Mexican Bank Accounts & US Tax Obligations | International Tax Lawyers

In this essay, I would like to discuss three main US tax obligations concerning Mexican bank accounts: the worldwide income reporting requirement, FBAR and Form 8938. I will only concentrate on the obligations concerning individuals, not business entities.

Mexican Bank Accounts and US Tax Residents

Before we delve into the discussion concerning US tax obligations, we should establish who is required to comply with these obligations. In other words, who needs to report their Mexican bank accounts to the IRS?

The answer to this question is clear: US tax residents. Only US tax residents must disclose their worldwide income and report their Mexican bank accounts on FBAR and Form 8938. Non-resident aliens who have never declared themselves as US tax residents do not need to comply with these requirements.

US tax residents include US citizens, US Permanent Residents, an individual who satisfied the Substantial Presence test and an individual who properly declares himself a US tax resident. This is, of course, the general rule; important exceptions exist to this rule.

Mexican Bank Accounts: Worldwide Income Reporting Requirement

US tax residents must disclose their worldwide income on their US tax returns, including any income generated by Mexican bank accounts. In other words, all interest, dividend and royalty income produced by these accounts must be reported on Form 1040. Similarly, any capital gains from sales of investments held in Mexican bank accounts should also be disclosed on Form 1040. US taxpayers should pay special attention to the reporting of PFIC distributions and PFIC sales.

It is also possible that you may have to disclose passive income generated by your Mexican business entities through the operation of Subpart F rules and the GILTI regime, but this is a topic for a separate discussion.

Mexican Bank Accounts: FBAR

US tax residents must disclose on FBAR their ownership interest in or signatory authority or any other authority over Mexican bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000. FBAR is a common acronym for the Report of Foreign Bank and Financial Accounts, FinCEN Form 114. Even though this is a FinCEN Form, the IRS is charged with the enforcement of this form since 2001.

While seemingly simple, FBAR contains a number of traps for the unwary. One of the most common trap is the definition of “account”. For the FBAR purposes, “account” has a much broader definition than what people generally think of as an account. ‘Account” includes not just regular checking and savings accounts, but also investment accounts, life insurance policies with a cash surrender value, precious metals accounts, earth mineral accounts, et cetera. In fact, it is very likely that the IRS will find that an account exists whenever there is a custodial relationship between a financial institution and a US person’s foreign asset.

FBAR is a very dangerous form. Not only is the filing threshold very low, but there are huge penalties for FBAR noncompliance. For a willful violation, the penalties can go up to $100,000 (adjusted for inflation) per account per year or 50% of the highest value of the account per year, whichever is higher. In special circumstances, the IRS may refer FBAR noncompliance to the US Department of Justice for criminal prosecution. Even non-willful FBAR penalties may go up to $10,000 (again, adjusted for inflation) per account per year.

Mexican Bank Accounts: FATCA Form 8938

The final requirement that I wish to discuss today is the FATCA Form 8938. Born out of the Foreign Account Tax Compliance Act, Form 8938 occupies a unique role in US international tax compliance. On the one hand, it may result in the duplication of a taxpayer’s US tax disclosures (especially with respect to the accounts already disclosed on FBAR). On the other hand, however, Form 8938 is a “catch-all” form that fills the compliance gaps with respect to other US international tax forms.

For example, if a taxpayer holds a paper bond certificate, this asset would not be reported on FBAR, because it is not an account. For the Form 8938 purposes, however, the IRS would consider this certificate as part of assets that fall within the definition of the Specified Foreign Financial Assets (“SFFA”).

Hence, the scope of Form 8938 is very broad. It requires a specified person (this term is almost equivalent to a US tax resident) to disclose all SFFA as long as these SFFA, in the aggregate, exceed the applicable filing threshold.

SFFA includes a huge variety of foreign financial assets which are divided into two sub-categories: (a) foreign bank and financial accounts; and (b) “other” foreign financial assets. The definition of the “other” assets is impressive in its breadth: bonds, stocks, ownership interest in a closely-held business, beneficiary interest in a foreign trust, an interest rate swap, currency swap; basis swap; interest rate cap, interest rate floor, commodity swap; equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty; an option or other derivative instrument with respect to any currency or commodity that is entered into with a foreign counterparty or issuer; and so on.

