PFIC Reporting Requirements: What does the IRS Require? (Golding & Golding, Board-Certified Tax Specialist)

PFIC Reporting Requirements: What does the IRS Require? (Golding & Golding, Board-Certified Tax Specialist)

PFIC Reporting Requirements: When a person has a PFIC reporting requirement, they may have to file an IRS 8621 form. While the form is used to report PFICs, the requirements vary based on the various factors. In addition, there are various exceptions and exemptions

What are the Tax Return PFIC Reporting Requirements

A PFIC is a Passive Foreign Investment Company that involves certain deferral of tax rules, and which culminates in a heavy tax liability in the future. PFIC Reporting rules require a careful analysis of U.S. Tax, CFC (Controlled Foreign Corporations) and Attribution. U.S. Shareholders may be able to make certain elections (QEF or MTM).

The PFIC reporting requirements will vary based on a U.S. persons overseas investments. If IRS PFIC reporting requirements, there are negative consequences.

Why?

Because the IRS wants to tax you on the accrued and non-distributed growth – but it’s too hard for them to track.

The IRS has limited resources. Moreover, foreign companies and funds generally do not issue 1099 or 1099 equivalents, and the IRS has no idea how much the growth really is.

So they take a step back, ramp up enforcement, and figure they’ll get it on the back-end — when the money is distributed from the PFIC.

What is the Form 8621?

The Form 8621 is used to report Passive Foreign Investment Companies (PFIC). The form is required by U.S. shareholders with an ownership or interest in the foreign company. Some examples include BVIs and foreign mutual funds.

What are the Reporting Requirements?

PFIC reporting requirements are complex. They involve the annual disclosure of various aspects of the PFIC. This may include:

  • Date of purchase(s)
  • Value
  • Number of shares
  • Amount of income
  • Excess distribution calculation

PFIC Exceptions

Three of the more common exceptions include:

CFC overlap rule

“A 10% U.S. shareholder (defined in section 951(b)) that includes in income its pro rata share of subpart F income for stock of a CFC that is also a PFIC generally will not be subject to the PFIC provisions for the same stock during the qualified portion of the shareholder’s holding period of the stock in the PFIC. This exception does not apply to option holders. For more information, see section 1297(d).”

Chain of Ownership

“In general, an indirect shareholder that is not the first U.S. person in the chain of ownership is not required to complete Part I unless the indirect shareholder:

• Is treated as receiving an excess distribution from the PFIC;

• Is treated as recognizing gain that is treated as an excess distribution as a result of a disposition of the PFIC;

• Is required to include an amount in income under section 1293(a) with respect to the PFIC, unless another shareholder through which the indirect shareholder owns the PFIC files under section 1298(f) with respect to the PFIC and no other exception applies;

• Is required to include an amount in income under section 1296(a) with respect to the PFIC, unless another shareholder through which the indirect shareholder owns the PFIC files under section 1298(f) with respect to the PFIC; or

• Is required to report the status of a section 1294 election with respect to the PFIC. “

If aggregate value of shareholder’s PFIC stock is $25,000 or less

“A shareholder is not required to complete Part I with respect to a specific section 1291 fund if the shareholder meets the $25,000 exception on the last day of the shareholder’s tax year.

For purposes of determining whether a shareholder satisfies the $25,000 threshold, the shareholder takes into account all PFIC stock (QEFs, section 1291 funds, and PFIC stock subject to a section 1296 mark-to-market election) owned directly or indirectly other than PFIC stock owned through another U.S. person or PFIC stock owned through another PFIC.

Shareholders filing a joint return have a combined threshold of $50,000 instead of $25,000 for purposes of this exception.”

Exemptions to PFIC Reporting

As provided by the IRS instructions:

A shareholder is exempt from completing Part I if it meets one of the exceptions described below.

Special rules for estates and trusts

Certain U.S. grantors and beneficiaries of estates and trusts may qualify for an exception to filing Part I.

• A U.S. grantor of a domestic grantor trust is not required to complete Part I if the trust is a domestic liquidating trust or a widely held fixed investment trust, as described in Regulations section 1.1298-1(b)(3)(i). In these circumstances, the domestic grantor trust is required to complete Part I.

• In certain situations, a shareholder who is a member or beneficiary of (or participant in) an arrangement treated as a foreign pension fund under a U.S. income tax treaty that owns an interest in a PFIC is not required to complete Part I with respect to the PFIC.

• A U.S. beneficiary of a foreign non-grantor trust or foreign estate is not required to complete Part I with respect to the stock of the PFIC that is owned by the trust or estate unless it has made a QEF or section 1296 mark-to-market election, received an excess distribution, or recognized gain treated as an excess distribution with respect to the stock of the PFIC. See Regulations section 1.1298-1(b)(3)(iii).

Exempt Organizations

In general, if a shareholder of a PFIC is a tax-exempt organization, the shareholder is required to complete Part I only if income derived with respect to the PFIC stock would be taxable to the shareholder under subchapter F. See Regulations section 1.1298-1(c)(1).

Unreported Prior Year Reporting or Income

If you have unreported prior year issues for prior years coming you should not just begin filing forward. Rather, you should take advantage of what the IRS offshore amnesty programs, while they are still available.

Board-Certified Tax Lawyers – Golding & Golding, A PLC

Golding & Golding represents clients worldwide in over 70-countries exclusively in Streamlined, Offshore and IRS Voluntary Disclosure matters. We have successfully completed more than 1,000 streamlined and voluntary disclosure submissions.

How to Hire Experienced PFIC Counsel?

Generally, experienced attorneys in this field will have the following credentials/experience:

  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • Dually Licensed as an EA (Enrolled Agent) or CPA
  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience

Interested in Learning More about Golding & Golding?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant. 

Golding & Golding specializes in Streamlined Domestic Offshore Procedures. Contact our firm today for assistance with getting compliant.


IRS Offshore Voluntary Disclosure Specialist

IRS Offshore Voluntary Disclosure Specialist

Golding & Golding: Our international tax lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70+ different countries. Managing Partner Sean M. Golding is a Board-Certified Tax Law Specialist Attorney (a designation earned by < 1% of attorneys nationwide.). He leads a full-service offshore disclosure & tax law firm. Sean and his team have represented thousands of clients nationwide & worldwide in all aspects of IRS offshore & voluntary disclosure and compliance during his 20-year career as an Attorney.

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.
IRS Offshore Voluntary Disclosure Specialist