Dealing with international investments can be complex, especially when it comes to US tax compliance. This is where understanding Form 8621 filing requirements becomes essential for US taxpayers with interests in Passive Foreign Investment Companies (PFICs).

What is Form 8621?

Form 8621, officially known as the “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund,” is a tax form used by U.S. persons who own shares in a Passive Foreign Investment Company (PFIC). The primary purpose of Form 8621 is to report income, gains, distributions, and other details related to PFIC investments to the Internal Revenue Service (IRS).

Form 8621 is essential for ensuring that the IRS is aware of U.S. taxpayers’ interests in foreign investments and can properly tax the income derived from these investments.

What is a Passive Foreign Investment Company (PFIC)?

A PFIC is any foreign corporation that meets either of the following criteria:

1. ​At least 75% of its gross income is passive income, such as interest, dividends, or capital gains.
2. At least 50% of its assets produce or are held for the production of passive income.

These criteria indicate a significant portion of its income is passive, or its assets primarily produce passive income. This could include foreign mutual funds, hedge funds, or other investment companies primarily generating income from dividends, interest, royalties, or rent.

Form 8621 Filing Requirements: Who Needs to File?

The IRS requires certain US individuals and entities, classified as “US persons,” to file Form 8621. These filing requirements apply if they meet specific criteria related to their PFIC investments. You are generally considered a US person for tax purposes if you are a US citizen, resident alien (Green Card holder), or a US entity like a corporation or partnership.

Form 8621 filing requirements begin when certain events occur, even if the value of your PFIC holdings is relatively small. Here are 5 events that you should be aware of:

1. Receiving Distributions

If you receive distributions from your PFIC, such as dividends or interest payments, it triggers a reporting obligation. This is required irrespective of whether the PFIC is classified as a Qualified Electing Fund (QEF) or not.

2. Recognizing Gain

Selling or disposing of PFIC stock, resulting in a gain, requires you to report these transactions. This includes indirect distributions where you sell an interest in a foreign entity that holds PFIC stock.

3. Qualified Electing Fund (QEF) or Mark-to-Market Election

If you’ve chosen to treat your PFIC as a QEF or have made a mark-to-market election, specific reporting obligations come into play.

4. Making Election Reportable

Making certain elections related to your PFIC, such as deemed sale or deemed dividend elections, require reporting on Form 8621.

5. Annual Reporting Requirement (Section 1298(f))

Starting in 2013, the IRS introduced an annual reporting requirement for PFICs. Even if none of the events above occur, you are still required to file Form 8621 to report your PFIC holdings. This applies if you meet specific ownership thresholds.

Form 8621 Filing Requirements

Form 8621 must be filed by U.S. persons who own shares in a Passive Foreign Investment Company (PFIC). The form requires detailed information about the PFIC investment, including income, gains, and distributions received during the tax year. The purpose is to ensure that all relevant income and gains from foreign investments are reported to the IRS.

When completing Form 8621, the following information must be provided:

• General information about the PFIC, including its name, address, and identifying number
• Details about the PFIC shares owned, including acquisition dates and costs
• Income, gains, and distributions received from the PFIC during the tax year
• Information about any elections made regarding the PFIC (detailed below)

3 Main Reporting Methods for PFIC Investments

There are three main reporting methods for PFIC investments: the Qualified Electing Fund (QEF) Election, the Mark-to-Market Election, and the Excess Distribution Method. Each method has different implications for how income and gains are reported and taxed.

1. Qualified Electing Fund (QEF) Election

The QEF Election allows investors to include their share of the PFIC’s earnings and net capital gains in their income each year, regardless of whether they actually receive any distributions. This method requires the PFIC to provide an annual information statement to the investor.

• Advantages: Can reduce the tax burden by spreading out income recognition over time.
• Disadvantages: Requires detailed information from the PFIC, which may not always be available.

2. Mark-to-Market Election

The Mark-to-Market Election allows investors to report the annual change in the fair market value of their PFIC shares as ordinary income or loss. Gains are reported as ordinary income, and losses are reported to the extent of previously recognized gains.

• Advantages: Simplifies the reporting process and avoids the complexities of excess distribution calculations.
• Disadvantages: Gains are taxed at ordinary income rates, which may be higher than capital gains rates.

3. Excess Distribution Method

The Excess Distribution Method is the default method for reporting PFIC income. Under this method, distributions from the PFIC are divided into two parts: a portion that is treated as ordinary income, and an excess distribution, which is subject to a complex set of rules and potential interest charges.

• Advantages: Does not require detailed annual information from the PFIC.
• Disadvantages: Can result in higher tax liabilities due to the interest charge on excess distributions.

Understanding these reporting methods and choosing the most appropriate one for your situation is essential for proper compliance with PFIC rules and minimizing your tax burden.

