Sunrise on Zihuatanejo bay, Zihuatanejo

Sunrise on Zihuatanejo bay, Zihuatanejo. Photo by Page Cameron.

Per Internal Revenue Code Section 6048, any trust established in a foreign country by a United States citizen requires filing certain forms with the U.S. Department of the Treasury (Internal Revenue Service) each year.

Forms 3520 and 3520A must be filed by anyone who holds an interest in a foreign trust as a beneficiary. These forms are many pages long. The form 3520A is due on March 15th following the end of a calendar year. Form 3520 is due on the extended due date of the taxpayer’s personal tax return. These forms must be filed each year that the foreign trust is in existence. These forms report on the assets, liabilities and income and expenses of the foreign trust.

If the U.S. taxpayer has deposits in foreign banks, stock brokerage accounts or other foreign financial accounts and when the highest balance in those combined accounts equals or exceeds 10,000 US dollars, during a calendar year, form TDF 90-22.1 must be filed by June 30th following the end of each calendar year. This form is not filed with taxpayer’s personal tax return and cannot be extended beyond that due date.

Any U.S. citizen who holds an interest of 10 percent or more in a foreign corporation must file form 5471 and must be filed on the due date of taxpayer’s personal form 1040 each year. There are similar rules and special forms for U.S. taxpayers that hold interests in foreign partnerships and foreign limited liability companies.

The penalties for non-filing or late filing of any of the forms mentioned above can be 10,000.00 US dollars or more.

Recently there has been news in the media and on the internet that the Mexican bank trust (fideicomiso) probably should not be included in this filing requirement. Some attorneys believe that the Mexican bank trust, (fideicomiso) may not be a foreign trust and does not meet the criteria which requires filing of forms 3520 and 3520A. Some of these attorneys have also hypothesized that no reportable event occurs when a U.S. taxpayer acquires a property through a fideicomiso.

This is great in theory, but here are the facts:

The IRS has never issued any written ruling or opinion whether or not a fideicomiso is a foreign trust and IRS sources state it has no intention of doing so in the near future.

Under U.S. tax law, an oral decision made in an individual’s tax matter CANNOT be cited as authority by another taxpayer in a similar factual situation.

No one has received a private letter ruling that the Mexican fideicomiso is not a foreign trust nor have any court cases so decided.

Unfortunately, most of the standard wording in a Mexican fideicomiso document reads just like the wording of a foreign trust. A representative of the IRS General Counsels Office has said that since the IRS has not yet (nor may ever) issued a ruling that a fideicomiso is not a foreign trust; it is not advisable to rely on an opinion on that requirement that does not come in writing from the IRS.

The fact the IRS will not issue a written opinion on fideicomiso filing requirements should be cause to worry. It would be easy for them to issue written guidance if they really were certain that the beneficiaries of fideicomisos did not have to file the foreign trust forms.

Currently in almost all situations, anyone who has filed these forms late and included a late filing excuse has not been assessed penalties. Those who have filed the forms late and did not include a late filing explanation have been assessed penalties, but have subsequently been able to get the penalty abated after appealing. This could change in the future.

In conclusion, common sense requires that the taxpayer file the Forms 3520 and 3520A, unless the IRS states in writing that it is not necessary to file these forms. Any U.S. taxpayer should file if he/she wishes to avoid time consuming and expensive audits and court litigation.

The foreign trust forms do not change the existing rule that; rental income from the real estate held in fideicomiso must be reported on personal U.S. tax returns.

There are also reporting requirements in Mexico. If the property is sold, the gain or loss must be reported under the same rules that apply to personal or rental property located in the United States. If sold at a gain, a credit for Mexican taxes paid on that gain can be taken against the U.S. income tax on any of the gain which is taxable on the taxpayer’s U.S. tax return.

It should be kept in mind that there are attorneys out there writing articles and issuing written opinions stating various positions on all aspects of the United States income tax law. Some of those opinions are correct and some are not. Generally the taxpayer must go to court to determine if the opinion is correct unless the IRS later concedes this in writing. For approximately five years, the IRS has known that certain attorneys have expressed that a fideicomiso should not have to file Forms 3520 and 3520A. The IRS has not agreed as of this date.