Form 8938 requires not only the reporting of SFFA, but also the income generated by the SFFA. In essence, the worldwide income reporting requirement is incorporated directly into the form.

The filing threshold for Form 8938 is more reasonable than that of FBAR for specified persons who reside in the United States, but it is still fairly low (especially for individuals). For example, if a taxpayer lives in the United States, he will need to file Form 8938 if he has SFFA of $50,000 ($100,000 for a married couple) or higher at the end of the year or $75,000 ($150,000 for a married couple) or higher during any time during the year. Specified persons who reside outside of the United States enjoy much higher thresholds.

Form 8938 has its own penalty system which contains some unique elements. First of all, a failure to comply with the Form 8938 requirements may allow the IRS to impose a $10,000 failure-to-file penalty which may go up to as high as $50,000 in certain circumstances. Second, Form 8938 noncompliance will lead to an imposition of much higher accuracy-related penalties on the income tax side – 40% of the additional tax liability. Third, Form 8938 noncompliance will limit the taxpayer’s ability to utilize the Foreign Tax Credit.

Finally, a failure to file Form 8938 will directly affect the Statute of Limitations of the entire tax return by extending the Statute to the period that ends only three years after the form is filed. In other words, Form 8938 penalties may allow the IRS to audit tax years which otherwise would normally be outside of the general three-year statute of limitations.

Contact Sherayzen Law Office for Professional Help With the US Tax Reporting of Your Mexican Bank Accounts

Sherayzen Law Office’s core area of practice is international tax compliance, including offshore voluntary disclosures – i.e. helping US taxpayers with foreign assets and foreign income to stay in US tax compliance and, if a taxpayer fails failed to comply with US tax laws in the past, bring him into compliance through an offshore voluntary disclosure. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Foreign Inheritance Definition | International Tax Lawyer & Attorney

Foreign inheritance definition is a topic of crucial importance for both US income and US estate tax compliance, because domestic inheritance and foreign inheritance have vastly different income tax results and reporting requirements. Hence, the topic of foreign inheritance definition directly concerns millions of Americans who reside overseas and tens of millions of Americans who have relatives outside of the United States. In this article, I will explore the foreign inheritance definition and warn against the common tax traps associated with it.

Foreign Inheritance Definition: Confusion Among Taxpayers

There is an enormous confusion right now among many US taxpayers with respect to US tax compliance requirements concerning a foreign inheritance. Some taxpayers firmly believe that a foreign inheritance is never subject to US taxation, some adopt an exactly opposite position while the rest simply do not know what to think.

It appears that the notion that foreign inheritance is non-taxable was acquired by reading various articles on the internet that state exactly this point. The people who believe that foreign inheritance is taxable also draw their conclusion from the internet – the difference arises from the fact that they read different articles. Finally, the third category of taxpayers read both kinds of articles and they simply do not know who to believe.

What is going on? Why is it that the articles on the internet seem to draw mutually-exclusive conclusions? Is one category of articles correct while the other one is one hundred percent wrong?

The answer to these questions lies in identifying the purpose for which an internet article was written, because the source of confusion lies in the foreign inheritance definition. It turns out that there are two definitions with separate applicable US tax compliance requirements!

Foreign Inheritance Definition for Income Tax Purposes

The first foreign inheritance definition exists for income tax purposes only. Under this rule, foreign inheritance is an inheritance received from a decedent who is a non-resident alien.

In this context, “non-resident alien” is defined by the IRS income tax rules. In other words, a non-resident alien is a person who does not fall into any of the tax residency categories. He cannot be a US citizen or US permanent resident; he did not stay long enough to satisfy the Substantial Presence Test; and he never declared himself a US tax resident (for example, by filing a joint US tax return with his US spouse).

Foreign Inheritance Definition for Estate Tax Purposes

A different definition of foreign inheritance applies under the US estate tax rules. Here, a foreign inheritance is defined as an inheritance received from a decedent who is a nonresident noncitizen. A noncitizen is a nonresident if he is domiciled outside of the United States. The term “domicile” here means acquiring a place to live without a present intention of later leaving. There are various factors used to determine a person’s domicile.