De Minimus Exception

A common misconception is that all PFIC ownership requires filing Form 8621. However, an important exception exists called the “de minimis” exception. It applies if the total value of your PFIC holdings is below a certain threshold.

If your ownership falls under this exception and you have not made any specific elections, you may be exempt from the annual filing requirement under Section 1298(f). For tax year 2023, this exception applies if the total value of your PFICs is less than $25,000 for individuals filing as single or married filing separately, or less than $50,000 for married couples filing jointly. 

However, if distributions or gains are received, filing is still required regardless of these thresholds.

It’s similar to exceeding the minimum filing requirement for regular income tax, but with international investments. However, if you’ve received distributions or realized gains from your PFICs, you must file Form 8621 even if the value of the holdings is under these amounts.

How to Complete Form 8621

Completing Form 8621 involves several steps, each corresponding to different parts of the form. Here is a detailed guide to help you through the process:

Part I: General Information

In this section, you will provide basic details about yourself and the PFIC. This includes:

• Your name, address, and taxpayer identification number (TIN).
• The PFIC’s name, address, and identifying number.
• The type of PFIC stock you hold and the number of shares.
• The date you acquired the shares and the total value of your PFIC holdings.

Part II: Summary of Annual Information Statements

Here, you will summarize the information provided by the PFIC in its annual statement. This includes:

• The PFIC’s earnings and profits for the year.
• The total distributions received from the PFIC.
• Any excess distributions and the number of days in your holding period.

Part III: Income from a Qualified Electing Fund (QEF)

If you have made a QEF election, this section will be used to report your share of the PFIC’s earnings. You will need to:

• Report ordinary earnings and net capital gains from the PFIC.
• Include any previously taxed income distributions and adjustments to basis in PFIC stock.

Part IV: Gains from Mark-to-Market Election

For those who have made a mark-to-market election, this section is used to report the annual change in the fair market value of PFIC shares:

• Report the fair market value of the PFIC shares at the beginning and end of the tax year.
• Calculate the difference to determine the gain or loss.
• Include this gain or loss as ordinary income.

Part V: Excess Distributions

If you have received any excess distributions, this section will help you calculate the tax due:

• Report the total amount of excess distributions.
• Calculate the portion attributable to each year of your holding period.
• Determine the interest charge on the deferred tax from excess distributions.

Common Mistakes to Avoid When Filling Out Form 8621

Filling out Form 8621 can be complex, and there are several common mistakes to watch out for:

• Incorrect General Information: Ensure that all identifying details for both you and the PFIC are accurate.
• Missing Information: Double-check that you have included all required details, especially in Parts II through V.
• Incorrect Calculations: Pay close attention to calculations in the QEF, mark-to-market, and excess distribution sections.
• Overlooking Elections: Make sure any elections (QEF or mark-to-market) are correctly reported and supported by the necessary documentation.
• Late Filing: File the form on time to avoid penalties and interest charges.

By following these steps and avoiding common mistakes, you can ensure that Form 8621 is completed accurately and submitted in compliance with IRS requirements. 

If you have any doubts or complex situations, it is advisable to seek professional assistance from a tax advisor or CPA.

Understanding PFIC Reporting Thresholds

Determining whether your PFIC holdings exceed the reporting threshold involves valuing your PFIC stock. This generally involves looking at the fair market value at the end of your taxable year. If your PFIC is denominated in foreign currency, select a reasonable exchange rate.

Penalties for Not Filing

Failing to meet Form 8621 filing requirements can result in penalties. You may face an accuracy-related penalty, which can be 40% of the underpayment of tax attributed to your PFIC. This is concerning when you consider the potential complexity of PFIC tax calculations.

Additionally, the IRS might treat your tax return as incomplete without Form 8621. An incomplete tax return could leave you open to audits indefinitely. This is one reason why many taxpayers choose to work with a qualified tax professional to help them avoid costly mistakes or penalties.

Navigating Offshore Tax Compliance

If you haven’t met past filing deadlines, the IRS offers offshore amnesty programs. One example is the Streamlined Procedure for non-willful violations. This option allows taxpayers with offshore reporting delinquencies to comply with reduced penalties.

The IRS is paying close attention to Streamlined Procedure submissions these days, especially in light of concerns about potential fraud. That’s why seeking guidance from an experienced tax attorney specializing in international tax compliance is important. An expert can help you avoid any potential issues and ensure you meet all Form 8621 filing requirements.

Conclusion

Meeting Form 8621 filing requirements is a critical part of managing your international investments as a US taxpayer.

This complex area of tax law deserves careful consideration. Seeking assistance from a tax professional with expertise in expat tax, such as Dimov Tax and CPA Specialists, can provide valuable support.

Our knowledge in this area can help you understand your obligations and file prior year or current year returns. Contact us today to speak with a qualified tax professional.