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Form 1040-B is usually required when a taxpayer has over $400 of interest or dividends. However, part III of this form must be completed even when it is not necessary to detail the source of interest and dividends received. Part III must be completed by U.S. citizens and residents who have any interest in a foreign trust or any authority over a foreign financial account.
Parts I and II of Schedule B are used to report interest and dividend income. Part III is used to disclose the existence of any foreign accounts over which the taxpayer has an interest or any signatory authority or to report the existence of a foreign trust in which the taxpayer is a grantor or a beneficiary that has received any kind of distribution.
Question 7a and 7b of Part III require the disclosure of an "interest in or signature or other authority over a financial account in a foreign country", as required by the instructions to Form TD F 90.22.1 . Further details are provided in the explanation of that form, but generally, the answer to question 7a only applies where the total of all foreign accounts exceeds $10,000 at any time in the taxable year.
Part III, question 8 asks if the taxpayer received a distribution from a foreign trust or was the grantor or a transferor to a foreign trust, which will usually require the filing of Form 3520.
Schedule B is a part of Form 1040 and is due at the same time.
It is filed with Form 1040.
Part III should only take a few moments to complete.
A failure to respond to these questions if they apply may result in filing an incomplete return which would prevent the return from being a timely filed return and hence would be subject to examination for up to six years instead of three years after filing. In addition, there are severe penalties for a failure to file Form TD F 90-22.1 and/or the Foreign Trust Form 3520.
In most cases, the grantor of a foreign trust will be required to respond to both question 7 and 8, whereas the U.S. beneficiary of a foreign trust may only be required to respond to question 8. If a taxpayer has an interest in a foreign corporation, the taxpayer may be deemed to have "authority" over a foreign account, even though a foreign agent may have custody of the funds. An officer or director of a foreign corporation with signatory authority or control over any foreign account will be required to respond affirmatively.
In the context of a variable life insurance policy issued by a foreign company, we believe the segregated account represents a "financial account" even though the policy owner has no direct authority over any transactions within the account.