Check the Box or Face the Tax Penalty! | USTaxAid

Diane Kennedy's Blog

Check the Box or Face the Tax Penalty!

Written by Diane Kennedy, CPA on October 29, 2021

The US Supreme Court recently declined to hear a case. In effect, the penalty stands and it’s all because a taxpayer didn’t check a box on her Schedule B. 

Alice Kimble received a penalty of $700,000 for not reporting her foreign financial accounts. She had Swiss accounts at HSBC and UBS in the early 2000s and didn’t realize she needed to report those accounts. In 2008, she discovered she should have file her return.

Luckily, she thought, the IRS introduced an amnesty program called the Offshore Voluntary Disclosure Program (OVDP) in 2009. This allowed taxpayers who had missed the filing to catch up with amended tax returns. Unfortunately, she missed checking one box on the return. Schedule B has a box that you need to check if you have foreign financial accounts.

One little box.

She missed it. Unfortunately, it’s one of the most common mistakes US taxpayers make. If you have an investment in a foreign account, no matter how much, you need to check it. If you have an investment in a mutual fund that includes foreign accounts (evidenced because you have foreign tax credits), you need to check it. 

Unfortunately, Alice Kimble missed it when she filed her return herself.

The IRS said that cost her $697,229 (almost $700,000). There was no tax due. She just missed the box. She sued for recovery in the Court of Federal Claims.

She lost.

She asked the US Supreme Court to hear her case. They declined. She owes the money. 

Schedule B Foreign Investment Account

Schedule B is the form you use to report interest and dividend income. There is a box on there that is truly “check the box”. Check if you have foreign investments. The place that hangs people up sometimes has to do with when you have to check it. You may have foreign investments even if your money is all in your US account and you have invested in foreign stock funds. You may not even know you have because your broker invested you.

The easiest way to tell, in that case, is to look if you have foreign tax that was paid on your behalf and as reported on the Form 1099 you received from your brokerage. 

It’s more serious if you marked “no” to the foreign investments and you had an interest in or signatory authority over a foreign bank or investment account. In that case the IRS considers this an outright lie. 

What If You Haven’t Filed and You Should Have?

If you haven’t properly filed your disclosure for foreign investment accounts such as checking the box on Schedule B, filing the FinCen 114 (if you had $10K or more in aggregate at any point during the year in foreign accounts) or Form 8938 (if you had $50K – $400K or more, depending on circumstances in foreign accounts), it’s not too late.

You can always catch up. It’s a lot easier, and cheaper, if you file before the IRS catches you. Talk to a tax professional as soon as possible to get you current.

What tax tips and filing requirements are you missing? For a limited time, you can subscribe to Strategic Tax Updates FREE of charge. The updates will soon be $99/year but you can subscribe for free now. 

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