2011 Foreign Earned Income Exclusion (Form 2555)

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

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

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!

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

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

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

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.