U.S. Tax of Mexico Income & Reporting (IRS Mexico Tax Guide)
We represent numerous clients each year, with unreported income, accounts, assets and investments from Mexico.
Whether it is a Foreign Person who relocated to the United States with Mexican assets, or a U.S. Person investing in Mexico – we can help.
Common Questions involving Mexico and U.S. Tax/Reporting:
- Are Pension Funds Taxable in the U.S.?
- Is there a Tax Treaty with Mexico?
- Is there a FATCA Agreement with Mexico?
- Do I report interest income or dividends from Mexico?
- Do I report Rental Income from Mexico?
- Is my Mexico Company Reportable in the U.S.?
U.S. Tax of Mexico Income
With the implementation of FATCA (and the signing of the FATCA Agreement by Mexico) the U.S. government is taking a deeper interest in ensuring reporting and disclosure compliance of individuals and businesses involving Mexico.
Specifically as to Mexico, the FATCA agreement was in force since 2014.
U.S. Tax Treaty with Mexico
United States and Mexico do have an income tax treaty in place. The main purpose of a tax treaty is to ensure proper tax treatment of monies earned by US citizens, Mexican citizens, ex-pats and residents of each other’s country.
It allows for tax deferred treatment and tax preferences based on various factors, such as the type of income, source of income, etc.
You can access the U.S. and Mexico dual tax treaty here.
The requirement to file U.S. tax returns (unless a person is otherwise exempted or excluded) is a requirement that comes along with being a US citizen and/or legal permanent resident. Under U.S. tax law, the United States taxes U.S. taxpayers on their worldwide income.
That means that even if you are a U.S. Expat and earn the money outside of the United States (Whether you are a resident of the U.S or not), you are required to file a U.S. tax return, report the income, and usually pay tax on the money (Unless the Foreign Tax Credit or Foreign Earned Income Exclusion applies).
Mexico and FATCA
FATCA is the Foreign Account Tax Compliance Act. It is a global law developed by the United States for the purpose of cracking down on international tax fraud in offshore tax evasion. More than 110 countries have agreed to enforce FATCA and many thousands of foreign financial institutions have agreed to report US account holders to the United States. For more information on FATCA, Click Here.
Mexico was one of the earlier countries to sign the FATCA Agreement.
As a result of the signing of this agreement, the window of opportunity to get into compliance before it is too late is closing fast. If a Foreign Financial Institution reports your information to the United States and you are audited or examined before you have an opportunity to get into compliance, penalties can be very steep…reaching upwards of 100% value of your foreign account.
Foreign Account Reporting – Bank, Investment & Retirement
There is a lot of misinformation and confusion online regarding requirements report foreign bank accounts, foreign retirement accounts, foreign investment accounts and the interplay between foreign account reporting for individuals and FATCA.
FBAR vs. FATCA
FBAR (report of foreign bank and financial account) and FATCA are two acronyms that are used synonymously, but they are different.
FBAR (Treasury Department Form FinCEN 114)
The FBAR aka FinCEN 114 is a form, which is required to be filed by any US taxpayer who has an annual aggregate total of more than $10,000 overseas. It does not matter whether the money is in one bank account or scattered over numerous bank accounts; moreover, it does not matter if your account has $10,000 in it – it is important to remember that the threshold requirement is more than $10,000 in total of all your foreign accounts.
*Whether or not a Country has entered into a FATCA agreement has no bearing on whether you as an individual or business are required to report your foreign accounts.
The following is a brief summary of FBAR Reporting, in general:
If you, your family, your business, your foreign trust, and/or PFIC (Passive Foreign Investment Company) have more than $10,000 (in annual aggregate total at any time) overseas in foreign accounts and either have ownership or signatory authority over the account, it is important that you have an understanding of what you must do to maintain FBAR (Report of Foreign Bank and Financial Accounts) compliance.
