BajaNomad - Hefty penalty for not reporting your fideicomiso to the IRS

Hefty penalty for not reporting your fideicomiso to the IRS

latitude26n - 4-29-2005 at 12:44 AM

Here is a little something we just learned (but almost wished we hadn't) from the webiste of our new tax guy:

Under US tax law the fideicomiso meets the definition of a "foreign trust." That means you are required to file Form 3520 when you initially establish the fideicomiso or foreign trust and the trustee is to file Form 3520A for each year thereafter.
The Form 3520 must be filed with your tax return, while the Form 3520A is due on March 15 of each year, though you can apply for an extension of time using Form 2758. These forms must be filed for any foreign trust controlled by a US citizen or those of which a US citizen are the beneficiaries.

Some international tax professionals have argued that the fideicomiso is not really a trust but is an agent for holding title to real property in Mexico. Recent discussions with an IRS International Division Counsel has reaffirmed that the IRS considers Section 6048(a) to apply to fideicomisos as used in Mexico and Form 3520 and 3520A should be filed. They have indicated they have no current plans to issue any future rulings on this subject.

If you fail to file Form 3520, there is a penalty charged equal to 35% of the value of the property transferred to the trust, or of any unreported distribution. This penalty can be waived by the IRS for reasonable cause (which has not been clearly defined). The IRS has issued no guidance with respect to what is considered reasonable cause for failure to file Form 3520 and 3520A for a Mexican fideicomiso. Therefore any taxpayer that has failed to file this form and continues to not file this form is at great risk of potential past, present and future penalties.

The Form 3520A reports each year's income and expenses for the trust. It includes a year end balance sheet for the trust and information on distributions made to beneficiaries.

The US owners or beneficiaries of the trust are subject to a penalty of 5% of the trust's gross asset value for failing to file this form. Penalties can be waived for "reasonable cause" but as stated above, what that reasonable cause is has not been defined by the IRS.

We'd never heard of the need to report our fideicomiso to the IRS and we were too late to report our new trust with this years taxes. Because of the hefty 35% fine, ($19,000 in our case !) the tax guy had a suggestion which will require some "doctoring", and we'll report it with next years taxes.

The main point he made is" don't let it slide" because of the amount of the penalty.

Here's his website:

http://www.taxmeless.com/page11.html

The tax forms 3520 and 3520A along with the instructions for filling them out are downloadble from the IRS website.
Everyone's favorite type of reading...

latitude26n - 4-29-2005 at 07:09 AM

Sorry to repeat the info-
I must have missed that meeting

Bruce R Leech - 4-29-2005 at 07:33 AM

you also must report any other income you receive while you are in Mexico. such as money received from renting your home or from any business you may have.

Bruce R Leech - 4-29-2005 at 07:35 AM

you must also report a Mexican corporation. this is where you can relay git in trouble if you forget this.

turtleandtoad - 4-30-2005 at 03:19 PM

So, if I've got this right, you (the trustor) have to file the origional 3520 and the bank (trustee) has to file all subsequent 3520A forms with the US IRS.

And if the bank (trustee) fails to file on time, you get fined?

latitude26n - 4-30-2005 at 04:29 PM

No, you the trustee are responsible for reporting both to the IRS along with your federal income taxes.

The Mexican Bank is not involved in this process at all.

Our recent fideicomiso was finalized in Sept 04 but we didn't find out about this until March of 05.

Even tho they say you have until April 15 to file the initial trust notice 3520 with your taxes, because we hadn't filed the annual 3520A before the deadline on March 15, we would have been liable for the penalty???

It doesn't make sense to me, but I'm not going to argue with the tax guy.

[Edited on 4-30-2005 by latitude26n]

Bruce R Leech - 4-30-2005 at 04:34 PM

the thing is in the past many people did not do this and had no problems . but now the IRS has requested that all Banks in Mexico share this info with theme and the banks agreed to share this info. so now there is a very good reason for people to comply with the US law.

latitude26n - 4-30-2005 at 04:43 PM

You're right Bruce, my comment wasn't very clear.

US and Mexico are now sharing this type of financial info.

