TurboTax & Foreign Accounts – IRS Schedule B, FBAR or FATCA Form 8938?
- 1 IRS Form Schedule B
- 2 International Tax Law
- 3 Schedule B
- 4 Example – Under $1,500 Threshold
- 5 Example – Exceeding the $1,500 Threshold
- 6 Example – Foreign Accounts
- 7 What is a Foreign Account?
- 8 Tax Software Program – Schedule B Default Position
- 9 What is an FBAR Statement?
- 10 Threshold Requirements for Filing an IRS form 8938?
- 11 Out-of Compliance?
- 12 Golding & Golding, A PLC
IRS Schedule B is a deceptively dangerous form. Why? Because if you have foreign accounts and fail to properly complete the form, it may lead you down a road of serious fines and penalties.
IRS Form Schedule B
IRS Schedule B is like a Pandora’s box. Why? Because failing to mark off just a few boxes on Schedule B can lead taxpayers down a dangerous path, filled with potential IRS fines and penalties, with the catalyst being the Schedule B nondisclosure.
Specifically, schedule B question seven directly asks taxpayers whether they have any foreign accounts (or signature authority over the foreign accounts). If the taxpayer marks no, then the taxpayer is making a proactive representation to the IRS that they do not have any foreign accounts.
Moreover, since by signing a tax return the taxpayer is representing to the US government that they both read and understood their tax return, the IRS has the authority to question the taxpayer extensively about the issue. As a result, a seemingly harmless omission may lead to serious consequences.
That is not to say that there are not met its for reducing or even possibly eliminating any fines or penalties associated with failing to properly file or correctly file IRS schedule B – but depending on the circumstances of the individual’s tax situation, it may just be one of several issues the Taxpayer has to contend with.
International Tax Law
Depending on how much you keep up with changes in International Tax and the IRS, you may be aware that the Internal Revenue Service has made International Tax Law a key enforcement priority.
For most individuals, that will include ensuring that they properly filed a Schedule B, FBAR (Report of Foreign Bank and Financial Accounts) and possibly a FATCA Form 8938 (Statement of Specified Foreign Assets) under the Foreign Account Tax Compliance Act — which also includes insurance policies, ownership in a foreign business, and foreign bank accounts in general.
While the Schedule B is a relatively simple form, it is also a very easy way for individuals to get themselves in trouble if they do not file it properly
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 — even if their total does not exceed $1,500.
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-INT or 1099-DIV 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.
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.
Golding & Golding, A PLC
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo and various Law Journals nationwide.
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