There are very strict FBAR filing guidelines and requirements in accordance with general IRS tax law, Department of Treasury (DOJ) filing initiatives, and FATCA (Foreign Account Tax Compliance Act). Filing FBARs and ensuring compliance with IRS International Tax Laws, Rules, and Regulations is extremely important for anyone, or any business that maintains:
- Foreign Bank Accounts
- Foreign Savings Accounts
- Foreign Investment Accounts
- Foreign Securities Accounts
- Foreign Mutual Funds
- Foreign Trusts
- Foreign Retirement Plans
- Foreign Business and/or Corporate Accounts
- Foreign Life Insurance Policies
- Foreign Accounts held in a CFC (Controlled Foreign Corporation); or
- Foreign Accounts held in a PFIC (Passive Foreign Investment Company)
- FATCA (IRS Form 8938)
As described above, the goal of FATCA is to reduce offshore tax fraud and evasion. Like the FBAR, whether or not a foreign country has entered into a FATCA Agreement has no bearing on whether a FATCA form 8938 has to be filed. While there are many aspects and facets to FATCA, for individual taxpayers the main issue is form 8938. To learn more about the FATCA Form 8938, please Click Here.
Unlike the FBAR that has been unwavering threshold for filing, the threshold requirements for an 8938 vary, and are based on whether a person is married or single and/or whether they reside in the United States or outside of the United States
Estate Tax Treaty
The United States and Mexico do not have an Estate Tax Treaty in place. This may significantly impact your U.S. Estate Tax liability.
You should speak with an estate planning attorney prior to executing (or amending) an estate plan, if you are a US person with assets in Mexico.
Foreign Insurance – U.S. Tax
Foreign life insurance is a source of confusion for many individuals – rightly so, since the IRS has been unclear regarding the reporting requirements. Essentially, if the foreign life insurance policy has a surrender value, then it must be reported on an FBAR and/or 8938 (if the individual otherwise meets the threshold requirements).
In addition, if the insurance policy is a hybrid policy/annuity that generates current income such as interest, bonus or dividends than that income must be reported as well. It generally does not matter if the income is not actually distributed and/or whether you paid foreign tax on the earnings already.
Mexico Retirement Funds
Retirement plans from overseas countries is another bone of contention for many individuals required to file and/or pay US tax. Why? Because there may be both FBAR and FATCA Reporting requirements if the retirement fund has an individual account number. Depending on the type of retirement, there might also be an 8621 (PFIC) reporting requirement that is beyond the scope of this article.
More than just reporting the account information, taxpayers may also have to pay current tax on earnings of the retirement fund even though none of the money has been distributed, and even though the fund is growing tax-free overseas.
In other words, even though a foreign retirement fund may obtain tax deferment status until distributed in the foreign country of origin, from the US tax perspective it may not receive that same tax-deferred treatment such as a 401(k). Therefore, the individual with a retirement account is required to pay current tax on earnings that were not distributed.
If a person is required to pay current tax on the undistributed earnings they will generally receive a tax credit against any US tax due in the future once the money is distributed.
If you are a foreign national or US person with a foreign trust that is based in Mexico, it is important to ensure you have had your state tax plan reviewed by US international tax attorney.
Depending on whether the trust is a grantor trust and if it is currently funded, there could be immediate tax consequences and liabilities to the owner/grantor of the trust and/or the beneficiaries as well. Click Here to Learn More About Foreign Trusts.
Common Corporate Structures – De Facto
The United States has very strict rules when it comes to foreign corporations. In order to circumvent the very comprehensive reporting requirements necessary to get into tax compliance for foreign corporations, the IRS has laws in place to allow “disregarding of the entity.”
On a very basic level what that means is that if you have an entity such as an LLC, you may be able to disregard the entity for tax purposes. Thus, while you still have LLC protection for your business (if for example it was sued), you do not have to go through the rigorous reporting requirements of the LLC as if it was a corporation. Rather, you can simply disregard the entity and report all of the income, taxes, deductions etc. directly on your 1040 tax return form/schedule C.
