Common IRS Schedule B and FBAR Reporting Filing Examples

IRS Schedule B and Overseas Accounts

Schedule B Foreign Account & Income Reporting

One of the most common issues for U.S. Taxpayers who have foreign accounts, assets, and investments is not knowing that this information is required to be disclosed on their U.S. tax return and FBAR. When it comes to U.S. tax returns specifically Form 8938 is the most common international information reporting form that a Taxpayer may have to file to report their foreign accounts, assets, and income. However, there is another very common form that Taxpayers have to file and they are required to file this form even if they do not have to file Form 8938 – and even if they fall below the threshold requirements for having to file the FBAR. The form is Form 1040 Schedule B, and while the primary purpose is to report dividends and interest income that the Taxpayer generated both in the United States and abroad, the bottom third of the form requires Taxpayers to disclose basic information regarding their foreign accounts. 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.