Mexican Fideicomisos Requirement to File Forms 3520 & 3520A As a Foreign Trust

In Mexico Fideicomisos hold title to  certain real property owned  by non-Mexicans citizens. A Mexican bank is designated as the Trustee and the wording of the Fideicomiso document is clearly that of a trust.  The IRS has never made a written pronouncement or ruling that excludes Fideicomisos from the requirement that they file annually  Forms 3520 and 3520A.  Penalties for not filing these forms or filing them late are huge and can be up to 15% of the value of the property in the trust.

A Texas attorney recently has been widely circulating a  written opinion she wrote and a copy of her  email alleging that Mexican Fideicomisos may not be foreign trusts and  are not required to File Forms 3520 and 3520A. Her email cites a situation where the IRS informally agreed that her client did not have to file Forms 3520/3520A or pay any penalty for not filing.

We have checked with an IRS representative who directly deals with these issues.  They stated it is very unlikely that in the near future the IRS will ever issue any written ruling or opinion that Fideicomisos do not have to file these foreign trust reporting forms or are not foreign trusts.  

Informal decisions made by the IRS by law cannot be cited as authority by other taxpayers by law. The law also states  written private letter rulings in almost every circumstance cannot be cited as authority by other taxpayers.  Therefore reliance on a privae attorney's written opinion or an informal decision by the IRS can be very risky and will offer no protection in the event you fail to comply with currently accepted IRS filing requirements.  Filing the 3520/3520A form also would be significantly cheaper than going to Court to fight the IRS on this issue when you cannot even cite the informal decision as authority.

Until the IRS (if ever) declares in writing that  Fideicomiso's are exempt from the foreign trust filing requirements or are not foreign trusts, all owners of property in Mexico which hold their title through Fideicomiso's  should continue to file Forms 3520 and 3520A each year to avoid being assessed large monetary penalties by the IRS.

Court says government failed to establish that taxpayer "willfully" concealed offshore account

United States v. J. Bryan Williams; No. 1:09-cv-00437

The U.S. District Court for the Eastern District of Virginia, September 1, 2010, found that the government had failed to meet its burden to establish by a preponderance of the evidence that a taxpayer willfully failed to report his interest in a foreign bank accounts that were omitted from the individual's 2000 tax return as the record indicated that the accounts had been frozen in November of the previous year at the behest of the U.S. government.

Facts. In 1993, the defendant, J. Bryan Williams, opened up two Swiss bank accounts in the name of ALQI Holdings, Ltd., and over the course of seven years deposited in excess of $7 million in assets.

On Williams' 2000 tax return, the foreign accounts were not disclosed, nor was a Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts) (FBAR), filed by the June 30, 2001, deadline (for the 2000 tax year).

In January 2002, the defendant disclosed his financial interests in the offshore accounts to an IRS agent, based on advice received from his tax attorneys and accountants. Further disclosures were made:

·       Upon the filing of his 2001 tax return (October 2002);

·       In an application to participate in the Offshore Voluntary Compliance Initiative (February 2003);

·       In amended returns for 1999 and 2000 (filed February 2003);

·       While pleading guilty to tax fraud (May 2003) as well as to conspiracy charges and tax evasion for the offshore funds from 1993 to 2000 (June 2003); and

·       Upon filing his filing of form TD F 90-22.1 for tax years 1993 through 2000 (January 2007).

The facts also indicated that Williams met with Swiss authorities in 2000 and that his Swiss accounts were frozen on November 14, 2000, "at the behest of the U.S. government." Although the government had earlier stipulated to November 14, 2000, as the date the accounts were froze, it appears that government sought to disavow such stipulation and sought to argue that the accounts were not frozen until a later time.

Court's opinion. The government sought to enforce its assessment of two FBAR penalties against the defendant for willfully failing to report his interest in his offshore accounts for the tax year 2000.

The government argued that the defendant's signature on his Form 1040 was prima facieevidence that Williams knew the contents of his tax return.

The court found, however, that while Williams had in fact not disclosed his offshore account on his original 1040 for the 2000 tax year, such actions occurred after he found out that the U.S. and Swiss authorities found out about the ALQI accounts. Thus, in the court's view, Williams was aware that the authorities knew about his offshore accounts by the fall of 2000, long before the FBAR deadline of June 30, 2001.

The court said that such evidence demonstrated that Williams lacked any motivation to willfully conceal his offshore accounts on his 2000 tax return, and thereafter.

"Williams' subsequent disclosures throughout 2002 and 2003 corroborate his lack of intent," the court said. "Though made after the June 30, 2001 deadline, Williams' disclosure of the ALQI accounts to John Manton of the IRS in January 2002 indicates to the Court that Williams continued to believe the assets had already been disclosed. That is, it makes little sense for Williams to disclose the ALQI accounts merely six months after the deadline he supposedly willfully violated."

Treasury Inspector General Finds 10% of Foreign Earned Income Exclusions claimed in 2008 Are Invalid or Erroneous

TIGTA Finds Significant Loss in IRS Revenue Because of Erroneously Claimed Foreign Earned Income Tax Exclusions

WASHINGTON - The Internal Revenue Service (IRS) lost an estimated $90 million in revenue for Tax Year 2008 because of erroneously claimed foreign earned income tax exclusions, according to a report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).

The foreign earned income tax exclusion allows a taxpayer to exclude up to $91,500 of foreign earned income. A taxpayer qualifies for this exclusion if he or she has foreign income and a home in a foreign country. An eligible taxpayer designates this status by filing Form 2555 (Foreign Earned Income) with the IRS.

TIGTA conducted a performance audit to assess the IRS's ability to ensure the accuracy of these exclusions. TIGTA reviewed 231,277 tax returns from Tax Year 2008 and found that 10 percent (23,334) of taxpayers claiming the exclusion either failed to qualify for the exclusion or inaccurately computed the exclusion. The income erroneously excluded totaled $675 million. The estimated tax avoided totaled $90 million.

"This is very troubling. Over five years, the estimated revenue loss to the IRS could total more than $450 million," said J. Russell George, Treasury Inspector General for Tax Administration. "Improvements must be made to reduce erroneously claimed foreign earned income tax exclusions," he added.

TIGTA made seven recommendations to the IRS in this report, and the IRS agreed with four of the seven recommendations.

To review the report, including the scope and methodology, go to: http:www.treas.gov/tigta/auditreports/2010reports/201040091fr.pdf.