It’s Not a New Kind of Tequila—But Perhaps One Could Come in Handy Now

Opinion

From time to time, I learn of folks who consider acquiring real property in Mexico by creating a foreign corporation and then having the corporation buy the property. The reasons I hear are varied. More often than not the desire may be to have the property listed in a name that is not their own. Grin.

The federal tax code is replete with opportunities to “screw it up.” Little publicized requirements—often coupled with draconian penalties for noncompliance—should give pause and invite careful reflection as to what one wants to do and how to do it right. Enter IRS Form 926.

This virtual unknown is used to report contributions of property by US persons to foreign corporations. For example, cash contributions by a US person who ends up owning or controlling 10 percent or more of the foreign corporation are reportable, as is cash exceeding US$100,000 in the preceding 12 months. Don’t think of splitting things up with a relative. The IRS already thought of that, too. There is another form for reporting transactions with foreign partnerships and one for foreign trusts. They do try to cover all the bases.

 

Of course, the “926” is in addition to a wide array of other reporting requirements that may apply to the same set of facts. That cash contribution triggers one kind of report, and ownership of the corporation requires a separate one. Of course, the Foreign Bank Account Reports (FBAR) and Statement of Specified Foreign Financial Assets (Form 8938) are additional examples. The sad thing is that each requirement has really meaningful penalties, and they all add up. Form 926 violations are a cool 10 percent of the property contributed, up to US$100,000. Besides, that aspect of the return can be audited “forever” until three years after the 926 is in fact filed. If the IRS thinks there was “intentional disregard” of the rule, the US$100,000 penalty limit does not apply. Tequila, anyone?

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the US Tax Court, and other taxing agencies. His love of things Mexican has led him to devote part of his practice to the tax matters of US expats in Mexico. He can be reached at tax@orlandogotay.com. Consult with your US tax professional of choice. This article is only food for thought and is not specific advice to you.

 

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