From the Desk of Rick Ashley, CPA Congratulations on your purchase of property in Mexico. As as a US citizen and a new property owner in Mexico, you may be required to file additional forms with the Internal Revenue Service. If you are going to live and work in Mexico or any other country, you are allowed an automatic 2 month extension to file your return. Remember, however, that if you use that extension, you will still be required to have prepaid your estimated taxes due or pay interest on any tax that is not paid by April 15th• We are taking this opportunity to remind you that there are a number of other forms that US citizens who are living outside the United States may be required to file. Not all of these forms need to be filed by April 15th• Some can be filed later, and some must be filed earlier. Attached you will find descriptions of some of these forms. Please read them carefully. You may find that one or more will apply to you. With the improved electronic technology used by governments today and the information exchange agreements they are signing, it is important to prepare your tax returns that are compliant with both the Mexican and US regulations. At Calderon, we are pledged to help you achieve the goal of fully compliant tax returns while taking advantage of the varying tax methodologies afforded by both countries. We have a great deal of experience working with the tax laws of both the Mexican and US governments, and understand their complexities. If you own a Home through a Mexican Residential Trust (Fideicomiso) -Forms 3520 and 3520A The IRS Form 3520, the "Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foregn Gifts" is used to report 'transactions' in any foreign trust. This includes a fideicomiso, or Mexican Residential Trust. A reportable transaction may be the purchase or sale of a property titled through a /ideicomiso; a major remodel of that property; the gift or other disposition of that property; or the death of a grantor or beneficiary of the foreign trust. Regardless of where you file your 1040, this form must be filed with the IRS Service Center in Ogden, Utah. It must be filed at the same time that your 1040 is due; taking into consideration any extensions to file you have received. Failure to file this form can be as high as 35% of the gross value of the property. With a penalty of this size, it is obviously important to give careful attention to compliance. There has been some controversy regarding this form and its applicability to /ideicomisos, but the IRS has informally indicated it is applicable for fideicomisos and there are very strong penalties if it is not filed. Addtionally the IRS has assessed penalties against taxpayers for filing this form late. Form 3520-A, the 'Annual Information Return of Foreign Trust with a U.S. Owner', is used to report any activity that occurred in a trust during the tax year. This form must be filed every year by the fiduciary of a trust whether there is a 'reportable transaction' or not. Unfortunately, Mexican banks will not fill out these forms, and the IRS holds the US taxpayer ultimately responsible for filing them. There are several important portions to this form. The 'Foreign Grantor Trust Owner Statement' (page 3) and the 'Foreign Grantor Trust Beneficiary Statement' (page 4) must be given to US owners and beneficiaries by the due date for filing. The Due Date for Form 3520-A is the 15th of the third month after the end of the trust's tax year, usually March 15th. While the penalties for failure to timely file are not as onerous as those of Form 3520, they are still pretty severe in that the penalty is 5% of the gross value of U.S. owner's share of the trust assets. If you open or have Financial Accounts in foreign countries Form TO F 90-22.1 Each United States citizen who has a financial interest in or signature or other authority over any foreign financial accounts must be familiar with the Form 90-22.1. This form is entitled "Report of Foreign Bank and Financial Accounts" and its purpose is to report to the IRS certain information regarding financial accounts in which a U.S. taxpayer has an interest or signature authority. Basically, if a U.S. taxpayer has an aggregate value in excess $10,000 US Dollars at any time during the year, this form must be completed and filed. Examples of financial accounts that need to be considered are checking accounts, savings accounts, securities, securities derivatives, mutual funds, demand deposits, time deposits, debit card accounts, prepaid card accounts or any other accounts maintained with a financial institution or other person engaged in the business of a financial institution. Ownership need not be direct ownership. For example, a bank account owned by a Trust in which the U.S. taxpayer has a present beneficial interest, either directly or indirectly, in more than 50% of the assets or receives more than 500" of the income would be required to be reported on this return. Don't forget that this requirement for reporting is in the aggregate. You cannot have $9,000 in an account in Mexico and $2,000 in an account in Brazil and think this is not applicable to you; it is. This form must be filed with the US Treasury in Detroit, MI by June 30th of the succeeding year. Extensions for filing the Form 90-22.1 are not available. If you your aggregate balance is less than $10,000, you are not required to file this form. The maximum value