Contents

PFIC & CFC Overlap – IRS Foreign Company Filing Requirements

PFIC & CFC Overlap – IRS Foreign Company Filing Requirements (Golding & Golding)

PFIC & CFC Overlap – IRS Foreign Company Filing Requirements (Golding & Golding)

When it comes to international tax, and IRS filing requirements for  U.S. Shareholders of foreign companies — there are two main headaches. The first is PFIC (Passive Foreign Investment Companies) and the second is CFC (Controlled Foreign Corporations).

In reality, there are many headaches involving international tax (repatriation tax, GILTI, treaty rules, FATCA, etc.) but today’s focus will be on PFIC and CFC overlap, since it impacts many of our clients.

General PFIC Rules

A PFIC is a Passive Foreign Investment Company. If you own or have interest in a PFIC, you may be subject  to very burdensome and onerous tax and reporting rules; it depends.

PFIC Test

As defined by the IRS:

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)).

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.


PFIC Example 1: Not So Bad

-You are Married Filing Jointly

– Your PFIC is due to ownership in foreign mutual funds

– Total value of PFIC is under $50,000

– No Income Distribution

In this scenario, since you are below the $50,000 exemption for married couples who have no income distributions from a PFIC, your tax and reporting is not that bad.

PFIC Example 2:  Bad

– You are Married Filing Jointly

– Your PFIC is mix of Investment Funds and ownership of a Foreign Company (possibly a BVI that holds a Hong Kong Ltd.) that you use to aggregate all your passive investments under one roof.

– Total value of the PFIC is $1,300,000

– The PFIC generates all different types of income. Some is distributed in some years, and not in other years.

In the second scenario, you are above the $25,000/$50,000 exclusion and income is being distributed. Therefore, for each bucket of income, for each year, you have to perform an Excess Distribution calculation – which is a very complicated and detailed analysis.

General CFC Rules

In order to be considered a controlled foreign corporation, the Foreign Corporation must be:

  • Owned more than 50% by U.S. Person(s), and
  • Each U.S. shareholder owns at least 10% ownership (Attribution Rules Apply).

CFC and PFIC Reporting

The reporting rules for CFC and PFICs are different.

PFIC Reporting (Form 8621)

Presuming that the taxpayer has a PFIC and the value exceeds the $25K/$50K exclusion amount, he/she has to file a Form 8621 each year with the IRS. If the form is not filed, then the tax return is not considered complete.

That means that because the return is not considered complete, it extends the time for the IRS to audit the return (which is bad)

CFC Reporting (Form 5471)

A U.S. person does not have to report a CFC, “just to report it.” For example, with the PFIC, even if the U.S. person has no income, if he/she exceeds the $25K/$50K exclusion amount – it has to be reported.

With a CFC, generally, a U.S. Shareholder files a Form 5471, but only if the shareholder meets one of the definitions of being a “Category of Filer” who is required to file the form.

And, sometimes a person may not even be a shareholder but still have to file a Form 5471, and sometimes Form 5471 has to be filed by a U.S. shareholder even if the foreign corporation is not considered a CFC.

In other words, Form 5471 is not limited to just CFC, and even if a person is not a shareholder in a CFC, he or she may still have to file a Form 5471 is they meet the threshold requirement for filing.

What if the CFC and PFIC rules overlap?

The general rules involving the CFC and PFIC overlap are complicated, and can generally be found in section 1297 (Passive Foreign Investment Company)

If a U.S. Shareholder is considered a direct owner of a PFIC and CFC, then usually the CFC rules will trump, so that the PFIC will not become subject to the CFC rules.

In other words, when a person is held to be the owner of a foreign company, and that company meets the definition of being a CFC, then it will not also have to comply with the PFIC rules.

IRS Section 1297 (d): Exception for U.S. Shareholders of CFCs


(1) In general For purposes of this part, a corporation shall not be treated with respect to a shareholder as a passive foreign investment company during the qualified portion of such shareholder’s holding period with respect to stock in such corporation.


(2) Qualified portion: For purposes of this subsection, the term “qualified portion” means the portion of the shareholder’s holding period— (A) which is after December 31, 1997, and (B) during which the shareholder is a United States shareholder (as defined in section 951(b)) of the corporation and the corporation is a controlled foreign corporation.

Only the relevant portions have been reproduced from the code – exceptions apply.

It’s in the Legislative History

The legislative history involving code section 1297 (d) provides that


“[A] shareholder that is subject to current inclusion under the subpart F rules with respect to stock of a PFIC that is also a CFC generally is not subject also to the PFIC provisions with respect to the same stock.”


What is Subpart F?

Subpart is a very complex area of tax law. It involves several ant-deferral of foreign income rules, and requires the immediate taxation of certain foreign income, in years a CFC has Earnings & Profits, involving income which may have not even been distributed to the shareholder

What Forms for PFIC and CFC Do I Report to the IRS?

While a shareholder of both a PFIC and CFC may not have to deal with the tax issues per se of computing both PFIC and CFC analyses – the reporting is a bit different.

When a person owns a PFIC and is not exempt from reporting, then we recommend filing the Form 8621. That is because if Form 8621 is required to be filed, but is not filed, then the tax return remains open for potential audit – and that can be very dangerous.

If the PFIC also qualifies as a CFC and meets one of the categories of filers for Form 5471 then the general recommendation by experienced tax practitioners is to file the 5471 as well.

While it can be a bit daunting, the penalties for not filing form 5471 are very high (starting at $10,000).

And, the Form 5471 is a common penalty the IRS issues.

What if You Have Unreported Income or Assets?

If you are out of compliance, the penalties can be severe. Therefore, you may consider entering IRS offshore voluntary disclosure/tax amnesty, before it is too late.

What Type of Attorney Should I Hire?

IRS Voluntary Disclosure is a specialized area of law. An IRS Voluntary Disclosure is a complex undertaking. It requires the coordination of several moving parts, including strategy development, Tax Preparation, Legal Analysis, Negotiation and more.

You should hire a Tax Attorney who has the following credentials:

  • ~20 Years of Private Practice experience representing his/her own clients
  • Experienced in Criminal and Civil Tax Litigation
  • Experienced representing clients in Eggshell and Reverse Eggshell Audits.
  • Advanced Tax Degree (LL.M.)
  • EA (Enrolled Agent) or CPA (Certified Public Accountant)
  • Preferably a Board Certified Tax Law Specialist

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)

Our Managing Partner, Sean M. Golding, JD, LLM, EA  earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

Less than 1% of Tax Attorneys Nationwide are Board Certified Tax Law Specialists 

The Board Certified Tax Law Specialist exam is offered in many states, and is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. Certification also requires the completion of significant ethics and experience requirements.

In California alone, out of more than 200,000 practicing attorneys (with thousands of attorneys practicing in some area of tax law), less than 350 attorneys are Board Certified Tax Law Specialists.

Beware of Copycat Law Firms

Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

Contact Us Today; Let us Help You.

International Tax Lawyers - Golding & Golding, A PLC

International Tax Lawyers - Golding & Golding, A PLC

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, JD, LL.M., EA and his team have represented thousands of clients in all aspects of IRS offshore disclosure and compliance during his 20-year career as an Attorney. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo and various Law Journals nationwide.

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, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
International Tax Lawyers - Golding & Golding, A PLC