Summaries of US Tax Laws Affecting Citzens Living Abroad – TAX TIME 2013 !

March 14, 2013
For CURRENT details, see our master article on taxes at: IRS Tax Issues for Americans Living and Working Abroad in Mexico – Master Article

It’s TAX TIME again… With the reporting deadlines for IRS form 3520-A coming tomorrow, IRS income tax and 3520 filings coming on April 15, and Foreign Financial Account filings due in June…  we thought you might appreciate a few fresh perspectives.

As a part of our growing body of tax information for Yucalandia readers,   we welcome Patrick W. Martin (C.P.A., J.D.) as a guest author.   Mr. Martin is simultaneously a former accountant,  CPA,   an international US tax lawyer,  with additional studies in international law in Mexico.   He is currently a partner in his firm,   in charge of a team of specialized international tax lawyers,   many of whom studied in Mexico and then later in the U.S.A. He also worked for the IRS Chief Counsel Office 20+ years ago.

Mr. Martin generously offers the following insights and summaries describing US Tax Laws and Regulations. His information is fully vetted, and fits official IRS publications and fits what Yucalandia needed 7 prior articles to cover.    We especially like how he describes the ways that the various IRS regulations and Justice Dept. rulings work together (or not).

Enough introductions,   we are very pleased to present Mr. Martin’s insights on the thicket of tax and reporting requirements that currently face US citizens living abroad.

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Dear Readers of Fideicomisos, Shakespeare, and Yucalandia,

I am impressed with the thoughtful comments and understanding presented by Yucalandia, describing very complex areas of the U.S. international tax law,  and am pleased to contribute to their existing articles.

For background:   Our international tax team simply focuses on complex international tax law matters.   Fortunately, or unfortunately, this little world is our professional life.   Incidentally, my wife has a small real estate project in Mexico and so I live with these issues personally – in addition to advising various taxpayers

This question of Fideicomisos and informational reporting under IRC Section 6048 is something that is near and dear to our hearts.    One of our tax lawyers is currently on a special task force with the AICPAs and IRS regarding foreign trust reporting.

In short,  we have argued for years that the IRS should not include Fideicomisos as foreign trusts subject to reporting under IRC Section 6048 (which gives rise to IRS Forms 3520 and 3520-A).   My partner Enrique Hernandez formally presented such a proposal on behalf of the State Bar, Taxation Section to the IRS and Treasury:

MEXICAN RESIDENTIAL TRUSTS AND THE REPORTING REQUIREMENTS OF SECTION 6048: http://www.procopio.com/userfiles/file/assets/files1/mexican-residential-trusts-and-the-reporting-requirements-of-section-6048-841.pdf

Many IRS and U.S. Treasury tax attorneys (particularly in Associate Chief Counsel – International division;   and International Tax Counsel of U.S. Treasury) have been sympathetic to this argument.   Unfortunately, they could not and would not exclude Fideicomisos from reporting.     As pointed out, the IRS Internal Revenue Manual  (which is the Bible of the IRS and its employees),  even expressly contemplates Fideicomisos and IRS Forms 3520- and 3520-A IRS Manual Chapter 22. International Error Resolution – Section 19. Foreign Trust System – 3.22.19.1.1.1 (01-01-2013) FIDEICOMISO (a.k.a. Foreign Trust)

Where does the IRS currently stand today regarding Fideicomisos and reporting on your U.S. income tax return?

• IRS Form 3520 and 3520-A:   Other than a private letter ruling  (“PLR” – which cannot be relied upon by taxpayers other than the one who requested it),  that was issued to a single taxpayer last year,   the IRS’ formal position has not changed.    i.e. A Fideicomiso is a foreign trust and hence subject to IRS Forms 3520 and 3520-A.
• The penalty for failure to file either form,  if required,  is a US $10,000 penalty.   In practice, we notice that the IRS regularly waives the penalty it assesses in this area,  but only after a fight.   This means that it gets expensive for the taxpayer
• I have personally had conversations with key lawyers at the IRS national office in DC,  over the last few weeks,   who are contemplating issuing some type of formal guidance to exclude Fideicomisos from the foreign trust filing requirements (IRS Form 3520 and 3520-A).    These discussions have also been on-going with the AICPA task force regarding foreign trusts.   To date, no exclusion has been issued, but I have my fingers crossed.
• Our general recommendation is continue to file IRS Form 3520 and 3520-A; UNLESS AND UNTIL the IRS issues such guidance (e.g., in the form of a Revenue Ruling or General Counsel Memorandum).    It is less expensive to do so, compared to having to fight penalties that are assessed by the IRS.    We have seen numerous penalties being assessed and consistent with the IRS Internal Revenue Manual rules.

