Primer on Schedule B, Foreign Accounts and Willful/Non-Willful

Court Denies Schedule B Willfulness Summ. Jdg. FBAR Motion

Understanding Schedule B and Foreign Accounts

U.S. taxpayers who have foreign accounts, assets, or investments may have several different types of international information reporting forms that have to be filed each year to disclose their interest in foreign money to the IRS and FinCEN.  Some of the more common foreign tax forms that the taxpayer may be familiar with include:

• • • FBAR

    • Form 8938

    • Form 3520

    • Form 5471

    • Form 8865

    • Form 8621

One less common but equally important tax form for foreign account disclosure is Form 1040 Schedule B. Schedule B is less known for FBAR and Form 3520 reporting because Schedule B is primarily used to report interest and dividends. However, there is another aspect of filing Schedule B which is to report foreign accounts and foreign trust ownership/distributions. Let’s walk through the basics of Schedule B as well as briefly summarize a recent court case that limits the government’s ability to frame certain Schedule B issues as de facto willful.

What is Schedule B for Form 1040?

The Schedule B Form that is part of the IRS 1040 tax return is a very unassuming international tax form. The title of the form is ‘Interest and Dividends’ — and does not refer to foreign accounts. Thus, it is understandable that many taxpayers who fall below the interest and dividend threshold requirements for having to file a Schedule B would be blissfully unaware of the foreign account/trust aspect of Schedule B. It is not until the taxpayer gets to the bottom third of the page that they may learn for the first time they are required to file this form even if they are not required to file an FBAR or Form 8938.

Part III Foreign Accounts and Trusts

Schedule B, Part III Provides the following statement regarding foreign accounts and trusts:

• • • “You must complete this part if you (a) had over $1,500 of taxable interest or ordinary dividends; (b) had a foreign account; or (c) received a distribution from, or were a grantor of, or a transferor to, a foreign trust.”

What is very important about these statements, is that the taxpayer does not have to have more than $1,500 of taxable interest or dividends to file the form. Rather, even if the taxpayer has ownership or signature authority over a foreign account, they are required to file Schedule B to disclose their ownership/signature authority interest — even if ultimately, they are not required to file the FBAR.

Question 7, Schedule B (Foreign Accounts)

Question 7 of Schedule B has two subparts:

• • • “At any time during 2023, did 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? See instructions

      • If “Yes,” are you required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), to report that financial interest or signature authority? See FinCEN Form 114 and its instructions for filing requirements and exceptions to those requirements.

    • If you are required to file FinCEN Form 114, list the name(s) of the foreign country(-ies) where the financial account(s) is (are) located.”

Thus, taxpayers who have an ownership or signature authority in a foreign account are required to file a Schedule B, even if they do not have the file the FBAR.

Question 8 of Schedule B (Foreign Trusts)

Question 8 on Schedule B refers to distributions/ownership of from foreign trusts

• • • “During 2023, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If “Yes,” you may have to file Form 3520.”

Failure to File Schedule B for Foreign Accounts is Not Fatal

When a person fails to file a Schedule B — and especially in a situation in which they have foreign accounts and were required to file the FBAR — they may become subject to penalties if they did not file the FBAR. However, it is important to note that just because a person did not file Schedule B and/or filed the form incorrectly does not mean that the person is willful or unable to establish reasonable cause.

Court Rejects Government’s Schedule B FBAR Willfulness Motion

In the recent 2024 case of Saydam, the Taxpayer was required to file an FBAR (but did not do so) and also did not identify in his Schedule B that he had foreign accounts. The government used this fact as primary support for its motion for summary judgment, but the court disagreed and rejected the motion.

The IRS, Schedule B, FBAR & Streamlined FAQ 13

It is very important to note, that the IRS does not always take the position that just because a taxpayer fails to file Schedule B or files it incorrectly they are willful. In fact, as part of the Streamlined Filing Compliance Procedures (IRS procedures used by taxpayers who are non-willful but have unreported foreign accounts, assets, or investments to report their foreign accounts) the Frequently Asked Questions confirms that an incorrect Schedule B is not dispositive of willfulness.

As provided by the IRS Streamlined FAQ:

• • • “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.”

Thus, just because a Taxpayer’s Schedule B has errors does not mean they are willful.

U.S. vs Saydam (22-cv-07371-DMR)

Let’s look at some of the key excerpts from the argument and the court ruling:

• • • “Plaintiff argues that Defendant’s Schedule B forms demonstrate a willful violation of the statute. From 2014 to 2017, Defendant filed Schedule B forms through tax preparing services at H&R Block. Tuncay Dep. 159:3-162:19. Question 7a of Schedule B asks: “At any time during [the tax year], did you have a financial interest in or signature authority over a financial account . . . located in a foreign country?” From 2014 to 2017, Defendant filled out “No” for this question. Saydam Tax Returns. Defendant does not dispute that he signed and filed the tax returns under penalty of perjury. Tuncay Dep. 162:6-19, 164:7-13, 166:25-167:4. He also does not dispute in his opposition brief that his answers to Question 7a were false.

  • • However, he argues that the Schedule B forms do not demonstrate a willful violation because the H&R Block tax preparers never asked him about foreign accounts, so he was not aware that his foreign accounts were relevant to his U.S. tax returns. Opp’n 16-19. The Government responds that Defendant cannot genuinely dispute that H&R Block failed to ask him about his foreign accounts, because all three of Defendant’s H&R Block tax preparers testified that they always ask their clients about foreign accounts before filling in the Schedule B form. Reply 2-6. And even if there were a genuine dispute, the Government argues that H&R Block’s conduct is not material, because the fact that Defendant signed and filed the tax returns is sufficient in and of itself to demonstrate willfulness.”

  • • Defendant also attacks the credibility of the H&R Block employees who prepared Defendant’s tax returns. Although the employees testified that they always ask their clients about foreign accounts before filling in the Schedule B form, there is no record of exactly what they asked Defendant, and none of the individuals involved remember the details of Defendant’s appointments. [Docket Nos. 34-3 (Linda Dunn Dep.); 34-4 (German Gomez Dep.); 34-5 (Morris Rorer Dep.).] None of the employees are qualified to prepare returns related to foreign income. Defendant testified that each appointment took “at most 20 minutes,” he would rely on the tax preparer to fill in the requisite forms, and he would only briefly review the tax return for the “numbers that we owed.” Tuncay Dep. 159:3-160:1.

  • • While this evidence could support a finding that the tax preparers asked Defendant about his foreign accounts and that he acted willfully in failing to disclose them, the Court is “not entitled to weigh the evidence and resolve disputed underlying factual issues.” See JUUL Labs, Inc. v. Chou, 557 F.Supp.3d 1041, 1056 (C.D. Cal. 2021) (citing Chevron Corp. v. Pennzoil Co., 974 F.2d 1156, 1161 (9th Cir. 1992)). A reasonable jury could conclude that Defendant’s signed tax forms, which were the product of short and routinized oral interviews conducted by the H&R Block employees, are insufficient to establish willfulness. Reasonable jurors could differ on whether Defendant’s failure to review his Schedule B or consult with a specialized foreign income tax preparer demonstrates willfulness or mere negligence.”

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.