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U.S. EXPAT TAX GUIDE โ€“ MEXICO

How to Catch Up on US Taxes After Years in Mexico

If youโ€™ve lived in Mexico and didnโ€™t file US tax returns, there are options to get compliant with the IRS.

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One solution is the Streamlined Foreign Offshore Procedure, which helps expats catch up on tax filings without facing penalties for past non-compliance. Many expats believe that not owing taxes means they donโ€™t need to file, but thatโ€™s a common misunderstanding.

How do I resolve my unfiled tax returns?

If youโ€™ve missed several years of returns, and havenโ€™t been contacted by the IRS, the Streamlined Foreign Offshore Procedure can help. This program allows you to file the past three years of returns and six years of FBARs without penalties, as long as your failure to file was non-willful, meaning you were unaware of the filing requirements.

Can the IRS discover that I havenโ€™t filed?

Yes, the IRS can find out if you havenโ€™t filed through various reporting mechanisms.ย 

The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report accounts held by US citizens, so even if you live abroad, your financial information may be flagged if you havenโ€™t filed your returns.

What does the Streamlined Foreign Offshore Procedure involve?

The Streamlined Foreign Offshore Procedure lets US expats file their last three years of tax returns and six years of FBARs. It also requires submitting a certification form explaining why you didnโ€™t file earlier and confirming that you will comply with tax obligations going forward.ย 

This program is designed to help expats avoid penalties while catching up with their IRS filings.

Do you need help preparing the offshore certification?

Yes, itโ€™s advisable to work with a tax professional to prepare your offshore certification. This document explains why you didnโ€™t file your tax returns or FBARs and is crucial in proving that your non-compliance wasnโ€™t intentional.ย 

Tax professionals can ensure the certification is detailed and accurate, reducing your chances of facing penalties.

How many years of returns do I need to file?

Even if youโ€™ve been non-compliant for over a decade, you typically only need to file the most recent three years of tax returns and six years of FBARs under the Streamlined Procedure.ย 

As long as the IRS hasnโ€™t contacted you or initiated an audit, this program can help you get back on track.

Will I face penalties for late filings?

The Streamlined Foreign Offshore Procedure is designed to waive penalties for late filings, including FBAR penalties. While you may still have to pay interest on any taxes owed, the program removes the financial burden of penalties, helping you resolve your tax situation without additional fines.

Can I claim stimulus payments while living in Mexico?

Yes, US citizens living in Mexico are eligible for IRS stimulus payments, even if they are filing under the Streamlined Foreign Offshore Procedure. Filing a US tax return or using the amnesty program enables you to claim these payments.

What is the eligibility for the third stimulus payment?

The third stimulus payment provides US$1,400 per individual and spouse, provided your 2021 income doesnโ€™t exceed US$75,000 for single filers, or US$150,000 for those married filing jointly. If your income surpasses these thresholds, the stimulus amount decreases proportionally.

You will need to file by April 2025 to claim this benefit, as the stimulus phase-out begins beyond the mentioned income limits.

What happens if I don’t file FBARs?

Failing to file FBARs (Foreign Bank Account Reports) can result in hefty fines and, in some instances, criminal prosecution. The FBAR filing requirement applies if the combined balance of your foreign accounts exceeds US$10,000 at any point during the year.ย 

The FBAR ensures that your foreign assets are properly reported to the US Treasury to prevent tax evasion or non-compliance.

Penalties range from non-willful violationsโ€”up to US$10,000 per violationโ€”to willful violations, which can amount to the greater of US$100,000 or 50% of the account balance.

What are the penalties for not filing a tax return?

Penalties for not filing a tax return or FBAR are severe and compounded by interest charges. If you fail to file your tax return by the due date, the penalty is 5% of the unpaid tax per month, capped at 25%. If the return is over 60 days late, the minimum penalty is either US$485 or 100% of the tax due, whichever is less.

Failing to pay taxes results in an additional 0.5% penalty per month, again capped at 25%. Besides these penalties, the IRS imposes interest, compounded daily, on any unpaid amounts based on the current federal short-term rate plus 3%.

If both penalties for failure-to-file and failure-to-pay are applied in the same month, the combined total for that month will be 5%. However, this can increase rapidly, so it is essential to file your tax returns and pay any owed taxes on time.

How do I file FBARs?

Filing an FBAR is done electronically through the Financial Crimes Enforcement Networkโ€™s (FinCEN) website. US expats must file FBAR by April 15 each year, with an automatic extension available until October 15.

Why partner with a specialist Expat accountant?

Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in Germany. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.

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