Schedule B, Question 7 - Answering No Does Not Make You Willful by Golding & Golding

Schedule B, Question 7 – Answering No Does Not Make You Willful by Golding & Golding

Schedule B, Question 7

IRS Schedule B of the 1040 is a very misunderstood form. That is because many tax professionals (Attorneys, CPA, EA, etc.) misunderstand the threshold requirements, especially when it involves Foreign Accounts.

In almost all situations, if a person has ownership, joint ownership, an interest in, or signature authority over a foreign account (yes, accounts from your home country are considered “Foreign”) the individual will have to mark “Yes” on Schedule B.

This is true, even if you do not meet the FBAR filing threshold, and/or the Form 8938 (FATCA) threshold filing requirement. Schedule B is not asking you how much; rather, it is just asking whether you have any ownership or signature authority over any foreign accounts. 

Online Fear Mongering

There is a lot of bad information online, primarily comprised of know-it-alls who know nothing, and fear-mongers who employ unnecessary scare tactics to goad you into OVDP, even when you were Non-Willful and should have submitted to the IRS Streamlined Offshore Program.

Schedule B

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 $1,500 and/or when a person has ownership, joint ownership, or signature authority over a foreign account.

Example – Under $1,500 Threshold

David has various bank accounts and stock/securities in the United States that generates 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 falls 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 about, 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.”

As you can see, for this portion of the form, it does not require $1,500 requirement in order to meet the qualifications to file the form. Rather, it is just asking whether you had a financial interest in, or signature authority over…

What is a Foreign Account?

This is another confusing part. Let’s say Michelle is originally from Hong Kong and still maintains bank accounts in Hong Kong. When she begins completing her tax return, a question pops up regarding foreign accounts. Now, while Michelle is a permanent resident of the United States — she is still a citizen of Hong Kong. Thus, in Michelle’s mind – understandably so – she does not have foreign accounts. Rather, she has an account in the United States and a few accounts in her home country (aka “who is it foreign to?”)

Tip: The question is really asking whether you have any accounts outside of the United States. If you have an account outside of the United States, you should answer yes on this question, notwithstanding the fact that the foreign account is actually in your country of citizenship; for tax purposes, it is outside the United States.

Tax Software Program – Schedule B Default Position

It is very important to keep in mind that with many software programs, the default position is that you did not have any signature authority or ownership of a foreign account.

With the introduction of FATCA, and renewed enforcement in FBAR compliance, the IRS is taking a much tougher stance against the non-reporting of offshore/foreign/overseas accounts. While back in the day it was easier to rely upon the fact that your tax software’s default position was “No” to foreign accounts, that argument is not as strong as it was three years ago.

Depending on whether you have ownership of foreign accounts, you may also have to file an FBAR or FATCA Form 8938.

What is an FBAR Statement?

An FBAR statement is a Report of Foreign Bank and Financial Accounts form. It is electronically filed annually with the Department of the Treasury online. Before this year (2016) the form had to be filed no later than June 30th of the current tax year in order to report the accounts for the prior tax year (File in 2015 to report the 2014 Maximum Account Balances). The law is changing in 2016 which will be applicable in 2017, and will have an April 15th, 2017 due date.

Is it more than $10,000 per account, or in Total?

An FBAR is required to be filed when a person or business (explained below) has an annual aggregate total of foreign accounts that exceeds $10,000 on any day throughout the year. It does not matter if all that money is in one account or if a person had 11 accounts with $1000.00 in each account (you get the picture, right?). Once your overseas foreign accounts exceed $10,000, it is now time to report all of the foreign accounts. 

You are required to report the maximum balance throughout the year. If you do not have the maximum balance available, you can mark the box that notes the Max balance is unavailable — or alternatively you can use the best value have and then note that on the FBAR.

Threshold Requirements for Filing an IRS form 8938?

Whether or not the taxpayer has to file a FATCA Form 8938 will depend on the amount of money they have overseas, country of residence and marital status.

For Taxpayers residing in the United States:

Single Taxpayers or Married Filing Separate (MFS)

If a taxpayer is single, or files married filing separate then they will have to file IRS form 8938 if they have more than $50,000 in aggregate total in Specified Foreign Assets on the last day of the year. Alternatively, if they have less than $50,000 on the last day of the year but at any time during the year they had $75,000 or more in Specified Foreign Assets, then they are also required to file IRS form 8938.

Married Filing Jointly Taxpayers (MFJ)

When taxpayers file married filing jointly, the threshold requirements are doubled. In other words, when a couple files the US tax return as married filing jointly, they will only have to file IRS form 8938 when you have a combined annual aggregate total of $100,000 on the last day of the year or if it anytime during the year they had $150,000 or more in overseas accounts.

If a person does not meet these threshold requirements then generally they will not have to file IRS form 8938.

*Taxpayers should be sure they understand that even if they are not required to file IRS form 8938, they may still be required to file an FBAR with the Department of the Treasury, since the threshold requirements for overseas accounts and FBARs are significantly less ($10,000). 

**Unlike the FBAR, a person only has to file an IRS form 8938 when the money is theirs; with an FBAR, a person has to file the FBAR even if the money is not theirs, but they have signatory authority over the accounts.

***The Threshold Requirements for Taxpayers residing overseas to have to file a FATCA Form 8938 are significantly higher.

Single Taxpayers or Married Filing Separate (MFS) – Foreign Residents

If a taxpayer is single, or files married filing separate then they will have to file IRS form 8938 if they have more than $200,000 in aggregate total in Specified Foreign Assets on the last day of the year. Alternatively, if they have less than $200,000 on the last day of the year but at any time during the year they had $300,000 or more in Specified Foreign Assets, then they are also required to file IRS form 8938.

Married Filing Jointly Taxpayers (MFJ) – Foreign Residents

When taxpayers file married filing jointly, the threshold requirements are doubled. In other words, when a couple files the US tax return as married filing jointly, they will only have to file IRS form 8938 when you have a combined annual aggregate total of $400,000 on the last day of the year or if it anytime during the year they had $600,000 or more in overseas accounts.

If a person does not meet these threshold requirements then generally they will not have to file IRS form 8938.

Out-of Compliance?

If you have accounts outside of the United States, and are having a hard time understanding the laws, it is crucial that you speak with an experienced international tax lawyer to assist you.

If you are already out of compliance for prior years, and want to consider getting into compliance before it is too late, you may consider offshore disclosure.

Can I Still go Streamlined If I Marked No?

Yes, even if you Answered No on IRS Form Schedule B, Question 7 you can still Qualify for IRS Streamlined Offshore. In fact, even the IRS has confirmed this fact and provided the following: “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.”

IRS Voluntary Disclosure of Offshore Accounts

Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.