The Offshore Voluntary Disclosure Program deadline has come and gone. Now what?

A client recently asked me about what I thought of an article she read saying that it was not necessary to file Form 3520 & Form 3520-A for their Fideicomiso as the IRS is only looking for those people that are truly hiding monies offshore.

 Response: Yes, I have thoughts on that one!  Whoever wrote the article is rather irresponsible. That advice is similar to saying, “go ahead and run a red light if you don’t see any police.” There’s a problem with that logic.  Sometimes the police are hiding around the corner, and now there are hidden cameras!   (The cameras are qualified intermediaries, increased IRS Audits, and the IRS’s focus on foreign transactions)  Remember the penalties can be as high as 40% of the value of your property! 
 
Beware, when you get your 2009 Tax Return prepared this year, don’t be surprised if your tax preparer asks about your foreign activities and holdings for the 2009 tax year.  The IRS will penalize them if they do not.  You’re going to have to answer yes to the Question on Schedule B asking about your Foreign Trust.  As a result, the IRS will be looking for your Form 3520.

There’s more, I’ve been reviewing H.R. 3933 “Foreign Account Tax Compliance Act of 2009”, it focuses on increased Foreign Trust reporting and penalties.  http://thomas.loc.gov/cgi-bin/bdquery/z?d111:H.R.3933: 

The bill requires that any individual who holds an interest in a foreign entity (trust, partnership, corporation, etc.) report the asset, or pay a penalty of $10,000 for failure to disclose. 

The bill changes the Form 3520-A filing requirement of a US Owner of a foreign trust from being responsible to ensure Form 3520-A is filed to “shall submit such information.”  So, you won’t be able to say I thought the trustee was supposed to file Form 3520-A.

Additionally, the bill provides a minimum $10,000 late filing penalty for Form 3520 unless you can prove the reportable amount is less than $10,000.  If the reportable amount is proved to be less than $10,000 the IRS will refund the difference.  The minimum penalty applies to all returns required to be filed after 12/31/09.

This bill is a revenue raiser!  If enacted, the legislation is estimated to raise US $8.5 Billion over 10 years.  http://www.jhcohn.com/About/News-Archive/Proposed-Foreign-Account-Tax-Compliance-Act-2009.aspx.   

This linked article states that H.R. 3933 has full support of the administration.  http://www.martindale.com/government/article_Baker-Hostetler-LLP_856082.htm

Currently, a person can request a “reasonable cause” exception to penalties for not filing a timely Form 3520 & Form 3520-A. The reasonable cause exception works for “I didn’t know I was supposed to file”.  It does not work for “I didn’t think you were looking for me, so I didn’t file”.  That is called “intentional disregard” and provides no relief from penalties.

“Warning: to qualify for a reasonable cause exception to penalties, you must file shortly after finding out about your filing requirements.”

People who didn’t know about their Foreign Reporting Requirements, until after Offshore Voluntary Disclosure Program deadline passed, continue to ask me questions about possible huge IRS penalties for their:

• Fideicomiso
• Costa Rican S.A
• Panamanian Bearer Share Corporation, and
• Other Foreign Entities used to purchase a home offshore. 

 I talked with my contacts at IRS Criminal Investigation, IRS Offshore Compliance Initiatives and The IRS Office of Associate Chief Counsel (International) about how to file after the 10/15/09 deadline, and am continuing to help those who did not find out about their Foreign Reporting Requirements, until recently.

Advice: “Catch up on your Foreign Reporting requirements while you continue to have a reasonable cause exception to penalties. ”

 For help: visit www.dillingercpa.com and request a free consultation.

 

Greetings,

 First, I want to make sure everyone knows that the late Form 3520-As and Form 3520s from 2003 to 2008 only need to be “post marked” by 10/15/09, not received by 10/15/09.  I called Northern California CI to verify that “sent by” means “post marked”.  It does!

 Now, for those of you that want to file but cannot complete the returns by 10/15/09, this is what you need to do to buy some time:

 Go to the following link and find your local contact. 

 Then call and provide your Name, Address, Social Security Number and Date of Birth. (For both if married filing joint).  That’s it.

 If you’ve previously declared all of your foreign income on your tax returns, you may want to mention that you have no unreported foreign income.  You are only using the Voluntary Disclosure Program to file late Foreign Information Reporting Forms and are strictly using the Program because you require more time to file.  Remember that the Forms do need to be filed in a reasonable period of time.

 Many people have told me that they are apprehensive about calling CI to “turn themselves in”.  That is not what you’re doing.  You are just using the Voluntary Disclosure Program to receive additional time to file your returns under FAQ #42, and extend the guarantee of no late filing penalties.

 Note, I was told by Northern California CI that you can also fax the information.  If you don’t want to have a conversation with your local CI contact, call your local representative and request their fax number. 

 If you don’t want to call at all, you may send a letter to your local contact that provides all of the requested information and mail the signed letter to the appropriate address listed below.  If you include a signed Form 2848 for Power of Attorney with a tax professional, you may never have to speak with anyone at the IRS.  Make sure you obtain proof of mailing.  These are physical addresses so you are not limited to sending the note by USPS.

 Whichever method you use, I suggest doing it quickly.  People tend to wait until the last minute and you may have difficulty calling or faxing as we get closer to October 15^th.

  http://www.irs.gov/compliance/enforcement/article/0,,id=205909,00.html

 The following letter will be requested after you clear the required checks.  Since CI is only requesting your address, you should receive the request for the letter by mail.   Complete the letter and send it to your local contact.  Be honest and remember that most of it doesn’t apply to you.  You were required by Mexico to create the Fideicomiso to purchase property in a restricted zone, and didn’t know about the Foreign Trust Filing requirements.  That’s all.  By this time, a tax professional should have more time to assist you!

 Plus, there’s a good chance you’ll have the 3520’s and 3520-A’s completed by the time the letter is requested!

 http://www.irs.gov/pub/foia/ig/ci/ltr-voluntary-disclosure-option-format-20090729.doc

 After October 15th, tax professionals, including me, will have more time to help you get through this in a timely manner.  However, if you’d like to obtain my services and use me as you Power of Attorney, send me an e-mail at john@dillingercpa.com , ASAP.

 

 

The IRS states that a Fideicomiso is a Foreign Trust and Must File Required Reporting Forms

The September 23^rd deadline has come and gone, so where do we stand?

There have been a few changes recently. 

First, the IRS granted an extension until October 15^th, 2009.  This helps a little.  However, this is also the Final Deadline for extended Form 1040s, and tax professionals, as everyone else,  only have so much time in a day.

Second, the IRS stated, in writing, that a Fideicomiso is required to file IRS Foreign Trust Reporting Forms, and must use the Offshore Voluntary Disclosure Program to avoid penalties.  There is no longer a reason to debate whether a Fideicomiso is required to file Form 3520 and Form 3520-A.   That is unless you wish to debate IRS Criminal Investigations.

 I recently spoke with Special Agent Arlette Lee, Public Information Officer of IRS-Criminal Investigation.  According to Agent Lee a mass e-mail was sent out to Fideicomiso owners with her contact information.  As a result, Agent Lee was bombarded with phone calls asking about Fideicomisos and Foreign Trust Filing requirements.  After receiving verification, Agent Lee informed callers that a Fideicomiso is in fact a Foreign Trust and is therefore subject to IRS Foreign Trust reporting requirements, Form 3520 and Form 3520-A.

 I explained to Agent Lee that the Form 3520 and Form 3520-A are extremely difficult to understand, that it would be impossible for so many people to file by the September 23^rd deadline and I pleaded for an extension. 

The next day, Agent Lee sent me an e-mail that  states “Taxpayers who have a Fideicomiso (Trust) need to come in through the VDP program to qualify for the reduced penalties.  Especially if there has been no tax noncompliance, the 20 percent offshore penalty would not apply to those assets”.

