more tax info including land trusts

IRS OFFSHORE VOLUNTARY DISCLOSURE DEAL ENDS 9/23/09

By Don D. Nelson, Attorney, C.P.A.

A lot of US Citizens living and working in Mexico have not been filing their US Income Tax Returns as required by U.S. Tax law. The Brits, Canadians and many those from many other countries in world, the U.S. Requires you file returns yearly no mater where you live or work in the world so long as you are a U.S. Citizen. Some have put off their returns so long, that they are now afraid to surface and file them. Often that is an unfounded concern since due to the US foreign earned income exclusion and foreign tax credits, when many years past due returns are filed, no tax is found to be due anyway.

To try to bring U.S. Expatriates out of the closet, in March the IRS announced the Offshore Voluntary Disclosure Program which allows those who have not filed returns or who have filed returns and not included their foreign source income to correct these errors and have some certainty of what might happen when they do file those returns. Entering this program will avoid criminal action and will also set a predetermined limit on the amount of penalties which may be imposed. Though the IRS envisions the program will mostly be used by wealthy taxpayers hiding assets and income abroad, unfortunately due to the its requirements it does immediately affect the average American working or operating a small business in other countries around the world. The program is extremely complex and therefore cannot be fully explained with this article, but we will try to cover some of the major points. More details are available using the internet links set forth later below.

The general requirements:

File last six years previously unfiled tax returns or amend your last six years tax returns to include all foreign source income.

These returns should include all previously unfiled foreign tax forms required under us tax law such as those for foreign bank and financial accounts (TDF 90- 22.1), foreign corporations (Form 5471), foreign partnerships, foreign LLCS, foreign investment companies, and foreign trusts (Form 3520 and 3520A) (Mexican real estate trusts required by Mexican law). There are other US foreign tax forms too numerous to mention which also have high penalties for non filing.

Pay all taxes, penalties and interest due on unpaid taxes

Follow certain filing procedures requiring an announcement you plan to participate
in the program.

In lieu of paying the extremely high penalties for failure to file the special foreign tax forms mentioned above, pay a penalty of 20% of the highest balance in all foreign bank and financial accounts during the year with the highest combined balances during that 6 year period. This is often much less than the year penalty for failing to file the form. For example the penalty for failure to file the foreign bank and financial account form (TDF 90-22.1) is $10,000 per year or more.

If you have reported all foreign income (including interest, dividends, corporate income, rents, etc) in your previously filed your tax returns for the past sixyears, but failed to include all of the special foreign forms (some of which arementioned above) you are required to now file those forms with an amended return, and also include a reasonable excuse for your failure to file those forms and in most situations no penalties or additional taxes will be imposed. The IRS has failed to define what an acceptable reasonable excuse would be.

If your foreign activities have produced no taxable or reportable income during the past six years and you now file all required foreign forms that were previously omitted with amended returns for those years, no additional tax or penalties will be charged if you attach a reasonable excuse for failing to file the required foreign bank account report, foreign corporation report, foreign trust form (fideicomiso in Mexico), etc. Also if you failed to file your tax returns, but need to file returns for the period you lived and or worked abroad, and due to the nature of your income and activities have none of the special foreign income tax forms previously mentioned or on the the complete list are required to be filed, you can now file without any fear of the 20% penalty. All that would be owed is any tax due plus normal penalties and interest on that tax due. Form 2555 (to claim the foreign earned income exclusion) and form 1116(Foreign tax credits) do not trigger the 20% penalty if filed late. However, in certain situations, the IRS can disallow the foreign earned income exclusion if a tax return is filed more than 18 months late and taxes are due with that return.

The IRS has indicated that it is possible after the 9/23/09 deadline for the Program, it will impose all civil, monetary and full criminal penalties against those who have not filed the required foreign income forms or who have failed to report their foreign source income by that deadline. Anyone who thinks they might have problems with nonreported foreign source income, unfiled returns, or unfiled special foreign tax forms should immediately consult with their legal and tax advisors to determine whether they should be participating in the Voluntary Disclosure Program or to file all past unfiled returns. The program is extremely complex and some guidance is essential to determine if you should participate and to determine your personal criminal and civil liability if you do not participate.

It should be noted that the IRS has currently been very successful with their program to force foreign banks and other financial institutions to disclose the names, etc. and all US citizens who have accounts. It is presumed they will be matching that data against the tax returns filed by those citizens.

Relevant Web Links:

Wall Street Journal Article:http://online.wsj.com/article/SB124804796387763807.html

IRS Information:
http://www.irs.gov/newsroom/article/0,,id=105689,00.html

Frequently Asked Questions:
http://www.taxmeless.com/IRS%20Disclosure.htm

Don D. Nelson, Attorney, C.P.A. has been assisting US Citizens living abroad and with
their U.S. Income taxes for the past 20 years. His email is
donnelsonattycpa@yahoo.com . His website includes a lot more information on the Offshore Disclosure Program and is located at www.TaxMeLess.com . His blog which includes the most current expat developments is at www.usexpatriate.blogspot.com.

US phone number is 949-481-4094 and the fax is 949-218-6483
Copyright Don D. Nelson, Attorney, CPA 2009. All rights reserved. / donnelsonattycpa@yahoo.com

I just talked with an IRS Agent in the Voluntary Disclosure Branch (510 637-1031) who was very knowledgeable about property ownership in Mexico and the require process. I will be filing the Voluntary Disclosure Paperwork by Sept 23. I just finished the process and that took nearly an hour of my time start to finish. I needed the IRS Form TDF 90-22.1 (available on the web) and a Personal Disclosure Statement. Here are the addresses to send the completed forms and statements:
TDF 90-22.1
Report of FBAR
Original and Explanation, Annual Requirement
Department of Treasury
PO Box 32621
Detroit, Michigan 48232-0621
Copy and Explanation
IRS
11501 Roosevelt Blvd
South Building Room 2002
Philadelphia, PA 19154
Attn: Charlie Judge
Offshore Unit, DPS-611
The IRS agent and I concluded that no amended returns were necessary since I received no income from the properties in Mexico. Seems easier than the lawyers make it out to be.