It is important to understand that, due to these two different definitions of a foreign inheritance, it is possible that a person could be a tax resident for income tax purposes and a nonresident noncitizen for estate tax purposes. Vice-versa may also be true.

Foreign Inheritance Definition and Tax Consequences

Now that we understand that there is a separate foreign inheritance definition for each tax regime (income and estate), we can clarify the confusion that prevails on the internet and among US taxpayers.

Generally, if the decedent was a non-resident alien, then neither his estate nor his US heirs would be subject to income taxes at the time of inheritance. I wish to emphasize here that this rule applies only “at the time of inheritance”, not before or after the foreign inheritance takes place. Exceptions may be possible with respect to foreign trusts.

On the other hand, if an inheritance was received from a taxpayer who is domiciled in the United States, then it will be subject to US estate tax rules irrespective of the country where the inherited assets are located. Of course, estate tax treaties may provide a certain amount of relief against double-taxation in this case.

If an inheritance was received from a nonresident noncitizen, then all foreign assets, except those considered as “US situs assets”, will avoid US estate taxation. The US situs assets above the exclusion of $60,000, however, may still be taxed in the United States.

Contact Sherayzen Law Office for Professional Tax Help With Your Foreign Inheritance

All of the rules that I have stated here are general, and your international tax attorney needs to apply them to your specific fact pattern in order to determine whether an inheritance fits a foreign inheritance definition for either estate or income tax purposes or both.

Furthermore, one should remember that “non-taxable” does not mean “non-reportable”. There are various income tax information reporting requirements that may apply to you even if your foreign inheritance was not taxable. Additionally, income tax recognition may be required in certain situations with respect to your foreign inheritance, especially before and after the you are deemed to have inherited your foreign assets.

Under these circumstances, the help of Sherayzen Law Office is of critical importance if you wish to stay in US tax compliance and avoid high IRS tax penalties. We are an international tax law firm highly experienced in US tax compliance concerning a foreign inheritance. We have successfully helped US taxpayers all over the globe with their foreign inheritance issues, and We can help You!

Contact Us Today to Schedule Your Confidential Consultation About Your Foreign Inheritance!

IRS Waives 2018 Estimated Tax Penalty for Certain Taxpayers | Tax News

On January 16, 2019, the IRS announced that it would waive the 2018 estimated tax penalty for taxpayers who paid at least 85% of their total tax liability during 2018, either through federal income tax withholding, quarterly estimated tax payments or the combination of both of these payment methods. These changes will be integrated in the forthcoming revision of Form 2210 and instructions.

The 85% threshold is a reduction from the usual 90% threshold required to avoid a penalty. It appears that this new limitation will apply only to the 2018 estimated tax penalty.

Why did the IRS single out the 2018 estimated tax penalty for this additional relief? Very simple – the IRS is trying to help the taxpayers who were unable to properly calculate the needed tax withholding and estimated tax payments due to the numerous changes to tax laws introduced by the 2017 Tax Cuts and Jobs Act.

The IRS probably also feels that its own federal tax withholding tables could have contributed to underpayment of tax by many taxpayers. When they were released in early 2018, the updated federal tax withholding tables reflected only the lower tax rates and the increased standard deduction. The tables, however, did not fully reflect other changes, such as the elimination of personal exemptions (including exemptions for dependents) and the severe limitations placed on  itemized deductions. Hence, if a taxpayer relied on the federal tax withholding tables, he would have been unfairly exposed to the 2018 estimated tax penalty had the IRS refused to grant this relief.

In all fairness, it should be mentioned that the IRS attempted to correct its mistake by initiating a very extensive education campaign (which also involved all IRS partner groups) for taxpayers with respect to the need to check on their tax withholding.

It is important to point out that the taxpayers should pay a lot more attention to their tax withholding for 2019 so that a 2018 estimated tax penalty does not turn into a 2019 estimated tax penalty. This is especially true for taxpayers who will now owe (maybe, somewhat unexpectedly for them) taxes on their tax returns. The highest-risk taxpayers are, of course, those who have itemized their deductions and complex income. Sherayzen Law Office also warns that taxpayers with foreign income are within this high-risk category.

2018 FBAR Currency Conversion Rates | FBAR Tax Lawyer & Attorney

2018 FBAR and 2018 Form 8938 instructions both require that 2018 FBAR Currency Conversion Rates be used to report the required highest balances of foreign financial assets on these forms. In the case of 2018 Form 8938, the 2018 FBAR Currency Conversion Rates is the default choice, not an exclusive one.