 Third, the Agent Lee’s e-mail devised a way for an extension beyond October 15^th.  Earlier this year, the IRS released FAQs regarding the Offshore Voluntary Disclosure Program.  FAQ 42 provides a way for those who reported all their income, but didn’t know they were supposed to file IRS Foreign Reporting Forms, to follow instructions and file “outside” of the Voluntary Disclosure Program.  However, to qualify, you must send the required forms to the IRS by October 15^th.

 In order to file the returns after October 15^th, you must go “through” Criminal Investigation and the Offshore Voluntary Disclosure Program.  To do this, you must contact IRS Criminal Investigation and provide your name, address, social security number and date birth by October 15, 2009.  Detailed instructions from Agent Lee’s e-mail are provided at the end of the article.

Many people that I talk to do not relish the idea of calling IRS Criminal Investigation and identifying themselves.  However, unless you can get the required forms completed by October 15^th, this is your only option.  Please note, that I’m currently trying to come up with a way to help more people. 

If you contact Criminal Investigation, please make sure to contact your local IRS office, a link to local contacts is provided below.  Only contact Agent Lee if you reside in Northern California.

The following is the e-mail I received from Special Agent, Arlette Lee

 ”Hi John,

  Here is a quick explanation of the proper reporting of a Fideicomiso.   

 See bottom of e-mail for quick procedures to enter the Voluntary Disclosure Program by September 23rd.

Taxpayers who have a Fideicomiso (Trust) need to come in through the VDP program to qualify for the reduced penalties.  Especially if there has been no tax noncompliance, the 20 percent offshore penalty would not apply to those assets.   They only need to identify themselves to us and they can get the correct forms filed shortly there after.  They need to identify themselves by September 23rd.  They should also be advised that is not necessary to file the 3520-As (Trust Return)  by 9/23. 

 Here are other applicable FAQs: 

 Q20. Does the twenty percent penalty apply to entities? Does the twenty percent penalty apply only to cash and securities held in foreign accounts or entities or to tangible and intangible assets as well?

A20. The twenty percent penalty applies to entities.  The twenty percent penalty applies to all assets (or at least the taxpayer’s share) held by foreign entities (e.g., trusts and corporations) for which the taxpayer was required to file information returns, as well as all foreign assets (e.g., financial accounts, tangible assets such as real estate or art, and intangible assets such as patents or stock or other interests in a U.S. business) held or controlled by the taxpayer. 

 Q37. Re: Q&A 20  A taxpayer owns valuable land and artwork located in a foreign jurisdiction.  This property produces no income and there were no reporting requirements regarding this property.  Must the taxpayer report the land and artwork and pay a 20 percent penalty?

A37. Q&A 20 relates to income producing property for which no income was reported.  Under those circumstances, no distinction is made between assets held directly and assets held through an entity in computing the 20 percent offshore penalty.  However, if the taxpayer owns nonincome producing property in the taxpayer’s own name, there has been no U.S. taxable event and no reporting obligation to disclose.  The taxpayer will be required to report any current income from the property or gain from its sale or other disposition at such time in the future as the income is realized.  Because there has as yet been no tax noncompliance, the 20 percent offshore penalty would not apply to those assets.  If the foreign assets were held in the name of an entity such as a trust or corporation, there would have been an information return filing obligation that may need to be disclosed.  See Q&A 42.

Although Q42 states that a taxpayer should file just file the delinquent returns, coming through the program will allow the reduction of the penalty.

Q42. Q&A 9 states that a taxpayer who only failed to file an FBAR should not use this process.  What about a taxpayer who only has delinquent Form 5471s or Form 3520s but no tax due?  Does that taxpayer fall outside this voluntary disclosure process?   

A42. A taxpayer who has failed to file tax information returns, such as Form 5471 for controlled foreign corporations (CFCs) or Form 3520 for foreign trusts but who has reported and paid tax on all their taxable income with respect to all transactions related to the CFCs or foreign trusts, should file delinquent information returns with the appropriate service center according to the instructions for the form and attach a statement explaining why the information returns are filed late. (The Form 5471 should be submitted with an amended return showing no change to income or tax liability.)  Send copies of the delinquent information returns, together with copies of tax returns for all relevant years, by September 23, 2009, to the Philadelphia Offshore Identification Unit at:

Internal Revenue Service
11501 Roosevelt Blvd.
South Bldg., Room 2002
Philadelphia, PA 19154
Attn: Charlie Judge, Offshore Unit, DP S-611

The IRS will not impose a penalty for the failure to file the information returns. 

 Step 1        Contact your local IRS-CI Office  http://www.irs.gov/compliance/enforcement/article/0,,id=205909,00.html  By SEPTEMBER 23rd                 

Provide CI with your name, address, social security number and date birth.  (CI will run preliminary checks to ensure that the taxpayer qualifies for program)

When the taxpayer clears the initial checks, CI will contact the taxpayer and asked for the “optional letter”.

Step 2        Complete and sign the optional letter with original signature http://www.irs.gov/pub/foia/ig/ci/ltr-voluntary-disclosure-option-format-20090729.doc

Send completed letter to local IRS-CI Office.  Once the CI completes the evaluation, it will be forwarded to Philadelphia for processing.  An examining agent will contact the taxpayer to complete the process.

Link to Frequently Asked Questions on Voluntary Disclosure  http://www.irs.gov/newsroom/article/0,,id=210027,00.html          

               Special Agent Arlette Lee 
               Public Information Officer
               IRS-Criminal Investigation 
               (Fax) 510-637-2909 
               Visit CI On The Web http://www.irs.gov/compliance/enforcement/index.html

 

IRS Extends Deadline for Disclosing Hidden Offshore Accounts

IR-2009-84, Sept. 21, 2009

WASHINGTON ─ The Internal Revenue Service today announced a one-time extension of the deadline for special voluntary disclosures by taxpayers with unreported income from hidden offshore accounts. These taxpayers now have until Oct. 15, 2009.   

Under special provisions issued in March, taxpayers with these hidden accounts originally had until Sept. 23, 2009 to come forward. Those taxpayers who do not voluntarily disclose their hidden accounts by the new deadline face much harsher civil penalties, where applicable, and possible criminal prosecution.

IRS officials decided to extend this deadline after receiving repeated requests from tax practitioners and attorneys around the country following an influx of taxpayer requests. By extending the deadline for a short period of time, the IRS is providing relief for those taxpayers who had intended to come forward prior to the deadline, but faced logistical and administrative challenges in meeting it. The extension will allow tax preparers and attorneys the necessary time to interview and advise their backlog of taxpayers with these hidden accounts, and prepare the necessary paperwork to qualify for the special penalty provisions.

The IRS also announced that there will be no further extensions.

http://www.irs.gov/newsroom/article/0,,id=213463,00.html

 

It’s darn tough to be 100% certain on anything

However, I’m 100% sure that a Fideicomiso is required to file Form 3520 and Form 3520-A with the IRS!

Why you may ask?  Because, as I mentioned in previous posts: The IRS recently told me that “Fideicomisos will never be given a Blanket Exception” from Foreign Trust reporting requirements. I believe this is because the IRS is afraid that an exception for Fideicomisos could be manipulated by some clever Tax Attorneys to help others avoid paying taxes.   This wouldn’t be the first time one bad apple spoiled it for the rest.

 In my opinion, the best case scenario for Fideicomisos and IRS reporting would be similar to what happened with Canadian Registered Retirement Savings Plans. Before 2003, they were required to File Form 3520 and Form 3520-A, at the urging of the AICPA and other groups, they now file a simpler Form 8891.

Also previously mentioned, both “The International Committee of the Tax Section of the California State Bar” and the “American Institute of Certified Public Accountants Foreign Trust Task Force” asked the IRS to exempt Fideicomisos from IRS Foreign Trust reporting requirements. The IRS responded that Fideicomisos are subject to IRS reporting requirements (Form 3520 and Form 3520-A). 

 Do you think that these specialized Attorneys and CPAs would have asked the IRS for an exception for Fideicomiso Foreign Trust reporting, unless they believed that Fideicomisos are currently required to file Form 3520 & 3520-A? 

