERE.  Our rates begin at $350 and up for returns claiming the foreign earned income exclusion and $250 and up for retirees living in Mexico not claiming that exclusion.

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 Don  D. Nelson, CPA, Attorney (Kauffman Nelson LLP) has been assisting US Citizens , Permanent Residents and nonresidents in over 40 countries around the world with their US tax planning, tax return preparation, and other tax / legal matters for 20 plus years. He offers his clients attorney-client privilege which is not available from other tax accountants. He has helped hundreds of US expatriates around the world “catch up” filing their past late returns most often with little or no tax cost to you the delinquent taxpayer. His main office is at 34145 Pacific Coast Highway #401, Dana Point, California 92629 USA.

• Visit our websites at www.TaxMeLess.com  or  www.expatattorneycpa.com .
• Email Don at ddnelson@gmail.com.
• US Phone 949-481-4094 or US fax 949-218-6483.
• Don's skype name is: dondnelson.

Our Tax Services Include

• US Expatriate and International Tax Return Preparation for Americans in Mexico
• US Nonresident return preparation for Mexican Citizens
• Review of IRS International Tax Forms Prepared by you or your tax preparer.
• Preparing and filing tax returns for past years – Our “Catch Up” tax service.
• Surrender of US Citizenship or Green Card Tax Planning and Assistance.
• International Business Tax Planning for Mexico and compliance.
• IRS Offshore Voluntary Disclosure Reprsentation and filing.
• IRS Audit Representation with respect to Expatriate and International Tax Issues

Mini Tax Consultations are available for you to discuss your situation with Don your personally and secure his counsel resolving your tax problems and future tax planning by phone or email. No personal visit is required. All consultations are subject to the absolut privacy and confidentiality of Attorney-client privilege. LEARN MORE HERE.

Mexican Taxes on Sale of Mexican Property

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

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

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

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

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.