Do I Really Have To Declare My Mexican Earnings?

Yes, unless you would rather go to jail
BY: ORLANDO GOTAY

There has been debate as to whether increased tax policing regarding offshore holdings produce meaningful results. The Justice Department regularly spews out announcements about the latest indictment, people who pled guilty to tax evasion, false returns, Foreign Bank Account Report (FBAR) nonfiling and such. But besides that, what else proves that crackdowns work?

A paper presented earlier this year by economics professor Joel Slemrod of the University of Michigan may offer clues. Titled “Taxing Hidden Wealth: The Consequences of U.S. Enforcement Initiatives on Evasive Foreign Accounts,” the paper gives the first meticulous analysis of what the Treasury accomplishes with these crackdowns.

After the 2009 crackdown, “new” compliance went through the roof as people realized they’d rather pay taxes than go to jail. Many new foreign accounts were declared on FBARs; there was an immediate increase of 19 percent, with an increase in aggregate wealth disclosed of around $75 billion. The reported interest income of “new reporters” went up by 63 percent, dividends by 25 percent, and capital gains by 18 percent.

The paper says that most of these folks have respectable income levels, but not all were “super rich.” Guess they didn’t think they were rich enough to have to report all of their income, huh?

This paper is the first instance, that I am aware of, of someone getting access to FBAR data. Slemrod argues that his analysis could tell apart holders of accounts opened for “legitimate” reasons versus others, and followed this with a per country analysis of individual responses, including those motivated by the various offshore “disclosure” programs, as well as ones that opted for a “quiet disclosure” (complying on a go-forward basis without admitting to prior infractions).

Fun fact: Mexico was in the “top 25 list” of FBARs filed by people who admitted to having undeclared accounts in 2010 and 2011.

Folks, let’s be candid about this. They have hit the mother lode with these crackdowns. And other countries have also realized there is a trillion dollar sized stash of undeclared wealth lurking around somewhere, waiting to be detected and taxed.

Not that any of our readers would ever knowingly report less taxable income than they earned (you would never do that, right?). But it would certainly be wise for people who have “suddenly” realized they might have made a “mistake” on some previous tax returns to play the straight and narrow when filing taxes next year.

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. 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 U.S. expats in Mexico.He can be reached at tax@orlandogotay.com, online radio at mixlr.com/orlandogotay or Facebook: GotayTaxLawyer.