The recent IRS Offshore Voluntary Disclosure Program cast a huge net to catch those hiding foreign income.  Those with a Fideicomiso are caught in that net.  The good news is that the program gives you until September 23, 2009 to be set free from the net, without fear of penalties. 

So far, I’ve talked to quite a few people about this.  Like you, they are not happy about it.  They think it’s not fair that someone who purchased a property outside of the restricted zone doesn’t have to file.  However, they want to sleep at night, and are taking this opportunity to file the required returns without fear of penalty.

More people are accepting the fact that it’s all about the trust, not the property.  Mexican law uses a Fideicomiso to provide the opportunity for foreigners purchase property in a restricted zone.  This is great!  However, it’s a double edged sword if you’re a U.S. Person, as the IRS believes that a Fideicomiso is a foreign trust, and foreign trusts have strict IRS filing requirements.  Sorry Folks, but that’s just what is.

 

What do you do now?

Well, you have a few choices:

#1.  Continue not to file.  However, you can no longer qualify for a reasonable cause exception from huge IRS penalties.  You know you are supposed to file and chose not to file.  Therefore, any IRS penalties for not filing would be the cause of willful neglect.  This is not an advisable course of action.  The IRS “will not be ignored.”

 #2.  Contact your current tax advisor.  Most likely they are unfamiliar with the reporting requirements.  The required forms are overly complex and the instructions make constant reference to tax law.  It would be very tough and not very profitable for a CPA to do just do a few of them.  Please keep in mind that the IRS Penalties for an incomplete or incorrect form are the same as those for not filing. 

 #3.  Go to www.dillingercpa.com and contact us regarding a free consultation.  We don’t want the cost of preparing the forms to prevent you from filing the forms.  Since we specialize in Foreign Trusts, we can prepare the forms for a very reasonable fee.  There is no reason that you cannot continue your relationship with your current tax advisor and only use our services for your foreign activities.

 More good news:

 I recently asked a contact at the IRS Offshore Compliance Department to verify that if one had to worry about years prior to 2003.  I received a written response that the IRS made an executive decision to go with only six years and the decision applies to those filing under FAQ #42 which states that if all income was reported, you can file for the last six years without fear of penalty, if you file by the September 23^rd deadline.

 Regarding, the September 23rd deadline, I asked several contacts at the IRS is the deadline was going to be extended.  Currently, an extension is not being discussed. 

If you want a Guarantee from huge IRS Penalties, you must file the required forms by 9/23/09.  The clock is ticking.

 

Compliant:The Word is Getting Out!

 

 

 

 

 Hello folks,

Over the last few months I have received many inquiries concerning the issue of owning a FIDEICOMISO and being compliant.  As such, let me share with you the frequently most asked questions (FAQ):

 

Why Doesn’t Everyone with a Fideicomiso Know About This?

 Good question.  When I went to a seminar on buying property in Mexico, my question was a little different: Why weren’t the IRS Foreign Trust Reporting requirements being addressed at a seminar on how to buy property in Mexico?  When I discussed this with other CPAs at the seminar (who specialized in Financial Audits, and knew little about tax) one said he was not sure of the reporting requirements but that even TurboTax asks whether or not you have a Foreign Trust.  Shouldn’t your CPA be asking you better questions than TurboTax?

 A typical “tax organizer” provided by your CPA asks whether you have a foreign account, trust or business, because Schedule B, of Form 1040 has a section asking about Foreign Accounts and/or Foreign Trusts.  Schedule B says that if you answer “yes” regarding Foreign Trusts, you may be required to file Form 3520.  My contacts at the IRS think that most tax preparer’s software is defaulted to answer “no” to these questions, and suggest that these defaults be removed. 

 However, I think the biggest reason you didn’t know about this is because US Tax law is extremely complex, and the more Congress tries to simplify it, the more complex it becomes.   I used to be able to prepare a tax return without a computer before the Tax Reform Act of 1986 attempted to simplify the tax code.  Just say no to tax simplification, it only serves to make things more complex. 

 

Why Doesn’t My CPA/Tax Preparer Know This?

CPAs tend to be a conservative breed.  Resistant to change, many seasoned CPAs continue to practice under the belief that as generalists, they can help their clients with all aspects of accounting and taxation.  Today, that is no longer possible.  As a prior IRS auditor, I witnessed too many taxpayers hurt by their CPA’s refusal to admit that they cannot be expert in every aspect of tax and accounting. 

 While being trained as an IRS Agent, a manager stated that tax law is complicated.  Sometimes you have to put your hand on your head, turn around twice take three giant steps and make sure to ask “Mother, may I?”

 CPAs cannot be expert in all aspects of tax law, it is far too complex.  The more specific an area of tax a CPA specializes in; the more accurate advice you’ll receive.  In addition, a specialist can complete the work more quickly, which translates into lower fees charged to you.

 

If Nobody Else is doing This, Why Should I?

 Once the IRS announced their Offshore Voluntary Disclosure Program, March 23, 2009, foreign reporting requirements began receiving greater press coverage.  When the program was announced, all late forms were required to be sent to IRS Criminal Investigation with mandatory penalty frameworks that had no reasonable cause exceptions. 

 I believe my repeated communications with the IRS helped provide the opportunity for those who did not know they were supposed to file Forms 3520 & 3520-A do so without fear of penalty.  However, the IRS is only currently granting this relief until September 23, 2009.

 If and when the IRS discovers that you have not filed the required forms, there is no guarantee of penalty relief.  Now that the public is being made aware of the filing requirements, if you don’t file, there is no reasonable cause exception.  In fact, the reason for not filing would be considered “willful neglect”.  You now know that you were and are required to file, and did not.

  

Why Does the IRS Think that a Fideicomiso is a Trust?

 In 1996, Congress changed the laws defining a “Foreign Trust”.  As of 1/1/1997, any trust is a US person if a court within the US is able to exercise primary supervision over the administration of the trust.  Unfortunately, a Fideicomiso is not primarily supervised by a US Court.  Therefore, it is a Foreign Trust.

 The IRS will not provide a blanket exception for Fideicomisos, as the exception could be used against the IRS for those really trying to hide income and assets from the IRS.  However, the AICPA (American Institute of CPAs) has been trying to get the IRS to relax the filing requirements for Fideicomisos.  Currently, the AICPA has put the issue on the back burner.

 Remember, we no longer have the a kinder and gentler IRS that resulted from 1998 congressional mandates.  Instead, we have an IRS that needs to bring in money – U.S. DEFICIT!

 For example, there are certain tax benefits for Real Estate Professionals.  A few years ago, the IRS began targeting California Real Estate Agents and claiming that they were not Real Estate Professionals unless they were also brokers.  This is due to a technicality in tax law.  Remember, if the IRS was playing “Mother, may I?” a California Real Estate Agent, took two giant steps, instead of three.  Therefore, no tax benefit allowed. 

 The IRS recently lost this argument in Tax Court.  However, since the tax liability was too small, the case cannot be used as precedence, and the IRS is continuing to state that a California Real Estate Agent is not a Real Estate Professional, unless they are also a broker.

 For now, a Fideicomiso is a Foreign Trust.  The failure to file Form 3520 and Form 3520-A can result in huge penalties.  I suggest filing, while you can.

 

If I Call the IRS, Why Can’t They Give Me An Answer?

 See the article below, which states “you get what you pay for” http://findarticles.com/p/articles/mi_m1272/is_2707_132/ai_115405768/

 

Should I Hire an Attorney?

 If you have not filed any of the required foreign reporting tax Forms: 5471, 5472, 926, 3520, 3520-A, 8865 or TD F 90-22.1, and you have any unreported taxable Foreign Income, you should hire an attorney that specializes in the Offshore Voluntary Disclosure Program.   If the trust had no taxable income, or reported the taxable income but not the required Forms, a CPA that specializes in Foreign Reporting should be able to help you become compliant.

 

Olly Olly Oxen Free! Or Come Out, Come Out wherever you are!

 

If you are a U.S. Person with property in a Fideicomiso, and have not filed the required IRS Foreign Trust Forms, you have an opportunity to become safe with the IRS regarding penalties and criminal investigation.  However, you must file the required forms before September 23, 2009. 