* IRS Form 8938 ( not  IRS Form 3520/3520s):   Next, the reporting requirements under Section 6048 (i.e., regarding foreign trusts – discussed above),  should not be confused with different reporting requirements that now are in place under the 2010 tax amendments for reporting of “specified foreign financial assets”;   also known as “FATCA” reporting,  under IRS Form 8938.    This is yet another layer of tax reporting by U.S. taxpayers and is required by IRC Section 6038D (a different code section):
http://www.irs.gov/Businesses/Corporations/Do-I-need-to-file-Form-8938,-%E2%80%9CStatement-of-Specified-Foreign-Financial-Assets%E2%80%9D%3F

The regulations under these provisions provide that assets held in a “grantor trust”  (which virtually every Fideicomiso with Mexican real estate would be a “grantor trust”)   are the assets that must be identified to see if they are so-called  “specified foreign financial assets.”   Real estate is NOT a “specified foreign financial asset”   and hence,  the general rule,  consistent with the regulations,  is that such real estate would not be required to be filed and reported on IRS Form 8939;   PROVIDED there are no other assets held in the Fideicomiso.    Be careful, however, since a U.S. citizen could always have other assets held in the Fideicomiso which could be “specified foreign financial assets”;    e.g., stocks or bonds in the Mexican Bolsa.   While this might be the rare case,  we have seen such cases –
http://www.irs.gov/Businesses/Corporations/InformationforUSTaxpayers

** Treasury Department Foreign Bank Account Report (“FBAR”) is not the same as IRS Form 3520/3520s-A’s.     Finally,  under a completely different federal statute (Title 31 – the Bank Secrecy Act versus Title 26 the Internal Revenue Code)   imposes reporting of foreign bank and investment accounts where the U.S. taxpayer has  “signature authority over”  or a  “financial interest in”  such foreign account.    Definitions of both of these concepts are expansive pursuant to regulations issued in 2011.   See my article on these regulations and their application:   FOREIGN BANK ACCOUNT REPORTS – 2011 R – http://www.procopio.com/userfiles/file/assets/files1/docs-1362371-v12-fbar-ules-and-regulations-to-whom-it-applies-1782.pdf

At the end of the day, I think the thoughts of a once famous writer, previously quoted, are worth reflecting upon:
Whether ’tis nobler in the mind to suffer
The slings and arrows of outrageous fortune,

Or to take arms against a sea of troubles,
And by opposing end them?

Unfortunately,   the tax law in this area has become absolutely far too complex.
The Taxpayers Advocate has written extensively in her latest annual reports about how U.S. taxpayers are burdened by these rules.   Thoughtful and conscientious U.S. citizens and other U.S. taxpayers try desperately to keep their had above water to understand these rules.    Penalties abound for all of us who do not report any of these information reporting requirements (US$10,000 minimum penalty by statute for failure to file each of the above forms,  when required).

Hopefully, this helps clear up some of the confusion in this area! If not, please write to your Congressman!!!   😉    Suerte!

Saludos – Patrick

PS – My disclaimer is that the above is not legal advice that anyone can rely upon for their own particular circumstances.   As with other Yucalandia articles:  This information is not meant as legal advice. It is for educational and informational purposes only.   See a competent professional for advice on important issues.

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If you liked this article, you might also check out our growing body of articles on tax issues for expats in Mexico:
~ Capital Gains Taxes on Mexican Properties
~ Income Tax Liabilities in Mexico
~ Fideicomisos and FATCA: US – Mexico Agreement on FATCA Reporting Requirements

~ IRS Reporting Requirements for Mexico: Fideicomisos / Mexican Land trusts
~ FBAR’s and Fideicomisos: To File or Not to File, That is the Question ,
~ US Income Tax Filing Information for Ex-Pats
~ Tax Issues for Americans and Other Expats Living in Mexico
~ Updated 2011 IRS Requirements: Foreign Account Tax Compliance Act (FATCA)

~ Tax Issues for Americans Living and Working in Mexico – A Redux for 2013
*       *       *       *
Feel free to copy while giving proper attribution: YucaLandia/Surviving Yucatan.
© Steven M. Fry

Read-on MacDuff . . .

