There are many information forms associated with international taxes and we are not sugar-coating this — they are complicated. To add to the angst, failure to file these forms or not file them on time can incur hefty penalties.
In another article, we will discuss the various compliance programs you may be eligible to participate in. We like to lay out all of the scenarios regarding penalties to our clients up front, so they know what we are potentially dealing with.
To get started, we will focus first on the very basics, your federal tax form, whichever version of Form 1040 that you are required to file. Many of us are familiar with this form, however we are going to go into more detail from an international tax perspective.
As in any case, if you have questions about why information to include on your tax forms regarding international transactions, please reach out to me.
1040/1040-SR – Schedule B
Individuals who meet the requirements set out by the Internal Revenue Service are required to file income tax returns on a yearly basis. The requirements can be found on the IRS’ page for 1040 Instructions.
This requirement is completed by filing a 1040 or a 1040A. Typically, taxpayers must fill out and attach Schedule B to their income tax return (1040/1040A) if they had any interest or dividends regardless of whether the source was foreign or domestic.
If the taxpayer had a foreign account or received a distribution from, created or contributed to a foreign trust, they are required to complete section III of Schedule B. Section III consists of two questions (four if you count subparts). These four “simple” questions lead to a world of confusion.
1040 Schedule B — Question 7a
The first question of Section III on Schedule B is Question 7a. Question 7a requires you to report if you had a financial interest or signature authority over a financial account in a foreign country. The definition of “foreign country” does not include U.S. territories. The term financial account includes but is not limited to:
- Securities, brokerage accounts
- Savings accounts
- Demand accounts
- Checking accounts
- Deposit accounts
- Time deposit accounts
- Other accounts maintained with a financial institution or other person performing the services of a financial institution.
- Commodity accounts
- Futures accounts
- Options accounts
- Insurance policies with cash value
- Shares in mutual funds or similar pooled funds
1040 Schedule B — Question 7a Line 2
If you answer “yes” to the first part of question 7a, you are then asked if you are required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR.) A logical person would probably search the IRS’s incredibly well-developed website for Form 114. This would leave the taxpayer confused.
While there are vague references to the form on the IRS site, the form itself is not there because it is not an IRS form. FinCEN is officially known as the Financial Crimes Enforcement Network. It is a separate division of the Department of Treasury. FinCEN’s mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.
FBAR is designated as Form 114 in the FinCEN system.