 

Don’t be surprised if your current tax advisor is unaware of these filing requirements.  Most are not.  I’m a CPA, and a former IRS Agent, who prepared international tax returns for a “Big Four” Accounting Firm, and have a Masters Degree in Accounting and a Second Masters Degree in Taxation.   You don’t have to take my word for it; take a look at the articles below for the opinion of other tax experts:

 

“IRS REQUIRES REPORTING OF MEXICAN BANK TRUSTS”

http://www.stewart.com.mx/download/557/pdf/March-2008-IRS.pdf

 

“US TAX RETURN FILING REQUIREMENTS FOR FIDEICOMISOS”

http://us-mexicantax.blogspot.com/2009/02/us-tax-return-filing-requirements-for.html

 

“WHAT HAPPENS IN MEXICO… HAS TO BE REPORTED TO THE IRS!  MEXICAN RESIDENTIAL TRUSTS AND THE REPORTING REQUIREMENTS UNDER IRC SECTION 6048”

http://www.procopio.com/assets/002/5206.pdf

 

“TAX IMPLICATIONS OF OWNING MEXICAN REAL ESTATE”

http://www.emeraldcoastinvest.com/Investment/OverseasInvesting.aspx

 

Some may argue that Fideicomisos are not really trusts.  However, my conversations with IRS General Counsel confirmed that the IRS will never issue a “blanket” exemption for Fideicomisos regarding Foreign Trust reporting requirements (Form 3520 and Form 3520-A).

 

Recently, the IRS began targeting Unreported Offshore accounts and entities and issued a Voluntary Disclosure Program to increase compliance.  To enter the program, you must go through the IRS’s Criminal Investigation Department and your penalties may be limited to only 20% of the value of your foreign assets. 

 

In response to the disclosure program the IRS issued FAQs.  I believe that my constant calls and e-mails to the IRS Hotline are responsible for FAQ #42, summarized below:

 

“42: FAQ 9 states that a taxpayer who only failed to file an FBAR should not use this process. What about a taxpayer who only has delinquent Form 5471s or Form 3520s but no tax due? Does that taxpayer fall outside this voluntary disclosure process?   

Response: A taxpayer who has failed to file tax information returns, such as … Form 3520 for foreign trusts but who has reported and paid tax on all their taxable income with respect to all transactions … should file delinquent information returns … by September 23, 2009 … The IRS will not impose a penalty for the failure to file the information returns.”

 

http://www.irs.gov/pub/irs-utl/faqs-revised_6_24.pdf

 

By the way, the Department of the Treasury announced that the IRS is budgeted to fund a “robust portfolio of IRS international tax compliance initiatives”, and the President has requested 800 new IRS agents to focus on offshore compliance.  http://www.bloomberg.com/apps/news?pid=20601213&sid=adZX3iEaxCe8

 

I want to help those with a Fideicomiso be safe from the IRS.  To do this, I will be focusing on the preparation of Forms 3520 and 3520-A, through September 23, 2009.  The IRS wants you to file forms for 6-years (2003 to 2008).  Depending on when you created your Fideicomiso and transactions involved, I can help you become compliant with the IRS and safe from penalties – contact us for a complimentary consultation. 

Please visit my website at Dillinger, CPA for contact information

 

Is the IRS Looking into Your Fideicomiso?

Fun and Discovery: April 16, 2009. 

 

After a grueling tax season, we immediately flew to Puerto Vallarta to participate in MexicoAlive’s http://www.mexicoalive.net/content.php Discovery Weekend.  After a thrilling water taxi ride, and a tour of the Malecon, we took a bus ride back to our resort where I learned that I was not the only CPA at the event.  During dinner, I brought up the issue of  little known complicated international tax law that most Americans are not aware of when purchasing real estate in a restricted zone in Mexico using a required Fideicomiso, or Mexican Residence Trust (MRT), there are IRS reporting requirements that carry stiff fines for nonreporting.  All of the guests at the Discovery Weekend were interested in purchasing real estate in a restricted zone in Mexico.  However, as I thought, none, even the other CPAs, were aware of the Foreign Trust filing requirements.

 

I can help: April 21, 2009.

 

On my flight home from Puerto Vallarta, I realized that there was probably a significant amount of US Taxpayers with MRTs that were inadvertently risking hefty penalties for not filing the required IRS Forms 3520 and 3520-A.  As a CPA, with international tax experience at a Big Four CPA Firm, experience as an IRS Revenue Agent, holding two Masters Degrees, one in Accounting and the other in Taxation, I believed that I’d be as good a choice of anyone to spread the word and help people keep their Mexican Residences safe from the IRS.

 

Research and Discovery: April 22, 2009.

 

I brushed up on research regarding the required filing and subsequent penalties regarding the failure to timely file Form 3520 and Form 3520-A for a foreign trust.  I ran into some controversy on the internet regarding the requirement to file a Form 3520 and Form 3520-A in regards to a MRT. 

 

However, the vast majority of opinions agree that MRTs are bound by Foreign Trust IRS filing requirements.  An article from Procopio titled “What Happens In Mexico…Has to Be Reported to the IRS!  Mexican Residential Trusts and the Reporting Requirements Under IRC Section 6048” by Enrique Hernandez-Pulido, Esq. http://www.procopio.com/assets/002/5206.pdf   The article confirmed that MRT’s are considered to be foreign trusts under IRC Sections 7701(30)(E)(i), (ii) and (31)(B), and under IRC Secion 6048(a)(3)(AQ)(i) and (ii), are required to disclose reportable events to the IRS, and under Treas. Regs. Section 404.6048-1, MRT’s are required to file a complete accounting of all trust activities and operation for the year.

 

The article continues to argue that the required filings should not be required and state that the California State Bar Tax Section proposed in a paper to the IRS that MRTs should not be required to file Form 3520 and 3520-A.  The reporting requirements are complex and time consuming, that are misunderstood by taxpayers, but also misunderstood by (and often unknown to) their US tax advisors.

 

By the way, the penalty for not filing Form 3520 is 35% of the reportable amount (fair market value of the real estate), plus possible additional penalties.  In addition, the penalty for not filing the annual Form 3520-A is 5% of the reportable amount, each year!  http://nestmannblog.sovereignsociety.com/2008/09/irs-cracks-down.html

 

Additional research led to an article by Marianne Kayan, ABA RPTE Section Fellow titled “Is Offshore Evil?  Current Legislative Developments.”   http://www.abanet.org/rppt/meetings_cle/2008/spring/programmaterial/TEmaterial/te61Kayan.pdf  The article referred to proposed expanded penalties in the President’s FY 2009 Budget.  Page 72 of the General Explanations of the Administration Fiscal Year 2009 Revenue Proposals released by the Department of the Treasury in February 2008, discusses the need of a minimum $10,000 penalty for failure to file a timely Form 3520.  http://www.treas.gov/offices/tax-policy/library/bluebk08.pdf  The reason for the proposed minimum penalty is because the IRS obtains information relating to the creation of a foreign trust from third parties, or the IRS discovers funding of a foreign trust from public records.  Without the cooperation of those involved with the trust it is difficult for the IRS to determine the amount to assess the 35% penalty against.

 

According to the Department of the Treasury, the 2010 Budget includes funding for a robust portfolio of IRS international tax compliance initiatives.  http://www.whitehouse.gov/omb/assets/fy2010_new_era/Department_of_the_Treasury.pdf

 

This is a little scary, the US’s two most recent budgets propose minimum late/nonfiling penalties for Foreign Trusts and additional IRS enforcement regarding international tax compliance.  I begin to wonder if the US Government intends to use the IRS’s complicated international tax reporting requirement to help offset the US’s current financial crisis?  My experience and research tells me that most beneficiary’s of MRT’s are unaware of the filing requirements.  In addition, my experience as a CPA and IRS Revenue Agent tells me that unless the Tax Advisor specializes in international tax at an expensive Big Four Accounting Firm, most US Tax Advisors are ignorant regarding international tax reporting requirements. 