The U.S. Department of Treasury  already published the 2018 FBAR Currency Conversion Rates online (they are called “Treasury’s Financial Management Service rates” or the “FMS rates”).

Since the 2018 FBAR Currency Conversion Rates are very important to US taxpayers, international tax lawyers and international tax accountants, Sherayzen Law Office provides the table below listing the official 2018 FBAR Currency Conversion Rates (note that the readers still need to refer to the official website for any updates).

 

Country – Currency

Foreign Currency to $1.00

AFGHANISTAN – AFGHANI

74.576

ALBANIA – LEK

107.05

ALGERIA – DINAR

117.898

ANGOLA – KWANZA

310.0000

ANTIGUA – BARBUDA – E. CARIBBEAN DOLLAR

2.7000

ARGENTINA – PESO

37.642

ARMENIA – DRAM

485.0000

AUSTRALIA – DOLLAR

1.4160

AUSTRIA – EURO

0.8720

AZERBAIJAN – NEW MANAT

1.7000

BAHAMAS – DOLLAR

1.0000

BAHRAIN – DINAR

0.3770

BANGLADESH – TAKA

84.0000

BARBADOS – DOLLAR

2.0200

BELARUS – NEW RUBLE

2.1600

BELGIUM – EURO

0.8720

BELIZE – DOLLAR

2.0000

BENIN – CFA FRANC

568.6500

BERMUDA – DOLLAR

1.0000

BOLIVIA – BOLIVIANO

6.8500

BOSNIA – MARKA

1.7060

BOTSWANA – PULA

10.6610

BRAZIL – REAL

3.8800

BRUNEI – DOLLAR

1.3610

BULGARIA – LEV

1.7070

BURKINA FASO – CFA FRANC

568.6500

BURUNDI – FRANC

1790.0000

CAMBODIA (KHMER) – RIEL

4103.0000

CAMEROON – CFA FRANC

603.8700

CANADA – DOLLAR

1.3620

CAPE VERDE – ESCUDO

94.8800

CAYMAN ISLANDS – DOLLAR

0.8200

CENTRAL AFRICAN REPUBLIC – CFA FRANC

603.8700

CHAD – CFA FRANC

603.8700

CHILE – PESO

693.0800

CHINA – RENMINBI

6.8760

COLOMBIA – PESO

3245.8000

COMOROS – FRANC

428.1400

CONGO, DEM. REP – CONGOLESE FRANC

1630.0000

COSTA RICA – COLON

603.5000

COTE D’IVOIRE – CFA FRANC

568.6500

CROATIA – KUNA

6.3100

CUBA – PESO

1.0000

CYPRUS – EURO

0.8720

CZECH REPUBLIC – KORUNA

21.9410

DENMARK – KRONE

6.5170

DJIBOUTI – FRANC

177.0000

DOMINICAN REPUBLIC – PESO

49.9400

ECUADOR – DOLARES

1.0000

EGYPT – POUND

17.8900

EL SALVADOR – DOLARES

1.0000

EQUATORIAL GUINEA – CFA FRANC

603.8700

ERITREA – NAKFA

15.0000

ESTONIA – EURO

0.8720

ETHIOPIA – BIRR

28.0400

EURO ZONE – EURO

0.8720

FIJI – DOLLAR

2.1080

FINLAND – EURO

0.8720

FRANCE – EURO

0.8720

GABON – CFA FRANC

603.8700

GAMBIA – DALASI

50.0000

GEORGIA – LARI

2.6700

GERMANY – EURO

0.8720

GHANA – CEDI

4.8250

GREECE – EURO

0.8720

GRENADA – EAST CARIBBEAN DOLLAR

2.7000

GUATEMALA – QUENTZAL

7.7150

GUINEA – FRANC

9076.0000

GUINEA BISSAU – CFA FRANC

568.6500

GUYANA – DOLLAR

215.0000

HAITI – GOURDE

77.1180

HONDURAS – LEMPIRA

25.0000

HONG KONG – DOLLAR

7.8320

HUNGARY – FORINT

280.1700

ICELAND – KRONA

116.1100

INDIA – RUPEE

69.8000

INDONESIA – RUPIAH

14440.0000

IRAN – RIAL

42000.0000

IRAQ – DINAR

1138.0000

IRELAND – EURO

0.8720

ISRAEL – SHEKEL

3.7490

ITALY – EURO

0.8720

JAMAICA – DOLLAR

126.0000

JAPAN – YEN

109.8500

JERUSALEM – SHEKEL

3.7490

JORDAN – DINAR

0.7080

KAZAKHSTAN – TENGE

375.1500

KENYA – SHILLING

101.8000

KOREA – WON

1114.4900

KOSOVO – EURO

0.8720

KUWAIT – DINAR

0.3030

KYRGYZSTAN – SOM

69.8000

LAOS – KIP

8535.0000

