IRS Schedule B & Overseas Accounts

IRS Schedule B and Overseas Accounts

IRS Schedule B and Overseas Accounts

While the IRS 1040 tax return Schedule B is generally an uncomplicated form, the foreign account aspects increase the complexity and confusion. Generally, Schedule B is required for Taxpayers when they have more than $1,500 in dividends and interest. But, even if a person does not have this type of income when the filer has foreign accounts, the form is required. While there is no penalty for failing to file 1040 Schedule B, the non-filing may lead to an audit, which may reveal unreported offshore or foreign bank accounts — and result in significant fines and penalties. Likewise, if unreported FBARs are discovered, issues with Schedule B can complicate the willful vs non-wilful analysis. These penalties may be abated or avoided with offshore amnesty.

Schedule B and Foreign Accounts

This is where many unsuspecting taxpayers find themselves in trouble.  While the main purpose of the IRS Form Schedule B is to report dividend and interest income that exceeds $1500 in total, there is a dual purpose for the form, which to report/acknowledge an interest in, or signature authority over foreign accounts.

Minimum Foreign Account Balance Threshold

There is no threshold requirement such as with an FBAR or form 8938 (although, a person does not have to file a schedule B if they’re not otherwise required to file a tax return). In other words, if you have foreign accounts and/or signature authority over foreign accounts but are not required to file a tax return, you are not required to file a tax return solely to file a Schedule B.

IRS Schedule B Examples

The Schedule B form is a schedule that is filed along with your tax return under certain circumstances. There are a list of various different circumstances that can be found on the IRS website, but the most common two scenarios is when a person has U.S. Interest or Dividend that in total exceeds $1500 and/or when a person has ownership, joint ownership, or signature authority over a foreign account.

Example – Under $1,500 Threshold, No Foreign Accounts

David has various bank accounts and stock/securities in the United States that generate a total of $1,100 a year. In this circumstance, unless other factors apply, David would not have to file a Schedule B, because he does not have foreign accounts, and his total annual interest and dividends fall below the threshold. Instead, David would aggregate the total interest and include the information on line 8, and the total dividend amount and include it on line 9.

Example – Exceeding the $1,500 Threshold

Using the same facts above, if David had $2,000 worth of interest income and $700 with the dividend income, David’s aggregate passive income for interest and dividends would be more than $1,500. As such, David would be required to identify each institution that he received an interest payment or dividend from and the amount he received. David would presumably have this information because each financial institution is required to issue their customers a 1099 to reflect any interest income or dividend income.

Example – Foreign Accounts

Notwithstanding the $1,500 threshold requirement, if a person has a foreign account (even if they have no interest or dividend income in the U.S. or abroad) they are also required to file a form Schedule B.  As provided by the IRS in its instructions:

• • • Use this schedule if any of the following applies…“You had a financial interest in, or signature authority over, a financial account in a foreign country or you received a distribution from, or were a grantor of, or transferor to, a foreign trust. Part III of the schedule has questions about foreign accounts and trusts.”

This portion of Schedule B does not require $1,500 requirement to meet the qualifications to file the form. Rather, it is just asking whether you had a financial interest in, or signature authority over…

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and 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.