Challenges for Unreported Mexico Assets/Income for US Expats

Challenges for Unreported Mexico Bank Assets for U.S. Expats

IRS Challenges for Unreported Mexico Bank Assets for U.S. Expats

Based on the proximity of Mexico to the United States, many U.S. Taxpayers have residency status in Mexico as well as either residents or citizens of Mexico and are also considered U.S. Persons for tax purposes — such as U.S. citizens Lawful Permanent Residents, and Foreign Nationals who meet the Substantial Presence Test. These Taxpayers may work and live in Mexico (or may invest in Mexican assets) and may have various foreign accounts, assets, and income in Mexico. For taxpayers who were required to report their Mexico accounts, assets, and income to the U.S. government but failed to do so they may be subject to significant fines and penalties. Especially because the United States has entered into a tax treaty with Mexico and a FATCA Agreement, which facilitates cooperation between the countries.

• • • What happens when a US expat who resides in Mexico realizes that they are out of compliance?

Common U.S/Mexico Expat Example

David and his wife are U.S. citizens who have lived in the United States for their entire lives. Once they retired, Taxpayers moved to Mexico where they both worked part-time jobs and invested in the Mexican marketplace. There are various types of accounts including bank accounts, pension plans, and mutual funds. Taxpayers were not aware that they were required to report this information on their U.S. tax returns, even though they previously worked with a tax professional in the United States.

• • • The question then becomes are David and his wife non-willful and what can they do to get into compliance?

Will the Mexico Banks Report these Taxpayers?

It is not uncommon for most of the larger foreign financial institutions in Mexico to report US taxpayers to the US government in accordance with FATCA (Foreign Account Tax Compliance Act). Foreign financial institutions such as BBVA, Santander, Inbursa, and Citigroup/Citibanamex are Foreign Financial Institutions in Mexico that strive to remain FATCA compliant — which means if they know that the Taxpayer is a U.S. person for tax purposes, they will report that person to the US government as part of their FATCA compliance procedures.

Mexico Account Reporting in the U.S.

Taxpayers who have foreign accounts assets and investments are typically required to file various international information reporting forms each year to disclose their information, such as the FBAR, Form 8938, Form 3520, Form 3520-A, and Form 5471.

Willful or Non-Willful?

As the old saying goes, a little bit of knowledge is dangerous. Oftentimes, we are approached by taxpayers who have accounts/assets in Mexico and other neighboring countries, have not reported their foreign accounts, and presume that they are non-willful and that they qualify for the streamlined procedures. It is important to note, that even if a taxpayer presents their case to the attorney as non-willful that does not mean they are non-willful and will qualify for the Streamlined Procedures. Each person’s facts and circumstances are different and while the taxpayer may automatically assume they are non-willful, that is not always the case and some additional probing by a Board-Certified Tax Law Specialist will reveal that the Taxpayer is not eligible for the Streamlined Procedures.

Specific facts such as whether the taxpayer is bilingual, do they have additional education and/or professional licenses in the U.S. and the extent of the assets and investments overseas will all come into play to determine whether the taxpayer is willful or non-willful.  And, since the statute of limitations for most streamlined actions is six years it is important that taxpayers fully present their case accurately to the attorney before jumping to the conclusion that they are non-willful because the IRS has a significant amount of time to challenge the Taxpayers’ assertion that they are non-willful.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.