But your Mexico Bank won't do the 3520A for you. Both of the forms are your sole responsibility as a part of your US federal income tax obligation..

Bruce R Leech - 4-30-2005 at 04:52 PM

Quote:

Originally posted by latitude26n
You're right Bruce, my comment wasn't very clear.

US and Mexico are now sharing this type of financial info.

But your Mexico Bank won't do the 3520A for you. Both of the forms are your sole responsibility as a part of your US federal income tax obligation..

your right and I understand . I was just adding the other.

turtleandtoad - 4-30-2005 at 05:20 PM

Merriam-Webster Online Dictionary

Main Entry: 1trust?ee
Pronunciation: "tr&s-'tE
Function: noun
1 a : one to whom something is entrusted b : a country charged with the supervision of a trust territory
2 a : a natural or legal person to whom property is legally committed to be administered for the benefit of a beneficiary (as a person or a charitable organization) b : one (as a corporate director) occupying a position of trust and performing functions comparable to those of a trustee

Therefore the institution (such as a bank) holding the paper is the "Trustee" not you. You are the "Trustor" or "Beneficiary".

However, I've already found the answer to my own question

"A foreign trust with a U.S. owner must file Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements under section 6048(b). Each U.S. person treated as an owner of any portion of a foreign trust under sections 671 through 679 is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries."

http://www.irs.gov/instructions/i3520a/ch01.html

Therefore, the Bank has to file the 3520A. You have to make sure that the Bank does it. Further on in the instructions it tell you who has to sign the 3520A, and it isn't you! If you were to fill out the form and sign it, that could be construed as counterfitting an official document!

latitude26n - 4-30-2005 at 06:37 PM

I am sorry. You are correct. I did not correctly use the terms trust-ee and trust-or.

We can't get this new bank to send facturas (receipts) for the fidei. fees or confirm receipt of any of the wire transfers that we've sent them. They also say that they aren't set up to send any notication or a bill for the annual fidei. payment like we'd grown accustomed to with our other bank. So chances are we'll be s.o.l. when it come to getting a receipt for that every year.

And we're supposed to leave it up to the Bank to file the 3520A ?

I certainly hope we overlooked some fine print somewhere. I'll ask Tax man on Monday.

Dave - 4-30-2005 at 07:04 PM

Reporting is one thing however you should be asking yourself why the IRS wants this information. Once you reach the obvious conclusion you then should structure the purchase and subsequent sale of your property to minimise your exposure.

For instance, foreign corporations, and corporations held by foreign corporations can enter into trust agreements in Mexico.

latitude26n - 4-30-2005 at 07:41 PM

Quote:

Originally posted by latitude26n

And we're supposed to leave it up to the Bank to file the 3520A?

Here's the Tax Man's response:

Yes the Mexican Bank is supposed to file the 3520A on behalf of you the beneficiary,

but said he hasn't been able to get a Mexican Bank to comply yet.

So to make sure that the form gets submitted, he/his clients complete the 3520A and submit it themselves.

[Edited on 5-1-2005 by latitude26n]

JZ - 4-30-2005 at 07:45 PM

Dave: I don't think that would be so easy. I'm sure setting up a MX corp has expenses which is one issue, but more importantly there must be 51% ownership by a Mexican national to establish a MX corp.

woody with a view - 4-30-2005 at 07:48 PM

JESUS CHRISTO....and all i wanted to do was disappear south below the radar of the *^@@!~&*(() IRS! so you mean to tell me if i have ANY income, besides SocSecurity, they're gonna know it? :light:

bajalou - 4-30-2005 at 07:54 PM

Mx corporations can be wholy owned by non-Mexicans. But they can not own the place in which you live. Still must have a fedicomiso for the home. The corp is for you to conduct a business with the proper permits etc.

:biggrin:

JZ - 4-30-2005 at 08:07 PM

>>Mx corporations can be wholy owned by non-Mexicans.