 

According to an article by Mitch Creekmore, titled “IRS Requires Reporting of Mexican Bank Trusts” written in March of 2008,  http://www.stewartmexico.com/download/557/pdf/March-2008-IRS.pdf  “The vast majority of U.S. buyers utilizing MRT’s for residential acquisitions according to Mexican foreign investment law are not aware of the IRS reporting requirements”. 

 

An article from US-Mexicantax.blogspots.com titled US Tax Return Filing Requirements for Fideicomisos” dated February 1, 2009, states that “Many US Citizens have said they do not file the form since the IRS could never find out they owned real property in Mexico.  http://us-mexicantax.blogspot.com/2009/02/us-tax-return-filing-requirements-for.html  Those people are failing to take into consideration the Mexican-US tax treaty which provides for an open exchange of information between the two countries and the fact that when fideicomiso is created it is registered in Mexico with a copy of your U.S. Passport.  Starting several years ago your passport is now connected with your social security number.”  Additionally, the article states that “An IRS Tax auditor’s job is to collect tax money to finance the government.  That usually takes a lot of time and effort and reviewing tedious accounting records.  Forms such as the 3520 and 3520A which provide for large penalties if filed late or not at all are an IRS auditor’s dream.”

 

In addition, an article from Raoul Rodriguez-Walters, CFP titled “The IRS and Your Mexican Trust: Trust? Or Not to Trust?  Mexadv_file_15.pdf states that the IRS can find out that you did not file Form 3520 or Form 3520-A just by looking at your Form 1040.  This is where you would report your rental income and the sale of your property.  In addition, the property would be included if required to file an estate tax return with the IRS.  The author poses the question: “Do you trust the IRS with your trust?” 

 

 

Voluntary Disclosure: April 23, 2009. 

 

I received a daily briefing email from the AICPA with an article from the Journal of Accountancy titled “FBAR Penalties Reduced for Six Months Foreign Reporting Penalties Reduced for Six Months”, written by neil A.J. Sullivan.   http://www.journalofaccountancy.com/Web/20091641 The article referred to Form 3520 and an IRS Memo dated March 23^rd, 2009.  The article stated that taxpayers making voluntary disclosures of offshore noncompliance can avoid …nondisclosure penalty provisions…pertaining to various information, including …Form 3520… Form 3520-A.  Well, there’s only five months left now.

 

A Google search led me to the memos referred to in the article above.  offshore-voluntary-disclosure-program.pdf The March 23^rd IRS Memo from Linda E. Stiff, Deputy Commissioner for Services and Enforcement written to the Commissioner, Large and Mid-Size Business Division and Commissioner, Small Business/Self-Employed Division, titled “Authorization to Apply Penalty Framework to Voluntary Disclosure Requests Regarding Unreported Offshore Accounts and Entities: states that “Criminal Investigation makes preliminary determination that taxpayers are eligible for voluntary disclosures”.  If eligible for voluntary disclosure, agreements to resolve tax liabilities will be made in the following manner:

 

1. Assess all taxes and interest due going back six years…Require the taxpayers to file or amend all returns
2. Assess either an accuracy or delinquency penalty on all years (no reasonable cause exception may be applied), and
3. In lieu of all other penalties that may apply, including FBAR and information return penalties, assess a penalty equal to 20% of the amount in foreign bank accounts/entities in the year with the highest aggregate account/asset value.

 

Another March 23, 2009 IRS Memo from Faris R. Fink, Deputy Commissioner, SBSE and Barry B. Shott, Deputy Commissioner, MBSB International written to SBSE Examination Area Directors and LMSB Industry Directors titled “Emphasis on and Proper Development of Offshore Examination Cases, Managerial Review, and Revocation of Last Chance Compliance Initiative” states that offshore cases sent to the field are work of the highest priority, and that foreign-based information should be gathered using tax treaties and tax information exchange agreements.  In addition, the memo discusses penalties for failure to file certain information returns, including Form 3520 and Form 3520-A and the steep penalties mentioned earlier.

 

A statement from the IRS Commissioner Doug Shulman from the article “On Offshore Income” dated March 26^th, 2009 warns that “For taxpayers who continue to hide their head in the sand, the situation will only become more dire.  They should come forward now under our voluntary disclosure practice and get right with the government.”

 

I am rather concerned with the statement regarding no reasonable cause exception, the statement regarding 20% penalties on the amount in foreign entities with the highest asset value.  For example, if a person purchased a beach front condo in Mexico for $200,000 six years ago, that was worth $400,000 a couple years ago, they are not going to be very happy about paying an $80,000 Form 3520 penalty because their tax advisor was ignorant about international tax reporting. Therefore, I’m beginning to think it’s time to call the IRS. 

 

4/27/09:  To quote Forrest Gump, Calling the IRS “is like a box of chocolates, you never know what you are going to get”.  Knowing this, I called the IRS international question and answer phone line and spoke to an agent that I think that I had dealt with previously, I had had to go over his head and complain to his supervisor.  This is the only reason I can think of that he started referring to me as sir, and then switched to ma’am.  The agent wanted to refer my question to someone else once I described a Fideicomiso and Form 3520 and Form 3520-A filing requirements.  I asked the agent to let me finish the question as I wanted to know how the March 23^rd memos regarding voluntary disclosure effected a Fideicomiso.  The agent said I’d hear back from the IRS within 15 days. 

4/28/09: I decided that the agent I spoke with yesterday may lose my message, I called again and reached a different agent.  This agent was able to ascertain and remember my gender while quickly realizing that the international tax matter was over his head.  The agent put me on hold and after awhile, gave me the phone number to a International Associate Counsel Group.  I called the number and left a message in the general mail box. 

4/30/09:  I called and left another general message.  Then I decided to Google search the phone number to see if I could find a name, as the voicemail system did not offer a directory.  Google provided a directory of extensions and I called back and hit the jackpot.  The IRS attorney knew what he was talking about!

The attorney explained that the IRS still does not know if a Fideicomiso is a trust or not.  Therefore, the IRS will not provide a blanket ruling.  The IRS most likely will not make a blanket ruling, as that could lead to abuse.  However, the IRS will entertain private letter rulings per individual situation. 

The attorney stated that he only saw one automatic penalty, years back.  The penalty was for $90,000.  The attorney  got the penalties abated.  However, the attorney said that he did hear about another automatic penalty for about $45,000 recently. 

The attorney advises everyone to file Form 3520 and 3520-As, and if penalized they should request a reasonable cause exception.  The attorney told me that if any of my clients filed delinquent 3520 or 3520-A, to call him and he’d have the penalties abated. 

I asked the attorney if he was aware of the 3/23/09 Memos from Faris Fink & Linda Stiff.  The attorney was not, and he was not pleased that he was not made aware of the memos.  I told the attorney that one of the memos specifically states “no reasonable cause exception may be applied” to penalties.  The attorney suggested that I speak with another IRS attorney to get his take on the matter.  In fact, the attorney (Attorney 1), will be calling the other attorney (Attorney 2) to discuss the matter and will then call me back.  I should call attorney 1 next week if I don’t hear back from him.  Attorney 1 asked me to e-mail the March 234d memos to him.  I did.

I called Attorney 2, but his voicemail message stated he was out of the office until May 12^th.  I left messages for the Attorney 1 on May 8^th and May 11^th, and the Attorney 2 on May 11^th.

 

I’m beginning to fear that the IRS has “cast a large net” to catch tax evaders using international entities, and that this net could devastate individuals who just wanted a better life by buying property in Mexico.

 

The IRS is no longer playing: May 4, 2009

 

An article in Forbes.com titled “Curbing Tax Havens”,reports on the President’s plan to reform international tax laws and improve enforcement.  http://www.forbes.com/2009/05/04/obama-taxes-jobs-business-washington-full-text.html   A few quotes: “This proposal requires foreign financial institutions that have dealings with the United States to sign an agreement with the IRS to become a “Qualified Intermediary” and share as much information about their U.S. customers as U.S. financial institutions do, or else face the presumption that they may be facilitating tax evasion…”

 

“In addition, the Obama Administration proposes tightening the reporting standards for overseas investments, increasing penalties and imposing negative presumptions on individuals who fail to report foreign accounts, and extending the statute of limitations for enforcement.”

