Mexico Property Ownership: IRS Foreign Trust Reporting Requirements
 John Dillinger - wordpress.com
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 |  | We no longer have the a kinder and gentler IRS that resulted from 1998 congressional mandates. Instead, we have an IRS that needs to bring in money U.S. DEFICIT! |  | | |
On September 21, 2009, the Internal Revenue Service announced a one-time extension of the deadline for special voluntary disclosures by taxpayers with unreported income from hidden offshore accounts. These taxpayers now have until Oct. 15, 2009. Click HERE for update: Foreign Trust Reporting Deadline Extended.
Over the last few months I have received many inquiries concerning the issue of owning a FIDEICOMISO and being compliant.
As such, let me share with you the most frequently asked questions (FAQ):
Q: Why Doesnt Everyone with a Fideicomiso Know About This?
A: Good question. When I went to a seminar on buying property in Mexico, my question was a little different: Why weren't the IRS Foreign Trust Reporting requirements being addressed at a seminar on how to buy property in Mexico? When I discussed this with other CPAs at the seminar (who specialized in Financial Audits, and knew little about tax) one said he was not sure of the reporting requirements but that even TurboTax asks whether or not you have a Foreign Trust. Shouldn't your CPA be asking you better questions than TurboTax?
A typical "tax organizer" provided by your CPA asks whether you have a foreign account, trust or business, because Schedule B, of Form 1040 has a section asking about Foreign Accounts and/or Foreign Trusts. Schedule B says that if you answer "yes" regarding Foreign Trusts, you may be required to file Form 3520. My contacts at the IRS think that most tax preparer's software is defaulted to answer "no" to these questions, and suggest that these defaults be removed.
However, I think the biggest reason you didn't know about this is because US Tax law is extremely complex, and the more Congress tries to simplify it, the more complex it becomes. I used to be able to prepare a tax return without a computer before the Tax Reform Act of 1986 attempted to simplify the tax code. Just say no to tax simplification, it only serves to make things more complex.
Q: Why Doesn't My CPA/Tax Preparer Know This?
A: CPAs tend to be a conservative breed. Resistant to change, many seasoned CPAs continue to practice under the belief that as generalists, they can help their clients with all aspects of accounting and taxation. Today, that is no longer possible. As a prior IRS auditor, I witnessed too many taxpayers hurt by their CPA's refusal to admit that they cannot be expert in every aspect of tax and accounting.
While being trained as an IRS Agent, a manager stated that tax law is complicated. Sometimes you have to put your hand on your head, turn around twice take three giant steps and make sure to ask "Mother, may I?"
CPAs cannot be expert in all aspects of tax law, it is far too complex. The more specific an area of tax a CPA specializes in; the more accurate advice you'll receive. In addition, a specialist can complete the work more quickly, which translates into lower fees charged to you.
Q: If Nobody Else is Doing This, Why Should I?
A: Once the IRS announced their Offshore Voluntary Disclosure Program, March 23, 2009, foreign reporting requirements began receiving greater press coverage. When the program was announced, all late forms were required to be sent to IRS Criminal Investigation with mandatory penalty frameworks that had no reasonable cause exceptions.
I believe my repeated communications with the IRS helped provide the opportunity for those who did not know they were supposed to file Forms 3520 & 3520-A do so without fear of penalty. However, the IRS is only currently granting this relief until September 23, 2009.
If and when the IRS discovers that you have not filed the required forms, there is no guarantee of penalty relief. Now that the public is being made aware of the filing requirements, if you don't file, there is no reasonable cause exception. In fact, the reason for not filing would be considered "willful neglect." You now know that you were and are required to file, and did not.
Q: Why Does the IRS Think that a Fideicomiso is a Trust?
In 1996, Congress changed the laws defining a "Foreign Trust." As of 1/1/1997, any trust is a US person if a court within the US is able to exercise primary supervision over the administration of the trust. Unfortunately, a Fideicomiso is not primarily supervised by a US Court. Therefore, it is a Foreign Trust.
The IRS will not provide a blanket exception for Fideicomisos, as the exception could be used against the IRS for those really trying to hide income and assets from the IRS. However, the AICPA (American Institute of CPAs) has being trying to get the IRS to relax the filing requirements for Fideicomisos. Currently, the AICPA has put the issue on the back burner.
Remember, we no longer have the a kinder and gentler IRS that resulted from 1998 congressional mandates. Instead, we have an IRS that needs to bring in money U.S. DEFICIT!
For example, there are certain tax benefits for Real Estate Professionals. A few years ago, the IRS began targeting California Real Estate Agents and claiming that they were not Real Estate Professionals unless they were also brokers. This is due to a technicality in tax law. Remember, if the IRS was playing "Mother, may I?" a California Real Estate Agent, took two giant steps, instead of three. Therefore, no tax benefit allowed.
The IRS recently lost this argument in Tax Court. However, since the tax liability was too small, the case cannot be used as precedence, and the IRS is continuing to state that a California Real Estate Agent is not a Real Estate Professional, unless they are also a broker.
For now, a Fideicomiso is a Foreign Trust. The failure to file Form 3520 and Form 3520-A can result in huge penalties. I suggest filing, while you can.
Q: If I Call the IRS, Why Can't They Give Me An Answer?
A: Click HERE to see an article, which states "you get what you pay for."
Q: Should I Hire an Attorney?
A: If you have not filed any of the required foreign reporting tax Forms: 5471, 5472, 926, 3520, 3520-A, 8865 or TD F 90-22.1, and you have any unreported taxable Foreign Income, you should hire an attorney that specializes in the Offshore Voluntary Disclosure Program. If the trust had no taxable income, or reported the taxable income but not the required Forms, a CPA that specializes in Foreign Reporting should be able to help you become compliant.
John Dillinger, CPA has been helping businesses and individuals with tax planning and compliance, individual tax preparation, IRS representation and international tax issues for over 25 years. Prior to starting his own CPA firm, he worked in International Tax at the "Big Four" accounting firm, PricewaterhouseCoopers and as an Internal Revenue Agent with the Self-Employed/Small Business Division of the Internal Revenue Service. For more information visit dillingercpa.com. |
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