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Wednesday, August 17, 2011

New Taxes Regulations for Americans


Foreign Bank and Financial Accounts Regulations
By Lynn Russ, exclusively for the Baja Good Life Club

With new tax regulations going into effect for Americans living in Mexico, the typical expatriate may be scrambling to understand just how the changes may affect them. As with any tax regulation, regardless of where you live, it can never be as easy as black and white. Tax regulations are inherently complex and the new Foreign Bank and Financial Accounts regulations are proving to be no different. But, with a basic outline of the regulations, most Americans can figure out how exactly they, and their bottom line, will be affected.

The basics of the regulation are pretty simple for American citizens in Mexico. If you have more than $10,000 in a foreign account, at any time throughout the year, you must account for this money and file IRS form TDF 90-22.1 each year and if you own a home in a foreign country, you have to file form 3520 and 3520-A every year back to 2003. Any citizen of the United States, including single member LLC’s or anyone with signature authority or power of attorney over an account that holds more than the $10,000 minimum must file the form for tax purposes. It can get a little tricky if you happen to be in Baja, as an American, and hold signature authority or power of attorney over someone’s account in another country, such as Canada; but you must file even under these atypical circumstances. Even if you never need to exercise the power of attorney over an account, you must file under the new regulations. You also have to file even if the account fails to generate any interest or dividends. If the account held a penny more than $10,000 even for the briefest period of time, the FBAR forms are necessary.

While some see the new regulations as an intrusion on Americans who live and work legally across the border, or perhaps even the equivalent of “taxation without representation” since they may be living full time in Baja and still filing tax returns with the U.S., the United States government and the IRS see it as a necessary tool to track people who use foreign accounts to hide money in avoidance of traditional taxes. If you are honest with your holdings and file according to law before the end of August deadline, there will be no real issues to worry about. However, the trouble may mount if you have more than the minimum and fail to file or underreport your earnings conflicting with the amount in the account. The civil and criminal penalties can be pricey and may be worse than simply paying any extra taxes the government may say you owe.

However, if you have kept accurate records for the last five years and attach a statement explaining why you may not have filed when you needed to, the penalties can possibly be waived. The best way to avoid any complications is to simply report all income. If you reported all income and wouldn’t have had to pay extra taxes, you can reasonably expect to file the forms without too much worry. There are now penalties for past failures to file that can get you into trouble if you do not bother to explain the oversight. Just making the effort to keep everything in check and explaining innocent oversights can really go a long way in appeasing authorities. If you truthfully disclose your foreign account holdings on your American tax return, you probably won’t owe more and therefore, will have no problems at all. But, if on your tax return, you left that question blank or declared there were no foreign accounts, your returns are inaccurate and you may very well owe more taxes and/or penalties.

As with any tax regulations, the exceptions can outnumber the rules. Certain foreign financial accounts that are jointly owned, correspondent accounts or foreign accounts owned by government entities are exceptions to filing the forms. Trust beneficiaries are also exempt.

To get the form, simply go to www.IRS.gov or call the IRS directly at 1-800-829-3676. If you need to find out for sure whether or not your accounts need to be listed or if disclosing your accounts may result in penalties from previous years, call the help line at 800-800-2877 and select option 2. Also, for specific inquiries, send questions to FBARquestions@irs.gov. Once you establish you need to file, complete the form and mail to the U.S. Department of Treasury. It can be a hassle to some; but it really is best to stay on top of the new regulations and try to be as accurate as possible on your returns. It can go a long way towards avoiding any extra headaches when it comes to tax time.