LATVIA – EURO

0.8720

LEBANON – POUND

1500.0000

LESOTHO – SOUTH AFRICAN RAND

14.3500

LIBERIA – DOLLAR

156.7100

LIBYA – DINAR

1.3860

LITHUANIA – EURO

0.8720

LUXEMBOURG – EURO

0.8720

MACAO – MOP

no listing

MACEDONIA FYROM – DENAR

53.5000

MADAGASCAR – ARIARY

3470.2000

MALAWI – KWACHA

733.0000

MALAYSIA – RINGGIT

4.1300

MALI – CFA FRANC

568.6500

MALTA – EURO

0.8720

MARSHALL ISLANDS – DOLLAR

1.0000

MARTINIQUE – EURO

0.8720

MAURITANIA – OUGUIYA

36.0000

MAURITIUS – RUPEE

34.1500

MEXICO – PESO

19.6540

MICRONESIA – DOLLAR

1.0000

MOLDOVA – LEU

16.9930

MONGOLIA – TUGRIK

2642.9200

MONTENEGRO – EURO

0.8720

MOROCCO – DIRHAM

9.5300

MOZAMBIQUE – METICAL

61.5300

MYANMAR – KYAT

1535.0000

NAMIBIA – DOLLAR

14.3500

NEPAL – RUPEE

111.6000

NETHERLANDS – EURO

0.8720

NETHERLANDS ANTILLES – GUILDER

1.7800

NEW ZEALAND – DOLLAR

1.4900

NICARAGUA – CORDOBA

32.3000

NIGER – CFA FRANC

568.6500

NIGERIA – NAIRA

361.0000

NORWAY – KRONE

8.6800

OMAN – RIAL

0.3850

PAKISTAN – RUPEE

138.6000

PALAU – DOLLAR

1.0000

PANAMA – BALBOA

1.0000

PAPUA NEW GUINEA – KINA

3.2840

PARAGUAY – GUARANI

5956.0000

PERU – NUEVO SOL

3.3750

PHILIPPINES – PESO

52.4900

POLAND – ZLOTY

3.7530

PORTUGAL – EURO

0.8720

QATAR – RIYAL

3.6400

ROMANIA – NEW LEU

4.0690

RUSSIA – RUBLE

69.6800

RWANDA – FRANC

890.0000

SAO TOME & PRINCIPE – NEW DOBRAS

21.5350

SAO TOME & PRINCIPE – DOBRAS

20941.0080

SAUDI ARABIA – RIYAL

3.7500

SENEGAL – CFA FRANC

568.6500

SERBIA – DINAR

103.3900

SEYCHELLES – RUPEE

13.5500

SIERRA LEONE – LEONE

8620.0000

SINGAPORE – DOLLAR

1.3610

SLOVAK REPUBLIC – EURO

0.8720

SLOVENIA – EURO

0.8720

SOLOMON ISLANDS – DOLLAR

7.7520

SOMALI – SHILLING

575.0000

SOUTH AFRICA – RAND

14.3500

SOUTH SUDANESE – POUND

153.7000

SPAIN – EURO

0.8720

SRI LANKA – RUPEE

182.6000

ST LUCIA – EC DOLLAR

2.7000

SUDAN – SUDANESE POUND

47.0000

SURINAME – GUILDER

7.5200

SWAZILAND – LILANGENI

14.3500

SWEDEN – KRONA

8.9380

SWITZERLAND – FRANC

0.9840

SYRIA – POUND

515.0000

TAIWAN – DOLLAR

30.5880

TAJIKISTAN – SOMONI

9.3500

TANZANIA – SHILLING

2295.0000

THAILAND – BAHT

32.3500

TIMOR – LESTE DILI

1.0000

TOGO – CFA FRANC

568.6500

TONGA – PA’ANGA

2.1730

TRINIDAD & TOBAGO – DOLLAR

6.7700

TUNISIA – DINAR

3.0090

TURKEY – LIRA

5.2830

TURKMENISTAN – NEW MANAT

3.4910

UGANDA – SHILLING

3705.0000

UKRAINE – HRYVNIA

27.7000

UNITED ARAB EMIRATES – DIRHAM

3.6730

UNITED KINGDOM – POUND STERLING

0.7810

URUGUAY – PESO

32.3200

UZBEKISTAN – SOM

8310.0000

VANUATU – VATU

111.6900

VENEZUELA – BOLIVAR – SOBERANO

563.9800

VENEZUELA – BOLIVAR – FUERTE

248832.0000

VIETNAM – DONG

23190.0000

WESTERN SAMOA – TALA

2.5350

YEMEN – RIAL

480.0000

ZAMBIA – NEW KWACHA

11.9000

ZIMBABWE – DOLLAR

1.0000

2019 Tax Filing Season Will Begin on January 28, 2019 | Tax Lawyer News

On January 7, 2019, the IRS confirmed that the 2019 tax filing season will begin on January 28, 2019. In other words, the 2019 tax filing season will begin on schedule despite the government shutdown.

2019 Tax Filing Season for 2018 Tax Returns and 2018 FBAR