Is that true. I've heard different.

tim40 - 5-1-2005 at 10:41 AM

Sooo....You have filed all of the correct papers to keep our IRS people delighted...now what? What is the implication for doing so? This thread covered if you do not,,,,but what if you do?

confusion says:

Sharksbaja - 5-1-2005 at 03:31 PM

Scare tactics. If you really think that the Notario and/or banco is going to share, let alone have access to your proprerty docs and so forth with uncle sam you might as well give up. The whole thing is a legal mess and the IRS would be hard pressed to prove your property is a 'real' trust. Even the best lawyers will tell you that the requirements contradict themselves. Their actual motivation is to extract money info from US property owners in Mex. They just want you to account for your money.....for them. I would bet money that a full 90% of US property owners in the "Restricted Zone" don't do squat about filing and the IRS would, according to sources, lose their case in a court of law if it were ever contested. Mexican wording and the IRS interpretation of the fideicomiso are probably at the root of this conundrum. Not personally holding a deed does not tranlate into a trust by definition. It is more of a holding agency of deeds for foriegn owners of coastal lands.
Because holding a deed in the bank institution is viewed as a trust and is therefore seen as an income source, the IRS wants YOU, unlike your mainland non-fideicomiso property owners, to report all transactions and so forth. Not very fair or equitable do you think?. Why should you have to report your house as some kind of money based trust? I think it's a crock, and so are their wishy-washy explanations. I frankly don't think anyone, especially the lawyers(trust me, they know how to make money from this) really knows how the reporting path should go, this is ludicrous and until an IRS official or politician with Baja property gets sucked into this themselves it probably won't end.

latitude26n - 5-1-2005 at 04:28 PM

We haven't reported the other 3 fideis. we've had in 17 years and obviously no one has noticed (IRS). But by the time we're done with this, the last Mexico property purchase we ever hope to make, our investment and the profit that we make when we sell someday will be a whole lot more than we've dealt with before.

When we do sell the property someday the relatively (for us ) large sum that shows up in our bank account after the Mexican taxes are paid, will appear as income that we'd have to explain, right?. (we don't currently have any creative tax sheltering strategies for this).

We have property investments in another foreign country and thought this we might trigger more red flags for an audit than your average American.

If we ever have to explain that the source of the income was the sale of property in Mexico, what are the odds that the guy is going to know the difference between a lot in Cuernavaca, and one in Los Barriles-

Probably zip.

But if he does know about the trust reporting requirement for Baja property, and looks for all the years of 3520A filings? The penalties for not reporting are exhorbinant along with the legal fees to fight the IRS.

We (the latitudes) don't have Dads nearby or big brothers that we can ask for for advise about all of this Mexican propety ownership stuff. So we just try and gather information from as many sources as possible and toss 'em all in the air and choose the one tha hits us in the head.

The Sculpin - 5-2-2005 at 06:17 AM

I'm not sure you're right about this 3520A filing. I believe the congressional intenet of this law was to keep track of US citizens creating foreign trusts in order to hide assets offshore. This was a marvelous opportunity for "tax management" before KPMG got caught with their pants down. By the way, unless you had at least 5M in discretionary assets, you couldn't play. I don't think the fideo falls into this group.

I think you need to get another opinion. This tax guy you mention is really creating problems if he's having you file a US form on behalf of a foriegn entity as a protective measure. Go to IRS.gov and pull the form down with the instructions. You couldn't even fill it out for a fideo if you wanted to!

As far as explaining the sudden increase in your bank account on sale of a foriegn property, remember, your a US citizen, and as such, you are taxed on your worldwide income, regardless of the source. So when you sell your Mexican holdings, you will pay tax to the Mexicans on the gain, and then you will turn around and do the verey same thing in the US. Now, in the US, you get a credit against US tax for the taxes you paid in Mexico, as long as the tax rate is equal to or higher than the US rate. You do that, the the IRS isn't going to care where your gain came from, you paid your tax!

latitude26n - 5-2-2005 at 10:37 AM

Thanks Sculpin

Check your u2u's also.

2frogs - 7-30-2005 at 12:32 PM

FRUSTRATION!