5 Responses to Summaries of US Tax Laws Affecting Citzens Living Abroad – TAX TIME 2013 !

  1. Pingback: TAX TIME 2013 ! ~ Summaries of US Tax Laws Affecting Citzens Living Abroad | Surviving Yucatan

  2. Pingback: Summaries of US Tax Laws Affecting Citzens Living Abroad by yucalandia » Jaltemba Jalapeño

  3. Joe says:

    Steve, I know from experience in trying to do it that it’s hard to restate the law and get it right, every time. With that in mind, please let me call attention to a couple of things in the first paragraph, above.

    The filing deadline for 3520a is March 15, for most people. It is possible to get an extension, but the request also has to be filed by March 15, and is not automatically granted. Second, the filing deadline for Form 3520 is usually the time when your federal tax return is due, with any extensions that have been granted (though it is NOT filed with the return). Form TD F 90-22.1 is due by the end of June: there are no provisions for extensions of time for filing (this is mainly of concern to those who maintain foreign bank or brokerage accounts: this form is not required, as you’ve mentioned in other places on this blog, of those who do no more than hold title to Mexican property via a fideicomiso).

    For those who live abroad, the filing deadline for Form 1040, the individuals tax return that we all know and love, the deadline is June 15, unless an extension of time for filing is requested, and granted. Any request for extension of time for filing should also be filed by the original deadline for the tax return.

    Again, for those living abroad, if there is no way to get your informational returns, or tax return, posted in the U.S. mail by the filing deadline, the IRS offers the option of posting your documents by several different delivery services, including DHL, among others, and recognizes the date you deliver the document to them as equivalent to posting in the U.S. mail for the purposes of calculating the date filed.

    There are several pitfalls that can be encountered when trying to comply with the reporting requirements besides failing to meet the filing deadlines that should also be mentioned; for example, a copy of page 3, of Form 3520a must be attached to Form 3520, and failure to attach page 3 of Form 3520a to Form 3520 could result in the assessment of a penalty. In addition, Form 3520a requires the attachment of a statement of the law on which the claim that the trust is a grantor trust is based. (I’ll mention what I see as the greater importance of this, later, but for now we’re just dealing with the reporting requirements). Failure to attach this statement is another of those things that could lead to a penalty being assessed. In my case, and based on the wording of my fideicomiso, I believed the following to apply: “Section 674: Power to Control Beneficial Enjoyment: by the terms of the trust instrument, beneficial enjoyment of the corpus, or the income therefrom, is subject to a power of disposition which they can exercise without the approval or consent of any adverse party; and, Section 677: Income for the Benefit of Grantor: by the terms of the trust instrument, income from the trust may be distributed, held or accumulated for future distribution to the grantors, without the approval or consent of any adverse party.”

    Having the trust determined to be a grantor trust has any number of practical benefits, among which is that it avoids the trust being treated as a taxable entity; instead, the grantor is fully responsible for any tax obligations created by the existence and functioning of the trust. No tax return need by prepared and filed on behalf of the trust, as would be the case in a non grantor trust. Further, it avoids any question relating to the potentially taxable nature of the beneficial use of the trust which otherwise would arise from the use of the property by those who purchased, subject to a fideicomiso, as would arise if the trust were a non grantor trust. Simply put, the owner’s own use of his own property could create a tax obligation for him if the trust were not a grantor trust, based on the fair market value of the use of the property; i.e., rental value.

    More could be said, but the more I type the greater the risk of a misstatement such as I mentioned earlier is easy to make!

    • yucalandia says:

      Good Morning Joe,
      You have described the details well!

      Re missstatements: You are exactly right. Precision is ultimately difficult when covering these complex IRS issues. I have corrected my misstatemnts on the 3520 filing date…. If you need me to edit any typos or anything thing you’d like to change – just make another comment and I’ll enter the changes.
      Thanks, steve

  4. Joe says:

    In making the comments I’ve made, I do not by any means pretend to represent that these are the opinions and understandings of an expert on the subject, and I invite Patrick, Steve, and any others who wish to to call attention to any misstatements that may appear in what I’ve written!

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