The IRS Wants to Know – Reporting Requirements for US Citizens
There appears to be some confusion as to what needs to be reported to the IRS by US citizens owning property in Mexico. Some US based accountants and tax preparers provide contradictory information and instructions to their clients. This article intends to dissipate this confusion.
First, a reminder, if you are a U.S. Citizen, the rules for filing income, estate, and gift tax returns and paying taxes are the same whether you reside in the United States or abroad. You are subject to tax on worldwide income from all sources and must report all taxable income and pay taxes according to the Internal Revenue Code.
Q 1: Do I need to report my Mexican Bank Trust that I created to purchase property?
According to the Foreign Trust Reporting Requirements and Treasury Regulations, a foreign trust with a U.S. owner must file a complete and accurate Form 3520-A and furnish the required annual statements to avoid penalties. The report needs to be filed within 15 days of the fiscal year end of the trust. However, common sense has prevailed. In a ruling published in 2013 by Wendy L Gribble of the IRS it was determined that a Mexican Land Trust is not a trust in the traditional sense, but an accommodation required under the Mexican Constitution to permit foreigners to own property in the Restricted Zones of Mexico. In fact, the Mexican Land Trust is the only type of trust where trustee is only an agent for the beneficiary, the US owner, and is holding the property for the beneficiary. Title to the real property and effective control is vested with the beneficiary and not the trustee as is the case in a typical trust. Therefore, with a Mexican Land Trust the US citizen retains direct ownership of the property for federal income tax purposes.
Therefore, the answer to this first question is NO,US Citizens do not have to report a Mexican Land Trust to the IRS nor file Form 3520.
Q 2: Do I need to report any other assets in Mexico?
In a concerted effort to fight money laundering and terrorist financing, the United States joined with the international community in adopting laws to comply with this effort. Accordingly, if you are a US Citizen and you have a financial interest or control of a Bank account located in Mexico which the average annual value is equal to or exceeds $10,000 USD at any time during the calendar year, you must report this account to the IRS. Note that the law does not make any distinction with a joint account. Therefore, it cannot be argued that because you hold this account with another person and theoretically are only the beneficiary of half the value of the account, that you do not need to report it.
Another note of interest is that this does not affect your income tax payable as the account does not indicate or imply that it is considered revenue. The amount in the account could be post-tax dollars that you transferred from your US account to your Mexican account. The law only requires that you report the existence of the account. One final observation: the only exception to this rule is if the bank account is held by a registered IRA of the US citizen. So the short answer to this question is YES, if your Mexican bank account has a balance of $10,000 USD or more at any time during the calendar year.
Several clients have asked Mexlaw: how would the IRS know? Do Mexican Banks report bank accounts owned by US Citizens? Mexico also is a participant and signatory of international treaties to combat money laundering and terrorist financing therefore, theoretically, Mexican Banks should report the existence of these accounts to US authorities. However, in practice, we have yet to meet a Mexican bank executive that was able to confirm that this requirement is complied with. Regardless, considering that the penalties are severe (up to $50,000 for the failure to file the report and a 40% penalty on the understatement of tax attributable to nondisclosed assets) it would be wise to file the report with your annual income tax returns.