During the 2019 tax filing season, US taxpayers must file their required 2018 federal income tax returns and 2018 information returns. Let me explain what I mean here.

One way to look at the US federal tax forms is to group them according to their tax collection purpose. The income tax returns are the tax forms used to calculate a taxpayer’s federal tax liability. The common example of this type of form is Form 1040 for individual taxpayers.

The information returns are a group of federal tax forms (and, separately, FBAR) which taxpayers use to disclose certain required information about their assets and activities. These forms are not immediately used to calculate a federal tax liability. A common example of this form is Form 8938. FinCEN Form 114, the Report of Foreign Bank and Financial Account, commonly known as FBAR, also belongs to this category of information returns even though it is not a tax form.

There is a third group of returns that consists of hybrid forms – i.e. forms used for both, income tax calculation and information return, purposes. Form 8621 for PFICs has been a prominent example of this type of a form since tax year 2013.

2019 Tax Filing Season Deadline and Available Extensions for Individual Taxpayers

Individual US taxpayers must file their required income tax and information returns by Monday, April 15, 2019. An interesting exception exists for residents of Maine and Massachusetts. Due to the Patriots’ Day holiday on April 15 in these two states and the Emancipation Day holiday on April 16 in the District of Columbia, the residents of Maine and Massachusetts will have until April 17, 2019 to file their US tax returns.

Taxpayers who reside overseas get an automatic extension until June 17 , 2019, to file their US tax returns.  The reason why the deadline is on June 17 is because June 15 falls on a Saturday. The taxpayers still must pay their estimated tax due by April 15, 2019.

Taxpayers can also apply for an automatic extension until October 15, 2019, to file their federal tax returns. Again, these taxpayers must still pay their estimated tax due by April 15, 2019, in order to avoid additional penalties.

Finally, certain taxpayers who reside overseas may ask the IRS for additional discretionary extension to file their 2018 federal tax return by December 16 (because December 15 is a Sunday this year), 2019. These taxpayers should send their request for the discretionary extension before their automatic extension runs out on October 15, 2019.

2019 Tax Filing Season Refunds

In light of the ongoing government shutdown, one of the chief concerns for US taxpayers is whether they will be able to get their tax refunds during the 2019 Tax Filing Season. The IRS assured everyone that it has the power to issue refunds during the government shutdown.

The IRS has been consistent in its position that, under the 31 U.S.C. 1324, the US Congress provided a permanent and indefinite appropriation for refunds. In 2011, the Office of Management and Budget (“OMB”) disagreed with the IRS and ordered it not to pay any refunds. It appears, however, that the OMB changed its position sometime after 2011.