Form 8621

Form 8621

Form 8621

 The IRS requires U.S. owners of a PFIC to report ownership of their passive foreign investment companies on Form 8621. Common examples include foreign mutual funds and holding companies.  In recent years, the IRS has aggressively increased enforcement of offshore reporting. In general, the Internal Revenue Service requires owners of offshore accounts, assets, investments, and income to report annually on various different formsThe Form 8621 is one of the more difficult international information returns.  This difficulty is compounded when a filer also has excess distributions.  If the taxpayer does not file the forms, the IRS may issue various fines and penalties. These penalties can be mitigated with the IRS tax amnesty programs, collectively referred to as offshore disclosure.

IRS Form 8621 Filing Requirements

The 8621 form is technically called “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund” and is used in situations in which a person has a PFIC (Passive Foreign Investment Company).  The failure to file this form may carry one of the stiffest penalties possible – an incomplete tax return, which means that the IRS could feasibly audit the return forever. That leaves your return subject to several different penalties. As you can imagine, there is some major complexity with form 8621. This is not a guide and we highly recommend that you do not rely upon it in preparing your form (Read: it is one of those forms in which you should have a tax practitioner prepare for you).

Foreign Investments Reported on Form 8621

A foreign corporation is a PFIC if it meets either the income or asset test described below:

      • Income Test

        • 75% or more of the corporation’s gross income for its taxable year is passive income (as defined in section 1297(b)).

          • Example: If you have a foreign corporation that earns all of its income from investments such as investing in stocks, securities, ETF’s, etc. and the income is all generated as a result of passive means, then it would be considered a PFIC under the income tax. To contrast this, if you own your own consulting firm that is a corporation and you earn all of the income due to your consulting skills, then you are earning “earned income” and would probably be able to sidestep the PFIC moniker – absent other facts.

      • Asset Test

        • At least 50% of the average percentage of assets (determined under section 1297(e)) held by the foreign corporation during the taxable year are assets that produce passive income or that are held for the production of passive income.

          • Example: You have a foreign corporation that does little more than hold foreign real estate which generates passive income. The rental income is passive income and the assets within the corporation that are generating passive income are at least 50% of the assets (in this example, all of the real estate held in the Corporation is used to generate passive income). This would probably be a PFIC, because at least 50% of the assets are being used to generate passive income.

Threshold for Reporting PFIC

Back in 2012, the rules changed and all PFICs have to be reported each year when the threshold requirement is met – whether or not any income was distributed. There are minimum threshold requirements, which will vary depending on whether the person is filing single or married filing separately versus jointly. The person who is single or married filing separately has to file form 8621 in any year that their total number of PFICs exceeds $25,000. Therefore, if you have one PFIC worth $50,000 or eight PFICs worth $5,000 each, these would meet the threshold requirements under either alternative and all PFICs would have to be reported. But for example, if a person only had one PFIC and it was only worth $19,000, then generally, unless there were distributions, it may not have to be reported. The same concept goes for individuals filing married filing jointly, if combined they have more than $50,000 in PFIC ownership.

*There is a discrepancy between the Regulation and Instructions as to whether Form 8621 (Pre-Part I) is required when a Taxpayer is below the 25K/50K with no distributions.

A Beginner’s Guide to 8621 Reporting

We have developed an introductory guide to supplement the Form 8621 Instructions.

How Many PFICs Do You Have?

Determine the total number of PFICs and what the total value is in the year. You are permitted to use any reasonable exchange rate, but most people use either the published Department of the Treasury exchange rates or the published IRS exchange rates – both of which are available online.

Determine the PFIC Values

Confirm that you exceed the threshold requirements for filing. If you are below the threshold requirements for filing, then confirm that you did not receive any distributions from the PFIC. If you received the distributions, then you have to file the form irrespective of whether you are below the $25,000 or jointly below the $50,000 threshold requirement.

Basic Filer Information

Complete the top portion of page 1, which requests basic information such as:

      • Name of the Shareholder

      • Address

      • Filing Year Of The Shareholder

      • Type Of Shareholder

      • Name And Address Of The PFIC

Summarizing the PFIC

The next step gets a little more complicated. The person is required to provide a basic summary of the annual information required on form 8621. This typically includes:

      • Describing each class of shares held by the shareholder

      • the date the shares were acquired during taxable year

      • the number of shares owned at the end of the year

      • the value of the shares

      • and whether there were any excess distributions or gain

Do You Have an Excess Distribution?

Excess Distributions are complicated. And, even if a person falls below the $25,000/$50,000 PFIC reporting threshold, if there were any “Excess Distributions” the taxpayer would still have to report the PFIC. 

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR, FATCA, PFIC and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.