Examples of Form 1040 Schedule B Foreign Account Filing

IRS Schedule B, Question 7 & Foreign Accounts

IRS Schedule B and FBAR Filing Requirements Explained

U.S. taxpayers who have foreign accounts, assets, or investments may have several different types of international information reporting forms that have to be filed each year to disclose their interest in foreign money to the IRS and FinCEN.  Some of the more common foreign tax forms that the taxpayer may be familiar with include:

• • • FBAR

    • Form 8938

    • Form 3520

    • Form 5471

    • Form 8865

    • Form 8621

One less common but equally important tax form for foreign account disclosure is Form 1040 Schedule B. Schedule B is less known for FBAR and Form 3520 reporting because Schedule B is primarily used to report interest and dividends. However, there is another aspect of filing Schedule B which is to report foreign accounts and foreign trust ownership/distributions. Let’s walk through the basics of Schedule B as well as briefly summarize a recent court case that limits the government’s ability to frame certain Schedule B issues as de facto willful.

What is Schedule B for Form 1040?

The Schedule B Form that is part of the IRS 1040 tax return is a very unassuming international tax form. The title of the form is ‘Interest and Dividends’ — and does not refer to foreign accounts. Thus, it is understandable that many taxpayers who fall below the interest and dividend threshold requirements for having to file a Schedule B would be blissfully unaware of the foreign account/trust aspect of Schedule B. It is not until the taxpayer gets to the bottom third of the page that they may learn for the first time they are required to file this form even if they are not required to file an FBAR or Form 8938.

Part III Foreign Accounts and Trusts

Schedule B, Part III Provides the following statement regarding foreign accounts and trusts:

• • • “You must complete this part if you (a) had over $1,500 of taxable interest or ordinary dividends; (b) had a foreign account; or (c) received a distribution from, or were a grantor of, or a transferor to, a foreign trust.”

What is very important about these statements, is that the taxpayer does not have to have more than $1,500 of taxable interest or dividends to file the form. Rather, even if the taxpayer has ownership or signature authority over a foreign account, they are required to file Schedule B to disclose their ownership/signature authority interest — even if ultimately, they are not required to file the FBAR.

Question 7, Schedule B (Foreign Accounts)

Question 7 of Schedule B has two subparts:

• • • “At any time during 2023, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country? See instructions

      • If “Yes,” are you required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), to report that financial interest or signature authority? See FinCEN Form 114 and its instructions for filing requirements and exceptions to those requirements.

    • If you are required to file FinCEN Form 114, list the name(s) of the foreign country(-ies) where the financial account(s) is (are) located.”

Thus, taxpayers with ownership or signature authority in a foreign account are required to file a Schedule B, even if they do not have to file the FBAR.

Question 8 of Schedule B (Foreign Trusts)

Question 8 on Schedule B refers to distributions/ownership of from foreign trusts

• • • “During 2023, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If “Yes,” you may have to file Form 3520.”

Failure to File Schedule B for Foreign Accounts is Not Fatal

When a person fails to file a Schedule B — and especially in a situation in which they have foreign accounts and were required to file the FBAR — they may become subject to penalties if they did not file the FBAR. However, it is important to note that just because a person did not file Schedule B and/or filed the form incorrectly does not mean that the person is willful or unable to establish reasonable cause.

The IRS, Schedule B, FBAR & Streamlined FAQ 13

It is very important to note, that the IRS does not always take the position that just because a taxpayer fails to file Schedule B or files it incorrectly they are willful. In fact, as part of the Streamlined Filing Compliance Procedures (IRS procedures used by taxpayers who are non-willful but have unreported foreign accounts, assets, or investments to report their foreign accounts) the Frequently Asked Questions confirms that an incorrect Schedule B is not dispositive of willfulness.

As provided by the IRS Streamlined FAQ:

• • • “We realize that many taxpayers failed to acknowledge their financial interest in or signature authority over foreign financial accounts on Form 1040, Schedule B. If you (or your return preparer) inadvertently checked “no” on Schedule B, line 7a, simply provide your explanation.”

Thus, just because a Taxpayer’s Schedule B has errors does not mean they are willful.

Examples of Schedule B Foreign Account Reporting

Let’s walk through the basics of Schedule B with examples.

*For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

No Interest or Dividends

Even if a Taxpayer does not have any interest or dividends either in the United States or abroad they still won’t be required to file the Schedule B if they have ownership or signature authority over a foreign account.

• • • Example: Brian files a U.S. tax return but does not have any interest or dividends. He does have signature authority over a foreign account, but he is not required to file the FBAR because the aggregate value of the foreign accounts is below $10,000. Brian is still required to file a Schedule B to identify his signature authority over the foreign account.

    • Example: Brianna files a U.S. tax return and has no interest or dividends but has ownership of a foreign account that does not exceed $10,000. Even though Brianna is not required to file the FBAR, she is required to file Schedule B.

Under $1,500 Dividends and Interest

Generally, if a Taxpayer has less than $1500 in dividends and interest then they are not required to file Schedule B unless they have ownership or signature authority over a foreign account.

• • • Example: Charles is a U.S. Person who generates $800 in interest income each year from his U.S. earnings period since Charles has under $1500 he did not know he had to file a Schedule B, but because Charles has ownership of a foreign account, he is required to file Schedule B and identify his ownership in the foreign account — and what country the account is located in.

    • Example: Christine has foreign dividends, but that income is not taxed in the foreign country because interest and dividends are exempt under the foreign country’s tax laws. Therefore, Christine did not include the information on her US tax return and did not file Schedule B. Since Christine has foreign dividends, she is required to include this information on her U.S. tax return because even if it is exempt overseas, generally it will be taxable in the U.S. Likewise, even though the total amount of dividends is under $1000 she must still file Schedule B because she must disclose her ownership of a foreign account.

Willful vs. Non-Willful Non-Compliance

When a Taxpayer fails to timely file a Schedule B or follows the form incorrectly, they may be at risk for fines and penalties. The key issue will be whether the government believes the Taxpayer was willful or non-willful.

• • • Example: Charlie is a tax filer who was completely unaware that he was required to report his foreign accounts or income on his US tax return. He previously had a U.S. tax preparer who never asked him, and the Schedule B was never filed. Chances are Charlie should be able to fix the situation and would be considered non-willful.

    • Example: Chester is a tax filer who uses TurboTax to file his tax returns. While he does not have any foreign bank accounts, he does have some foreign pension accounts that would exceed the FBAR filing requirement but not Form 8938. He was confused as to whether foreign pension accounts are considered reportable, and he has not received any income from these accounts. Chester should also be able to fix the situation and be considered non-willful.

    • Example: Chip is a tax filer who recently inherited a large amount of money but did not want to report the information on his U.S. tax return. A large portion of the funds are still located in foreign accounts. Chip has several thousands of dollars of interest and dividends income, so he files the annual Schedule B. Chip identified that he does not have any foreign accounts on his Schedule B although he knows that he has foreign accounts. Chip would not appear eligible to make a non-willful submission.

    • Example: Clarissa is a tax filer who has foreign accounts but did not tell her CPA she had foreign accounts. The CPA asked Clarissa whether she had foreign accounts and she said, No. And, when the tax preparer presented the tax return to her for signing, she noticed that Schedule B identified that there were no accounts overseas but did not tell the CPA about it. In this situation, because the CPA specifically asked her whether she had foreign accounts and Clarissa told him that she did not have foreign accounts and signed the tax return knowing Schedule B was inaccurate she does not appear to be eligible for a non-willful submission.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.