There is a lot of misinformation about the filing requirements for IRS form Schedule B. You must file Schedule B with your tax return when the total U.S. interest and dividends you earn exceeds $1,500. In addition, if you have ownership interest in any foreign accounts, you must also file a Schedule B, even if you do not meet the $1,500 threshold in your foreign account.
Schedule B is generally used to identify interest and dividend income and is filed with your IRS tax return by April 15. When the source of the dividends and interest are from the United States, then the form is only required when the total amount earned exceeds $1,500. If the amount does not exceed $1,500 (excluding foreign accounts), then the interest income is identified on page 1, line 8 of your IRS Form 1040 tax return.
If you have foreign accounts, the rules change.
When you have foreign accounts, there are various forms that you may need to file. For example, if you have a foreign trust, you must file IRS Form 3520. If you have a foreign business, you must file IRS Form 5471. If you have foreign bank accounts, you must file IRS Form 8938.
While many reporting requirements have filing thresholds, the same is not true with Schedule B. With Schedule B, you are required to file the form if 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.”
Failure to file Schedule B will result in an incomplete tax return, which can lead to bigger problems in the future. The IRS may reject your tax return and you may be subject to penalties and interest.
If you did not file Schedule B and you did not disclose your dividends and interests from domestic earnings, then there will probably be no issue in amending your tax return.
Did you simply not file Schedule B although you had foreign accounts? If so, you did not “affirmatively” conceal ownership of your foreign accounts. Thus, you may be able to amend your tax return to include a proper Schedule B.
On the other hand, did you file a Schedule B for your domestic accounts but not disclose your foreign accounts? Did you affirmatively answer on your Schedule B that you did not have any interest or signatory authority over a foreign financial account, when you actually did? The IRS would consider this an outright lie and therefore, it will not be as easy to amend your Schedule B, due to potential silent disclosure issues. Silent disclosure is when you try to amend your tax returns and disclose foreign accounts that you did not disclose previously, in order to avoid penalties that accompany untimely disclosure of foreign accounts.
Before amending the tax return, you must also consider whether you were required to file two other tax forms: IRS Form 8938 and FBAR.
IRS Form 8938 is a tax return form that you file when you have either $50,000 in a foreign account on the last day of the year or, if at any point during the year, you had more than $75,000 in such an account. For married couples, the threshold is $100,000 and $150,000, respectively.
The reason why this is so important is because there are hefty fines for failing to file Form 8938, which can reach tens of thousands of dollars. The IRS provided some guidance and indicated that the following penalty may apply, per year and per 8938 form:
“Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply.”
If you were required to file Form 8938 but did not do so, then amending Schedule B and including 8938 forms may result in penalties, since you would basically be announcing to the IRS that you did not disclose your foreign accounts to them before.
The Foreign Bank Account Report (FBAR) is a separate form that is filed electronically with the Department of Treasury. You must use this form to disclose your foreign accounts to the government if you have an annual aggregate total of $10,000 or more in foreign accounts. The form is due by June 30 each year.
The FBAR is filed directly with the Department of the Treasury and not the IRS. There are very hefty fines for failing to file an FBAR, and the FBAR filings are intertwined with the requirement to file Schedule B and disclose your foreign accounts. According to the IRS, your penalties may include, per year:
“If non-willful, up to $10,000; if willful, up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply.”
If you filed the FBARs but failed to file Schedule B, it is much easier to fix this issue than if you did not file both. If you did not file FBARs and a Schedule B or did not file the FBAR and misrepresented your foreign accounts on Schedule B, then you should contact a tax attorney to discuss the potential penalties and courses of action.
With the new FATCA (Foreign Account Tax Compliance Act) in full effect, the IRS is taking a much more aggressive position against taxpayers who fail to comply.