Is Form 8621 is Required even if there are No Distributions?
Form 8621 is a form required for individuals to file when they have a PFIC (Passive Foreign Investment Company).
PFIC is an interesting area of law, because the term Company is a misnomer. You do not need to have a foreign “company” to be required to file a form 8621.
We have blogged about PFIC often, because it is a very confusing area of law. It includes having to report foreign mutual funds (even though they are not in your “company”) and it includes fractional ownership of a PFIC (there is no 10% requirement as most forms such as a 5471 or 8865).
One of the biggest questions we receive is whether the form must be filed when there are no distributions. The answer is usually, yes.
Form 8621 Brief History
In years past, the IRS did not require a form 8621 to be filed unless there were distributions. A few years back, the IRS determined that too many individuals are hiding money offshore using PFIC (holding companies) which do not need to be registered under the person’s name in many foreign countries — which is a common way to hide money. It used to be common in the Cayman Islands until 2009 when shares required to be registered.
As a result, in 2012 the IRS issued updated rules requiring individuals to report PFICs, whether or not there were any distributions made from the PFIC. Thus, if you have foreign investments that are considered to be a PFIC, you must report the investments whether or not there are distributions. The IRS has provided for certain exemptions/exclusions depending on the value of the foreign mutual funds you own ($25,000/$50,000), but the general rule is that the form must be filed.
My CPA Told me Not to Worry About it
There are many general CPAs online trying to sell their services as an international tax CPAs as a “great alternative to using an attorney.” Why? Because the CPAs charge significantly less. With that said, we have received numerous inquiries from individual who first spoke to a CPA and then informed us that the CPAs are charging significantly less for the “same services.”
Once we realize the client has PFIC issues, we inquire as to whether the CPA’s significantly reduced fee is going to include preparing form 8621 (which is a relatively difficult form) as part of the package.
On multiple occasions we were told the CPA stated (you know who you are, because you keep trying to steal our Ad Copy) “there is no need to file form 8621 because the IRS will not ask for it, and there are no penalties associated with it.”
This is false…and dangerous for three reasons.
1. Perpetual Statute of Limitations
If you do not file the form 8621 with your tax returns, then the IRS is stated that a tax return is not complete. If a tax return is not complete, then it is “incomplete,” and therefore the statue limitations does not begin to run. In other words, your tax return remains open indefinitely because the form has not been filed. Moreover, the IRS will make the argument at the time of audit that even though it is just the 8621 that was not filed, the entire tax return is incomplete — and therefore the entire tax return should be subject to audit.
2. Congratulations, You Are Now Willful
If you knowingly do not file certain forms you know you are required to file, then you are willful. Thus, if your streamlined application is audited and the IRS agent asks about form 8621 and learns you knew you were supposed to file it but didn’t – you may be subject to willful penalties. Moreover, that behavior is considered criminal and there is no confidentiality with your CPA in any criminal inquiry involving an IRS audit. Therefore any communications you had with your CPA (aka agreeing to knowingly not filing a form) is fair game to the IRS.
3. Penalties 8938
A hyper-technical reading of the language involving filing the form 8621 reveals that the IRS could route penalties through form 8938, and therefore the failure to file form 8621 could lead to penalties under form 8938 — reaching upwards of $60,000 just for 8938 penalties alone.
Golding & Golding, A PLC
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.