of an account is the largest amount of currency or non-monetary assets that appear on any quarterly or more frequent account statement issued for the applicable year. If periodic account statements are not issued, the maximum account asset value is the largest amount of currency and non-monetary assets in the account at any time during the year. In computing the maximum value in foreign accounts during the year, convert foreign currency by using the official exchange rate at the end ofthe year. The civil penalty for willful failure to file this form can be as high as 50% of the total balance of the foreign accounts. Criminal penalties can also be applied. If your failure to file this form was "non-willful," the penalty imposed can be anything between zero and $10,000 per undisclosed account per year If you are forming a Partnership or are a Partner in a Foreign Partnership -Form 8865 The purpose of this Form 8865, entitled ttReturn of U.S. Persons With Respect to Certain Foreign Partnerships", is to report the activities and income of a foreign partnership where as little as 10% of the partnership is owned by a U.S. taxpayer. A U.S. taxpayer is either a U.S. person, or a U.S. partnership, corporation or trust. In computing the ownership percentage, an interest in a foreign partnership owned directly or indirectly by or for a corporation, partnership, estate or trust will be considered as being owned proportionately by the owners, partners or beneficiaries. There does not need to be a formal partnership agreement for this form to be required. If you developed a relationship with two or more persons in a foreign country who join together to carry on a trade or business with each person contributing money, property, labor, or skill with each member expecting to share in the profits or losses of their combined activities, then a partnership exists and this form is required. A limited partnership, syndicate, group, pool, joint venture or other unincorporated organization through which a business, financial operation or venture is carried on could be required to complete this form. If you qualify for preparing this return, then it must be attached to and filed with your tax return by the due date of your return including extensions. The penalties for failing to file the Form 8865 are $10,000 for failure to file plus an additional $10,000 for each month after notification up to a maximum of $50,000 plus 10% of the value of any transferred property not reported subject to a limit of $100,000. If you are starting a Foreign Corporation or own stock in a Foreign Corporation -Forms 5471 and 926 If you are an officer, director or shareholder of a foreign corporation where you or another U.S. person owns at least 10% of a foreign corporation, then this Form 5471, entitled "Information Return of U.S. Persons With Respect To Certain Foreign Corporations" and appropriate schedules must be filed with the IRS. If you qualify for preparing this return, then it must be attached to your income tax return and both returns filed by the due date of your tax return including extensions. Please note there are several categories of filers for this return and it is possible for one filer to satisfy the filing requirements of other filers, but the explanations and relationships are too detailed to discuss here. If you are required to file this return, it may be beneficial to coordinate with other officers, directors or shareholders in order to avoid duplicative filings and possible differing reporting of information. Be aware however, any person required to file this Form 5471 and supporting schedules and agrees to have another officer, director, or stockholder file the form and schedule for him or her may be subject to penalties if the person filing the Form 5471 does not file a correct and properly completed form and schedules. The penalties for failing to file the Form 5471 are $10,000 for failure to file plus with an additional $10,000 for each month after notification up to a maximum of $50,000. If you want to open a corporation in Mexico to operate a business, you should consult with us in order to select the best type of entity and avoid the dreaded Controlled Foreign Corporation. A U.S. taxpayer that owns stock of a foreign corporation must also be aware of Form 926. This form is entitled "Return by a U.S. Transferor of Property to a Foreign Corporation" and the purpose of this form is report certain transfers of tangible or intangible property to a foreign corporation. For example if you own at least 10% of the outstanding stock of a foreign corporation or the amount of cash transferred is more than $100,000, then you are required to file this form. Be aware that if you own at least 10% of the outstanding stock, then any cash transferred will require the filing of this form. If you qualify for preparing this return, then it must be attached to and filed with your income tax return. The penalty for failure to report these transfers is 10% of the value of the transfer not reported subject to a $100,000 limit Thanks to Richard H Ashley for the article Certified Public Accountant, USA Email: rickashleymex@gmail.com Enrique Mauricio Calderon Langarica Certified Public Accountant, Mexico Lisboa # 150, Col. Gustavo Dlaz Ordaz, Puerto Vallarta, Jalisco, C.P. 48310, Mexico Direct Line: (322) 293-5593 -US Number: (916) 226-1236 -Office Phone: (322) 224-0400 - www.calderonadvis8.com |