What was Mexico thinking :fire:

Believe me...from our experience in Costa Rica. Once the USA sticks their nose in a business, it can ruin you. Even when it was a Costa Rican company! Rumor alone can put you under. Is there no escaping the IRS.....I just want to be left alone Ha! Ha! Who said that

If it's true that the banks will be sharing information there will be no escape.

Price - 7-31-2005 at 02:44 AM

This whole tax thing is mind boggling !!!!! When we move to Baja our only income will be SS - anyone know about how much $$$$$$ we will be out ? The irs is the lowest of the low !!!!!!! They take our money and finance other countries - Don't you think it would make more sense to take care of the USA ? Oh yeah - we are talking about the irs !!!!!!!

2frogs - 7-31-2005 at 07:05 AM

The IRS can't even get their act together in the USA, I find it hard to believe they can get facts and keep them straight with Mexico as well????

Dave - 8-1-2005 at 12:32 PM

Quote:

Originally posted by 2frogs
The IRS can't even get their act together in the USA, I find it hard to believe they can get facts and keep them straight with Mexico as well????

Obviously, you have never been audited.

Most Mexican banks are parts of multi-national corporations. The largest, Banamex, is owned by Citicorp.

You can run but you can't hide

Sharksbaja - 8-1-2005 at 12:43 PM

Quote:

Originally posted by Dave

Quote:

Originally posted by 2frogs
The IRS can't even get their act together in the USA, I find it hard to believe they can get facts and keep them straight with Mexico as well????

Obviously, you have never been audited.

Most Mexican banks are parts of multi-national corporations. The largest, Banamex, is owned by Citicorp.

You can run but you can't hide

Gee Dave, you sure know how to instill fright. :lol:

Got me thinkin' :light:

2frogs - 8-1-2005 at 12:45 PM

Oh, believe me we've been through the mill with IRS rules while living in Costa Rica. It took yearrrrrs to get that mess straightened out. Dang it, you are right...you can run, but you can't hide :!:

Bruce R Leech - 8-2-2005 at 06:48 AM

the only option you have is to renounce your US citizenship. :light:

2frogs - 8-2-2005 at 07:22 AM

Oh, not doing that although after getting a letter from the IRS yesterday made us think about it. See, you can't even speak the nasty letters

That was spooky! Wish us luck! :yawn:

Bruce R Leech - 8-2-2005 at 07:25 AM

good luck 2frogs keep us posted maybe we all can learn something :light:

2frogs - 8-2-2005 at 08:02 AM

:no:

Thanks for the encouragement. I'll just keeping thinking they forgot to give us that huge refund :lol:

I hope we don't end up wishing we'd stayed in Costa Rica

The Sculpin - 8-2-2005 at 09:58 AM

Nice try Bruce, but renouncing your citizenship doesn't work. If the IRS can show that you renounced for evading US tax, they can go after you for any income earned 10 years after you renounce. And as 2frogs probably knows, they don't need to prove much. I realize it's an oversimplification, but because the US tax regime is "voluntary", it makes the audit process seem like it's governed by the Napoleonic code!!!

That being said, people at the IRS are just like people in any other organization, overworked, undertrained, and they have to produce. I have found that friendliness, patience, brevity, and "keeping it simple" can make the process much quicker and more bearable. Right in the middle of an audit interview, I realized that we had made a HUGE mistake that would have cost us tons. Trying to control the sweat on my brow, I answered the questions, kept the agent focused on the information he wanted, and calmly moved on to other things. My mistake?...........we inadvertantly forgot to translate expenses reported in pesos to dollars!!! Thankfully, that year is now closed....whew!

2frogs - 8-2-2005 at 10:26 AM

Yep, you never want to renounce as you never know when you might want to run home to daddy :saint:

Ha! Ha! We'll see what our tax attorney has to say first :?:

Nice try at sucking up to the IRS people He! He! I guess they could be reading this: :rolleyes:

Seriously,
It's just when you think you have everything settled from bad tax information while living in CR, it may be coming up to hit us in the back of the head again. UGH! :barf:

The Sculpin - 8-2-2005 at 10:36 AM

2frogs, I ain't sucking up. I just find that the nice way is the best way to start out. That way, when you go to the supervisor, or even to appeals, you can show you negotiated in good faith. Also, you get more flys with honey, or something like that.....Anyway, I'm a firm believer in having 2 attorneys on my payroll. I have a labrador, who makes a good living and gets me 95% of what I want. Then I have a doberman, who I pay very, very well, and he gets me the other 12%!!

