Taxes for US Expats in Mexico
US Expatriates in Mexico Must Be Aware of FATCA and IRS OVDP and Streamlined Procedures
Since the liberalization of trade with the United States in the 1990s, Mexico has offered many distinct economic opportunities for Americans. Mexico’s low cost of doing business, low labor costs, and close proximity to the United States can make the country a prime choice for manufacturing operations. In fact, many auto manufacturers, auto parts suppliers and other international companies set up a manufacturing presence in Mexico. In some instances, American employees may be sent to oversee these facilities and many do not realize the obligations for taxes for US expats in Mexico. In other instances, a group of expatriates may establish a business that caters to fellow expats and helps them establish a life and business in Mexico.
Aside from the business opportunities available in the country, Mexico is also home to the largest source of immigrants to the United States. Many of these Americans still have family members living and working in Mexico. These individuals may establish foreign accounts in Mexico to send remittances, or they may decide to return to Mexico for a time to reunite and spend time with family. In either scenario the establishment of a foreign financial account can give rise to an obligation to disclose the account. Furthermore, U.S. taxpayers living in foreign countries must also make numerous tax considerations to reduce the effects of double-taxation.
U.S. Expatriates and all Taxpayers Must Disclose Offshore Accounts
For years there was a perception that wealthy Americans were evading their fair share of taxes through the formation of overseas accounts and trusts. In response, Congress passed or strengthened a number of foreign account disclosure laws. The Bank Secrecy Act, the source of the Report of Foreign Bank Accounts (FBAR) obligation, was strengthened to include enhanced penalties for willful violations and established a penalty for even inadvertent non-compliance with the law. Under FBAR , a taxpayer with covered accounts must file FinCEN Form 114 online to disclose his or her foreign accounts if the balance in those foreign financial accounts exceeds $10,000 at any time during the tax year. It is irrelevant whether the threshold is exceeded for a moment or for the entire tax year. If the reporting threshold is crossed, foreign accounts the taxpayer holds or has an interest in must be disclosed by June 30. A report must be filed for each applicable tax year.
Upon conviction, failure to file FBAR can be punished severely. A non-willful FBAR tax compliance violation could include a simple mistake like forgetting to fill deadlines or a failure to realize a foreign account exceeded the disclosure threshold. A non-willful failure can result in a penalty of up to $10,000 (per account / per year). A willful failure – a violation involving a deliberate or voluntary violation of a known legal duty – can be punished much more harshly, and includes the risk of criminal tax exposure. A willful FBAR violation can be punished with a penalty of $100,000 or 50 percent of the original account balance (per account / per year). Since each year is considered a new violation, penalties can be assessed for multiple years. It is not uncommon for a willful FBAR conviction to result in penalties that exceeds the account’s original balance (up to 250% of the account balance is theoretically possible).
OVDP may Offer a Means to correct your Offshore Tax Concerns
Aside from FBAR, U.S. taxpayers and expatriates living in Mexico must also satisfy necessary Foreign Account Tax Compliance Act (FATCA) disclosures along with their obligation to file and pay taxes. Understanding FATCA can be difficult because many tax laypeople often fail to realize that a duty to disclose an account can be concurrent under both FBAR and FATCA. With respect to the tax payment and filing obligation, many tax laypeople struggle to understand whether they can mitigate the effects of double-taxation through use of provisions like the Foreign Earned Income Exclusion.
If you failed to make all required disclosures, tax filings, or tax payments you could be facing large fines and the potential for a criminal tax investigation. However, taxpayers who make a full and complete disclosure through one of the Offshore Voluntary Disclosure programs (OVDP) typically face reduced penalties and the IRS will usually refrain from initiating a criminal investigation. However, mistakes made during the OVDP process can exacerbate your civil or criminal tax concerns. The Tax Law Offices of David W. Klasing can advocate and negotiate with the IRS on your behalf. To schedule a reduced-rate tax consultation, call us at 800- 681-1295.