Schedule B Part III: Foreign Accounts and Trusts

IRS Form 1040 Schedule B is used to report interest and ordinary dividend income. However, Part III of the form also plays a role in international tax compliance by addressing foreign accounts and trusts, serving as a checkpoint for U.S. persons to disclose these arrangements. Taxpayers must complete this section if they have over $1,500 of taxable interest or ordinary dividends. Even if this income threshold is not met, Part III must still be completed by any U.S. person who had a foreign account or certain interactions with a foreign trust.

Purpose of Part III Foreign Accounts and Trusts

Part III of Schedule B functions as a disclosure mechanism for the U.S. government, promoting tax transparency and identifying individuals with potential foreign asset reporting obligations. The questions act as a preliminary screening tool, helping taxpayers and the IRS determine if more detailed information returns are necessary.

The core of these questions revolves around “financial interest” and “signature authority.” A financial interest refers to ownership or equity in an account, while signature authority means having control over the disposition of assets in the account through direct communication with the financial institution. Answering “Yes” to these questions does not, by itself, create a tax liability, but it signals that other reporting requirements may apply.

Answering the Foreign Bank Account Questions

Question 7a asks, “At any time during [the tax year], 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?” A “financial account” includes traditional bank accounts plus securities, brokerage, and other types of accounts holding financial assets. The term “foreign country” encompasses all locations outside of the United States and its territories.

A “Yes” answer is required if you hold legal title to or have control over a foreign account. This leads to the second part of the question, which asks if you are required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). This filing requirement is triggered if the total, aggregate value of all foreign financial accounts exceeded $10,000 at any point during the calendar year.

This is an aggregate figure; even if no single account surpasses $10,000, the requirement applies if the combined highest balances of all accounts do. Question 7b then requires the taxpayer to list the name of each foreign country where a financial account is located.

Answering the Foreign Trust Question

Question 8 of Part III addresses relationships with foreign trusts. It asks, “During [the tax year], did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust?” This question is designed to identify U.S. persons with specific connections to these entities.

To answer accurately, one must understand the key terms. A “foreign trust” is any trust that a U.S. court cannot exercise primary supervision over. A “distribution” is any payment received from the trust, and a “grantor” or “transferor” is the individual who created the trust or transferred property to it.

If a taxpayer received money or property from a foreign trust, created one, or moved assets into one during the year, they must check “Yes.” A “Yes” answer suggests a potential requirement to file Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.

Filing Requirements Triggered by a “Yes” Answer

Answering “Yes” on Schedule B, Part III, may trigger the need to file additional informational returns. For those with an FBAR requirement, FinCEN Form 114 is not filed with a federal income tax return. It must be submitted electronically through the Financial Crimes Enforcement Network’s (FinCEN) BSA E-Filing System. The annual deadline for the FBAR is April 15, but an automatic extension to October 15 is granted.

For trust-related issues, Form 3520 is filed directly with the IRS, and its due date aligns with the filer’s income tax return, including extensions.

In cases where the taxpayer is the U.S. owner of a foreign trust, they may also need to ensure the trust files Form 3520-A. This form is due by the 15th day of the third month after the trust’s tax year ends, which is March 15 for a calendar-year trust. An extension for Form 3520-A requires a separate application, Form 7004.

If the foreign trust fails to file a required Form 3520-A, the responsibility shifts to the U.S. owner. The owner must then complete and attach a substitute Form 3520-A to their own Form 3520, and the due date for the substitute form becomes the same as the due date for the Form 3520.