 

In other words, “You are guilty until proven innocent”.

 

“As part of the Obama Administration’s budget, the IRS will hire nearly 800 new employees devoted to international enforcement, increasing its ability to crack down on offshore tax avoidance.”

 

Reaction: May 5, 2009

 

An Article titled “Living offshore? Tax dodger, evader, unpatriotic and much worse!’ http://primapanama.blogs.com/_panama_residential_devel/2009/05/now-its-just-your-money-they-want-next-it-will-be-you.html?cid=6a00d8341c0f0f53ef01156f7c849f970c  is posted by the Sovereign Society.  The article discusses the IRS’s wide net saying “Of course there may be a few tax evaders caught in the sweep, but throwing such a wide net is designed to intimidate and bring fear to anyone considering trying to hold on to any money that is needed by the government.”  The article quotes the White House “These presumptions will make it easier for the IRS to demand information and pursue cases against international tax evaders.”

 

Quiet Disclosure: May 12, 2009.

 

I read an article written by Arden Dale, in the Wall Street Journal, titled “Quiet disclosure Risky on Offshore Accounts”.  http://online.wsj.com/article/SB124209153444209277.html  Before the March 23^rd memos, when a tax advisor discovered that a taxpayer was not compliant with international reporting, the rule of thumb was to “quietly disclose”, by either filing amended returns or to just begin filing correctly.  The Wall Street Journal article stated that “Now, individuals must flag their accounts to the IRS and go through a formal voluntary disclosure program”. 

 

I did a Google search on Quiet Disclosure and found FAQs on the Voluntary Disclosure Program.  http://www.irs.gov/pub/irs-news/faqs.pdf  FAQ #10, states that those who have already made “quiet” disclosures may take advantage of the penalty framework applicable to voluntary disclosure requests regarding unreported offshore accounts and entities.  Those taxpayers must send previously submitted documents” to Criminal Investigation by September 23, 2009.  Those making “quiet” disclosure should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years.

 

FAQ #9 is regarding taxpayers that did not report information about Foreign Accounts with a balance greater than $10,000.  The FAQ states that “The purpose for the voluntary disclosure practice is to provide a way for taxpayers who did not report taxable income in the pas t to voluntarily come forward and resolve their tax matters.  Thus, If you reported and paid tax on all taxable income but dide not file FBARs, do not use the voluntary disclosure process.”  The FAQ gives directions for reporting instructions and states “The IRS will not impose a penalty for the failure to file the FBARs”.

 

This is encouraging.  As there would not be any income to report on a MRT unless it was a rental, would the IRS see that MRTs should have the same exception?  However, I wonder what will happen if $1.00 of income was missed on the taxpayers tax return due to a difference in rounding when calculating exchange rates.  The FAQ states “If you reported and paid tax on ALL taxable income?  Also, what would happen if the MRT was rented, and the taxpayer didn’t report the rental income on their tax return?

 

Less encouraging is FAQ #20.  Does the 20% penalty apply to entities?  Answer, the 20% penalty applies to entities.  The 20% penalty applies to all assets held by foreign entities (e.g., trusts and corporations) for which the taxpayer was required to file information returns, as well as all foreign assets (e.g., financial accounts, tangible assets such as real estate or art…) held or controlled by the taxpayer.

 

FAQ #17 states that “The IRS has stepped up its enforcement efforts, including the use of John Doe summonses, to identify taxpayers using offshore accounts and entities to avoid tax.”

 

I called the first attorney at the IRS again, and had the following discussion.  First, I informed him that the news of the day was regarding “quiet” disclosure.  The attorney stated that ignorance of the law, regarding MRT filing requirements should be a reasonable cause for the waiver of penalties.  Unfortunately, the March 23^rd memos removal of the reasonable cause exception eliminated any incentive for a person with a MRT who did not know about filing requirements to get into compliance.  Most likely, if a person tried quiet disclosure by filing a delinquent Form 3520, the return would be automatically sent to Criminal Investigation, and would not even benefit from Voluntary Disclosure.  At that point, any penalties would be difficult to waive.

 

In addition, unless a tax advisor had the attorney’s very specific experience, education and background, and was basically him, the tax advisor would not be aware of the MRT’s filing requirements.  I agreed, but did remind him of my specific background, and that I sent him the March 23^rd memos.

 

The Second Attorney:  We had an enjoyable conversation, and he understood the situation.  However, no new light was shed on the issue.

 

New IRS contact:  I called the IRS Voluntary disclosure Hotline at (215) 516-4777 and left a specific message regarding reasonable cause exceptions for MRT’s that did not file Form 3520 or Form 3520-A.

 

Let’s inform: 5/13/2009.

I sent the following e-mail to the journalist that wrote the Wall Street Journal article on quiet disclosure:

Dear Ms. Dale,

Thank you for informing the public that there is now risk involved in “Quiet Disclosure” of offshore accounts and entities in yesterday’s Wall Street Journal article.  My conversations with multiple IRS Counsel informed that the use of “quiet disclosure” will most likely cause an individuals return to be flagged and sent to Criminal Investigation.  Quiet disclosure will not be considered voluntary disclosure. 

The 3/23/2009 memo from Linda E. Stiff, the IRS Deputy Commissioner for Services and Enforcement regarding Authorization to Apply Penalty Framework to Offshore Accounts and Entities states in regard to penalties “no reasonable cause exception may be applied”.   

I think that the IRS has thrown out a large net intended to catch tax evaders.  Unfortunately, there are many US taxpayers that could get trapped due to our complicated international reporting requirements.  Most CPAs and tax professionals are unaware of international tax reporting requirements.

 Therefore, it is important the IRS clarify that the voluntary disclosure program intent is to identify tax evaders, and not those with reasonable cause.   

If not, I wonder if taxpayers that inadvertently neglected to report foreign accounts or entities are going to be targeted to help fund the treasury.   

For example:  

A couple cannot afford their desired retirement lifestyle in the US.  Therefore, they purchase a retirement home in a restricted area of Mexico.  To purchase the home, Mexico requires that the home be placed in a Mexican Residence Trust or Fideicomiso.  The US requires that the foreign trust report the transaction on Form 3520 and future transactions annually on Form 3520-A.  Unfortunately, few tax professionals are aware of the filing requirements.  If the house had a high value in the last 6-years of $400,000, has a mortgage of $220,000 and is currently worth $300,000, the required penalty of 20% of $400,000 or $80,000 forces the couple to choose between the possibilities of criminal prosecution or losing their retirement home.

 A person with a foreign securities account with a reinvested dividends program moves to the US.  During the last 6-years the account value fluctuated to a high of $500,000 to a current low of $100,000.  During the period he/she was not aware that the reinvested dividends should have been reported as taxable income on his/her Form 1040 and that FBAR reporting was required.  The new voluntary disclosure program requires a minimum penalty of 20% of the highest balance of $500,000, or $100,000.  Therefore, the taxpayer has a choice of being wiped out or possibly facing criminal prosecution. 

I spent the past month trying to get to the bottom of the March 23^rd IRS Memos.  So, again, I thank you for helping to spread the word about quiet disclosure.  For reference, I’m a CPA who specialized in Expatriate Taxation at a Big Four Accounting Firm, a prior IRS Revenue Agent, and have Masters Degrees in both Taxation, and Accounting & Financial Management.

I received the following reply:

John,

Wow, thanks for this. I am always looking to advance the story…so keep me posted on where I might go next.

Arden

My response:

Arden,

You are welcome.  It’s been an interesting process, to say the least!  Regarding the advancement of the story, I’d like to get to the bottom of the IRS’s intent. 

The IRS states that the period of voluntary disclosure is to provide an opportunity for taxpayers who evaded taxes using offshore accounts and entities to become compliant, with known penalties.

