It may be October (and not April), but Patrick Oden is still busy preparing and sending off forms to the IRS for U.S. clients at his Chapala office. In a phone conversation, Oden said he had just filed a return for a client with a hefty income and tax obligations.
“One of the biggest sources of unnecessary confusion is the idea that it’s a bad thing to get an extension to file” after the normal April 15 deadline, he explained.
“We get an automatic 60-day extension but may need even more time than that. But people sometimes have the misconception that if they ask for an extension, it creates a red flag with the IRS and makes them more likely to audit you. But actually, it’s a positive – the IRS understands that expats need more time.”
In his recent years at lakeside, Oden has seen an influx of hurdles for expats, based on new U.S. laws. These, in turn, have compounded the confusion.
If Americans “have substantial interest income from Mexican banks or investment firms, they should ask for a constancia from their bank. It’s the equivalent of a 1099, saying how much tax has been paid to the Mexican government and how much interest earned.” Constancias are supposed to be ready by the end of March.
“But the secret is, some banks don’t have them ready on time. And even if they do, is 15 days enough to get everything finished by April 15?”
When you mix that glitch with the misconception that asking the IRS for an extension to file is a negative, things can get messy, Oden lamented.
“Another big fallacy is that if you earn money in Mexico, you don’t have to report it to the IRS,” Oden added. “You do,” although it often doesn’t result in additional tax obligations.
A misconception similar to the one about asking for an extension to file is the fear of filling out a FinCEN 114 form – a U.S. government form, which used to be called an FBAR, he said.
“Again, some people think the FinCEN 114 makes you more likely to be audited.” But it doesn’t, he explained.
Many people have a similar, wary reaction when a Mexican institution asks them to fill out a W-9, another U.S. form, in which you declare your Social Security number.
“When you fill it out, it just protects the Mexican bank from problems with the IRS,” he said. “Normally, it’s worth the time of the Mexican institutions to have U.S. clients, so they want to comply. And if they don’t, it can mean a lot of problems for them, including various types of penalties.”
Another point of confusion is regarding compliance with a 2016 law called by its acronym, FATCA.
“This law deals with a couple things. One is a requirement for U.S. holders of accounts in Mexican banks to report these accounts to the U.S. government.
“Another bit of fallout is that U.S. financial institutions sometimes don’t want expat accounts because they have to spend a lot of time verifying you – and they think it’s not worth their time.”
Oden explained that, at least for the present, “We just have to live with those rules.”
“I feel that one of the advantages I have as an expat tax preparer, compared to a U.S. based one, is that I deal with these issues all the time.”