When it comes to foreign businesses, certain businesses must file in the United States as a corporation. In other words, even if it is a one-person business that may seem similar to a U.S. single member LLC (SMLLC) – which would otherwise qualify for being disregarded – the IRS will not allow certain for business structures to be disregarded.
At the current time, Mexico is listed in IRC (Internal Revenue Code) as having a De Facto Corporate Status for all “Sociedad Anonimas.”
We deal with the issue of Sociedad Anonimas often, and you can read more here.
Foreign Real Estate
If a person is a “U.S. Person” and is required to file a tax return (1040) in that they are either considered to be a US taxpayer for income tax purposes and/or meet the threshold requirements for filing, then the United States taxes individuals on their worldwide income.
As such, it does not matter if the money is earned in Country that under Mexican law the earnings may be below the threshold reporting requirements for filing and paying taxes in Mexico.
As a US person, the United States taxes individuals on their worldwide income — including foreign rental income
Profit vs. income
Another very important distinction that is common is when a taxpayer has foreign property that earns rent income, but at the end of the day once expenses and foreign taxes are factored in there is no “profit.” Just because there is no profit does not mean there is no tax reporting requirement.
Rather, a person is required to report the gross income as well as the expenses on a Schedule E. Moreover, it is important to keep in mind that under US law the deductions and exclusions a person takes for their rental property may be different than in the country in which the property is located (for better or worse) – so just because there is no profit under foreign tax law does not mean there is no profit under US tax law.
Did You Recently Give Up Green Card?
Unfortunately, that does not mean you are out of the clear just yet…
Just because you recently gave up your Green Card does not mean you are automatically exempt from filing U.S. Tax Returns. If you are a Long-term Green Card Holders may still have tax filing, reporting and liability to the U.S. Whether a person meets the definition of “Covered Expatriate” is a complex analysis that requires the assistance of an experienced International Tax Lawyer.
Are You Out of Compliance with the IRS?
If you are out of compliance with the IRS, you may consider getting into compliance by using one of the approved Voluntary Disclosure/Tax Amnesty programs.
We Specialize in Safely Disclosing Foreign Money
We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)
Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
Examples of areas of tax we handle
- Unfiled Tax Returns
- Unreported Income Penalties
- International Tax Investigations (FATCA and more)
- FBAR Investigations
- International Tax Evasion
- Structuring Investigations
- Eggshell and Reverse Eggshell Audits
- Divorce and Offshore Accounts
- Foreign Mutual Funds
- Foreign Life Insurance
- Fixing Quiet Disclosure
- Foreign Real Estate Income
- Foreign Real Estate Sales
- Foreign Earned Income Exclusion
- Subpart F Income
- Foreign Inheritance
- Foreign Pension
- Form 3520
- Form 5471
- Form 8621
- Form 8865
- Form 8938 (FATCA)
Who Decides to Disclose Unreported Money?
What Types of Clients Do we Represent?
We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.
You are not alone, and you are not the only one to find himself or herself in this situation.
Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist
Our Managing Partner, Sean M. Golding, JD, LLM, EA holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)
He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.
Less than 1% of Tax Attorneys Nationwide
Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.
The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.
IRS Penalty List
The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:
Failure to File
If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.
The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
Failure to Pay
f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.
However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.
Civil Tax Fraud
If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.
A Penalty for failing to file FBARs
The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
A Penalty for failing to file Form 8938
The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 3520
The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A Penalty for failing to file Form 3520-A
The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A Penalty for failing to file Form 5471
A Penalty for failing to file Form 5472
The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A Penalty for failing to file Form 926
The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A Penalty for failing to file Form 8865
Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Fraud penalties imposed under IRC §§ 6651(f) or 6663
Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)
Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)
If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An Accuracy-Related Penalty on underpayments imposed under IRC § 6662
Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty
Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)
Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion
Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
What Should You Do?
Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.
Be Careful of the IRS
With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.
4 Types of IRS Voluntary Disclosure Programs
There are typically four types of IRS Voluntary Disclosure programs, and they include:
- Traditional (IRM) IRS Voluntary Disclosure Program
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)