However, communication from the IRS does not address taxpayers that were ignorant regarding complex, little known, foreign reporting requirements.  In fact, IRS communications state that regarding penalties, “no reasonable cause exception may be applied”. 

If the IRS does not issue a statement allowing reasonable cause, I am suspicious of motive.   

The US Treasury needs money.  Will the majority of the taxpayers be sympathetic to the IRS raiding the coffers of US taxpayers with overseas assets that could not afford to have their taxes prepared by a Big Four Accounting Firm CPA?

Return message: 5/14/09: 

 

I missed the call back from the Hotline, the IRS Technical Advisor left a message saying that I can only call him back at the hotline voicemail.  He would keep calling until he reached me.  Instructions left with reception to give the Technical Advisor my cell phone number, as I am flying out of town, tonight.

 

Another missed call: 5/15/09: 

 

Reception did not follow my instructions regarding my cell phone.  Therefore,  another message was left on my voice mail from the Technical Advisor.

 

Back in town: 5/20/09:

 

No new messages from the Technical Advisor, I leave another message on the Hotline identifying my previous question and cell phone number.  The hotline’s message states that call will be returned within one business day.

 

Try again, 5/22/09: 

 

I call the hotline, and start from scratch, restating my question and leaving both by business and cell phone numbers.

 

More reading: 5/24/09. 

 

Looking for answers, I read an article from Jay Krause of Withersworldwide.com, titled “Something to declare: IRS issues guidance for US taxpayers declaring offshore accounts. http://www.withersworldwide.com/news-publications/519/something-to-declare-irs-issues-guidance-us-taxpayers-declaring-offshore-accounts.aspx    A paragraph reads: “As part of the new guidance, the penalties associated with failing to meet these additional obligations will not be assessed if the taxpayer fully cooperates with the IRS and otherwise satisfies the voluntary disclosure requirements.  The waiver of these penalties may represent a significant savings over the amount that can be assessed if the IRS discovers that such reports have not been filed and the full range of applicable penalties is imposed.”   Wondering if Mr. Krause knew something I did not know, I sent him an e-mail asking for his authority. 

 

International response: 5/25/09. 

 

Mr. Krause, answered that the exemption from penalties he was referring to is after the 20% penalty has been assessed.  However, Mr. Krause stated that “FWIW, to the best of my knowledge there’s no basis in law for the IRS position applying a 20% penalty on entities.”

Hmmm.  Looks like I’ll have to keep trying the IRS Hotline.

 

I found the following on Google search, today: “AICPA response to May 25, 2007 IRS follow-up oral comments regarding Jan. 31, 2007, AICPA submission to IRS on foreign trust reporting.

 

http://tax.aicpa.org/NR/rdonlyres/4A148AAA-8B05-4185-940C-D50B9C9C6F79/0/Response_to_5_07_Qs_clean_03_03_08_e.doc

 

“In May 2007, we had briefly discussed with the IRS the issue as to whether a Mexican trust (Fideicomiso) should be treated as a foreign trust and subject to the section 6048(a), (b) and (c) reporting requirements.  Some of our members have been told that the IRS considers these to be “trusts” in all cases, while some of our members are of the opinion that Fideicomisos do not meet the definition of a “trust” in Treasury Regulation section 301.7701-4.  In May 2007, the IRS asked that we provide a specific request for guidance that includes an outline of the issue so that it can be forwarded to the appropriate parties. We are working on this and plan to forward this to you separately in the near future.   We were also requested by the IRS to possibly include a sanitized document and we are looking into this matter.” 

 

I’ll send the contact an e-mail tomorrow and find out if after two years, there has been any progress.

 

 5/26/09: Contact with AICPA

: Schimmer, Jon P. [mailto:jps@procopio.com]
Sent: Tuesday, May 26, 2009 9:00 AM
To: John Dillinger
Cc: Brodsky, Karen A (US – New York); Sherr, Eileen
Subject: RE: AICPA response to May 25, 2007 IRS follow-up oral comments regarding Jan. 31, 2007, AICPA submission to IRS on foreign trust reporting. 

Further to Eileen’s e-mail, it remains the position of the IRS at this point that Fideicomiso arrangements are trusts subject to Section 6048.  The IRS informally indicated that in the future, once the “universe” of types of Fideicomisos are better understood by the IRS, they may exempt certain of the more agency type arrangements from the reporting requirements.   

Jon P. Schimmer
Partner

Procopio, Cory, Hargreaves & Savitch LLP
530 B Street, Suite 2100
San Diego, CA 92101
direct dial:  (619) 525-3805
direct fax:  (619) 744-5496
jps@procopio.com
www.procopio.com
Please consider the environment before printing this e-mail. 

From: Sherr, Eileen [mailto:esherr@aicpa.org]
Sent: Tuesday, May 26, 2009 7:45 AM
To: ‘John Dillinger’
Cc: ‘Brodsky, Karen A (US – New York)’; Schimmer, Jon P.
Subject: RE: AICPA response to May 25, 2007 IRS follow-up oral comments regarding Jan. 31, 2007, AICPA submission to IRS on foreign trust reporting.

Thanks for your email. We have not heard much more from the IRS on this issue, but we sent them some sanitized documents and it is still on our plate to consider comments to IRS on this.

 

---

From: John Dillinger [mailto:jdillinger@napacpa.com]
Sent: Tuesday, May 26, 2009 10:26 AM
To: kbrodsky@deloitte.com
Cc: jeffrey.hoops@ey.com; justin.ransome@gt.com; Sherr, Eileen
Subject: Re: AICPA response to May 25, 2007 IRS follow-up oral comments regarding Jan. 31, 2007, AICPA submission to IRS on foreign trust reporting. 

Greetings Karen, 

I’ve been researching the effects of the new voluntary disclosure program and the filing requirements of a Fideicomiso.

During my research I read the AICPA response noted in the subject area of this e-mail. 

Specifically, I’m inquiring about the status of the following paragraph: 

1. In May 2007, we had briefly discussed with the IRS the issue as to whether a Mexican trust (Fideicomiso) should be treated as a foreign trust and subject to the section 6048(a), (b) and (c) reporting requirements.  Some of our members have been told that the IRS considers these to be “trusts” in all cases, while some of our members are of the opinion that Fideicomisos do not meet the definition of a “trust” in Treasury Regulation section 301.7701-4.  In May 2007, the IRS asked that we provide a specific request for guidance that includes an outline of the issue so that it can be forwarded to the appropriate parties. We are working on this and plan to forward this to you separately in the near future.   We were also requested by the IRS to possibly include a sanitized document and we are looking into this matter. 

 Dear Jon,

 My internet research led me to many articles written by Procopio on Fideicomisos.  Your efforts to educate the public are appreciated. 

Have you been able to ascertain how the IRS will be handling delinquent Form 3520’s and Form 3520-A’s under the new Voluntary Disclosure Program effective 3/23/09?

 If I take the March 23^rd memos and the recent FAQ’s literally, the 20% penalty based on highest 6-year FMV of assets, with no reasonable cause exception for delinquent filing, is very steep. 

 I had several discussions with IRS International General Counsel responsible for IRC 6048.  Unfortunately, the attorney was caught off guard.  In fact, he was unaware of the new program, and I had to forward copies of the March 23^rd memos to him. 

 The FAQ’s, dated 5/6/09, state that delinquent FBARs are not subject to the Voluntary Disclosure Program, if all income was reported on the tax return.  The reason provided is that “the purpose for the voluntary disclosure practice is to provide a way for taxpayers who did not report taxable income in the past to voluntarily come forward and resolve their tax matters.  Thus, if you reported and paid tax on all taxable income but did not file FBARs, do not use the voluntary disclosure process.” 

Based on the above logic, the same exception should apply to Fideicomisos and Forms 3520 & 3520-A.  I have left several messages with and am playing “phone tag” with the IRS Technical Advisor responsible for the IRS Voluntary Disclosure hotline.

 Any insight or authority would be appreciated.

Arguments on why Form 3520 is not required:

Subject:	Re: Mexico Property Ownership
From:	Steve Odem
Reply-To:	Tax Law and Practice Discussion
Date:	Tue, 10 Mar 2009 13:29:14 -0400
Content-Type:	text/plain

 

Foreigners acquire irrevocable and absolute ownership rights to property in Mexico through a 50-year perpetually renewable and transferable Bank Trust called a Fideicomiso. This Trust is a legal substitute for deeded (commonly referred to in the U.S. as fee simple) ownership and is provided specifically for non-nationals to own property in the formerly restricted zones (border and beach areas.) The Trust system of ownership is sanctioned by the Mexican government, provided for under the Mexican Constitution, and secured by the Central Bank of Mexico; thereby offering powerful protection.   Title is delivered to a Mexican Bank, authorized to act as the Trustee, designating the foreign buyer as the Beneficiary of the Trust (you). The Bank acts like an "employee" of the Beneficiary (you) in transactions involving the property. The Beneficiary (you) retains the use and control of the property and makes all the investment decisions. The rights of use and enjoyment, leasing, improving, mortgaging, selling, inheriting and willing the property is the same as when owned in fee simple title. It is your Trust and not the property of the government or the Bank.    A sale becomes registered when it is witnessed and recorded through a Notorio Publico in Mexicali. From there, title passes to the designated Bank to be held in the Fideicomiso (Trust).  There are specific Banks authorized by the Mexican government to hold the Real Estate Fideicomiso. Authorized Banks must pass extreme scrutiny.  (Playa de Oro uses BITAL Bank. You, however, have the right to transfer the Fideicomiso to any authorized Bank of your choice.)   The Bank reviews all paperwork of the current owner/developer to ensure that the documents are complete and legal.  The Bank will not issue a developer the right to apply for and form the Fideicomiso on their lots until they are satisfied with all documents and that the subdivision process has been completed. A question that often arises - in the event the holding Bank should ever fail, be bought by an unauthorized Bank, etc., what happens to the Fideicomiso?  Answer - the Fideicomiso will be transferred to another authorized Bank. The Bank does not own the Fideicomiso, you do!   This suggests a more general issue. A fideicomiso (fidécommis) isn't -- your professor of trusts and estates or of legal history would have told you -- a trust. But never mind that, the IRS uses it as a translation for "trust" in its Spanish-language publication, and Quebec too uses "fiducie" and "fidéicommis" for trusts.   The trouble is that the IRS has intentionally not clarified what it means by "trust". LeBoeuf Lamb, which handled tax and other issues on behalf of Lloyd's of London for its US investors (and wound up paying up to $50,000 damages each to some of them in a settlement for conflict of interest claims after the Lloyd's fiasco of the late 1990s), advised them to report their far-removed and highly-theoretical interest in Lloyd's overseas premium trust deeds with a paragraph on form 3520-A that disclaimed any obligation to report but did so "as a protective measure".

 

May 27^th: I received a call from the IRS Voluntary Disclosure Hotline, and we actually speak.  I explain the situation to the agent.  The agent was not aware of the situation, but will look into it.

So the AICPA, is still working on it:

http://tax.aicpa.org/NR/rdonlyres/4A148AAA-8B05-4185-940C-D50B9C9C6F79/0/Response_to_5_07_Qs_clean_03_03_08_e.doc

March 3, 2008

 

Ms. Maura A. Morgan

International Policy Analyst

LMSB, Globalization Strategy and Policy

Internal Revenue Service

5353 Yellowstone Road

Cheyenne, WY 82009

fax: 307-633-0814

maura.morgan@irs.gov

 

 

Re:  AICPA response to May 25, 2007 IRS follow-up oral comments regarding Jan. 31, 2007, AICPA submission to IRS on foreign trust reporting.

 

Dear Ms. Morgan:

 

The American Institute of Certified Public Accountants (AICPA) offers the below comments on foreign trust issues. These comments were developed by the Foreign Trust Task Force and approved by the Trust, Estate, and Gift, Tax Technical Resource Panel and the International Taxation Technical Resource Panel and Tax Executive Committee.  We previously commented on foreign trust reporting on January 31, 2007, and on Forms 3520 and 3520-A on June 17, 2003.

 

The AICPA is the national, professional organization of certified public accountants comprised of approximately 350,000 members.  Our members advise clients on federal, state, and international tax matters, and prepare income and other tax returns for millions of Americans.  Our members provide services to individuals, not-for-profit organizations, small and medium-sized businesses, as well as America’s largest businesses.

 

We are writing in response to several issues discussed in your May 25, 2007, follow-up call with the AICPA Foreign Trust Task Force Chair, Karen Brodsky.   The AICPA Foreign Trust Task Force would like to share with you the following comments.

 

 

1. In May 2007, we had briefly discussed with the IRS the issue as to whether a Mexican trust (Fideicomiso) should be treated as a foreign trust and subject to the section 6048(a), (b) and (c) reporting requirements.  Some of our members have been told that the IRS considers these to be “trusts” in all cases, while some of our members are of the opinion that Fideicomisos do not meet the definition of a “trust” in Treasury Regulation section 301.7701-4.  In May 2007, the IRS asked that we provide a specific request for guidance that includes an outline of the issue so that it can be forwarded to the appropriate parties. We are working on this and plan to forward this to you separately in the near future.   We were also requested by the IRS to possibly include a sanitized document and we are looking into this matter.   

 

We thank you for the opportunity to discuss and comment on these matters and welcome the opportunity to discuss our comments further with you or others at the IRS.    Please feel free to contact me at 212-773-2858 or jeffrey.hoops@ey.com;  Justin P. Ransome, Chair of the AICPA Trust, Estate, and Gift Tax Committee, at 202-521-1520 or justin.ransome@gt.com; Karen A. Brodsky, Chair, AICPA Foreign Trust Task Force, at 212-436-3025 or kbrodsky@deloitte.com; or Eileen R. Sherr, AICPA Technical Manager, at 202-434-9256 or esherr@aicpa.org, to discuss any of the above items or if you require any additional information. 

 

Great, somebody else out there is thinking about this.  He thinks that as the IRS’s intent is not to penalize you if reported ALL income, but failed to file an FBAR, the same would be true for an MRT.  However, he does mention that the IRS agent may not agree.  Again, do you trust the IRS with your trust?

 

9. I have properly reported all my taxable income but I only recently
learned that I should have been filing FBARs in prior years to report my
personal foreign bank account or to report the fact that I have signature
authority over bank accounts owned by my employer.  May I come
forward under the voluntary disclosure practice to correct this?

 

IRS REPLY: The purpose for the voluntary disclosure practice is to provide a way for taxpayers who did not report taxable income in the past to voluntarily come forward and resolve their tax matters.  Thus, If you reported and paid tax on all taxable income but did not file FBARs, do not use the voluntary disclosure process.   

For taxpayers who reported and paid tax on all their taxable income for prior years but did not file FBARs, you should file the delinquent FBAR reports according to the instructions and attach a statement explaining why the reports
are filed late.  Send copies of the delinquent FBARs, together with copies of tax returns for all relevant years, by September 23, 2009, to the Philadelphia Offshore Identification Unit at:

Internal Revenue Service
11501 Roosevelt Blvd.
South Bldg., Room 2002
Philadelphia, PA 19154
Attn: Charlie Judge, Offshore Unit, DP S-611

The IRS will not impose a penalty for the failure to file the FBARs.
(Emphasis added.)

While the IRS did not directly address the question of whether to use the OVCP where a foreign account or business had no income or incurred losses, it seems clear enough that the OVCP is only concerned with situations where there was a failure to report income and to pay the taxes that would be due on that income.

Although the IRS FAQ on the OVCP states that no penalties will be imposed for a failure to file the FBAR form, taxpayers may encounter a different conclusion on the part of IRS agents who only deal with that form and are not involved in the OVC Program. In addition, there are penalties for a late filing of forms such as the foreign trust form 3520-A and 3520, the foreign corporation form 5471 and 926 and the foreign partnership form 8865.

http://www.vernonjacobs.com/voluntary-compliance.html

5/29/09:  Another call back to the Voluntary Disclosure Hotline. Leave a message.