Good luck!

Bruce R Leech - 8-2-2005 at 11:26 AM

Quote:

Originally posted by The Sculpin
Nice try Bruce, but renouncing your citizenship doesn't work. If the IRS can show that you renounced for evading US tax, they can go after you for any income earned 10 years after you renounce. And as 2frogs probably knows, they don't need to prove much. I realize it's an oversimplification, but because the US tax regime is "voluntary", it makes the audit process seem like it's governed by the Napoleonic code!!!

That being said, people at the IRS are just like people in any other organization, overworked, undertrained, and they have to produce. I have found that friendliness, patience, brevity, and "keeping it simple" can make the process much quicker and more bearable. Right in the middle of an audit interview, I realized that we had made a HUGE mistake that would have cost us tons. Trying to control the sweat on my brow, I answered the questions, kept the agent focused on the information he wanted, and calmly moved on to other things. My mistake?...........we inadvertantly forgot to translate expenses reported in pesos to dollars!!! Thankfully, that year is now closed....whew!

wow I did not know that. thanks for the info

2frogs - 8-2-2005 at 03:47 PM

Just teasin' ya! I can't imagine NOT being like honey to the IRS. But, I'll let our tax lawyer do the talking Ha! Ha! I just got out of court from being a victum of hit and run a little over 3 yrs. ago. Took that long to catch her and go to court. I want nothing more to do with legal/gove./state etc., etc. stuff if I can help it. I was drug through court to look like the bad guy when all I was doing was sitting at a stop like and got rear ended. Still shaking my head about that loss :no:

Nope, I have no faith left in our system of any shape or form. But, that's just me.

We had a doberman that loved to patrol all night long and then in Costa Rica we had a German Shephard that was my shadow and protected me from everything. She hated snakes and could smell them a mile off and would cause a fuss to let me know to watch out. I bet she could smell out the IRS too. :spingrin:

:spingrin

h for heaven sakes I'm just foolin'

The Sculpin - 8-2-2005 at 04:27 PM

....no worries, 2frogs......panties now unbunched.... :cool:

2frogs - 8-2-2005 at 04:41 PM

Oh good Sculpin....walk with ease :biggrin:

Dave - 8-3-2005 at 09:23 AM

Quote:

Originally posted by Bruce R Leech
the only option you have is to renounce your US citizenship. :light:

Renouncing to escape taxation ain't legal and just plain stoopid. But if you've got lots of dough and want to keep it there are other options. Fer instance:

Become a Canadian citizen. There is zero tax for non-resident Canadians... anywhere. Several other countries offer the same benefits and there are many others that don't tax capital gains from non-resident corporations.

But you really don't need to jump through hoops just to save a few dollars. If you are a legal resident for at least two years (and can prove it*), Mexico doesn't tax capital gains from the sale of a home. Also, a corporate transfer of less than 25% asset value, need not be reported.

If you do your homework and structure your purchase wisely you can avoid most taxation.

*(Must have an FM and have registered an RFC# with Hacienda.)

2frogs - 8-3-2005 at 09:30 AM

Is it a good idea to get a 'good' tax attorney in Mexico to show you the ways NOT to get in troubles with Mexico and USA? :saint:

Dave - 8-3-2005 at 10:04 AM

Quote:

Originally posted by 2frogs
Is it a good idea to get a 'good' tax attorney in Mexico to show you the ways NOT to get in troubles with Mexico and USA? :saint:

Depending on your level of exposure, it would be prudent. (love that word :biggrin:

)

Now if you're thinking about something stupid like a business, I would get the best accountant money can buy. Fact is, I collect them...have three.

2frogs - 8-3-2005 at 10:30 AM

Nope, this move will be called retirement! :biggrin:

Sounds like us stateside...2 of um and probably by the time it's over we'll need 3 :wow: