Form 8621 Purpose
A U.S. person that is a direct or indirect shareholder of a passive foreign investment company (PFIC) or qualified electing fund (QEF) files Form 8621:
- when they receive certain direct or indirect distributions from a PFIC,
- recognize a gain on a direct or indirect disposition of PFIC stock (unfortunately, oftentimes reported as excess distributions), or
- are making an election reportable in Part II of the form.
Who Must File The PFIC Disclosure
Generally, a U.S. person that is a direct or indirect shareholder of a PFIC must file Form 8621 for each tax year. This applies under the following five circumstances if the U.S. person:
- Receives certain direct or indirect distributions from a PFIC,
- Recognizes gain on a direct or indirect disposition of PFIC stock,
- Reporting information concerning a QEF election or mark-to-market election,
- Making an election reportable in Part II of the form, or
- Required to file an annual report according to section 1298(f).
A separate Form 8621 requirement applies for each PFIC investment that is held directly or indirectly.
When To File The Form 8621
Form 8621 is attached to the shareholder’s tax return (or, if applicable, partnership or exempt organization return).
Both are subject to filing by the due date, including extensions.
Passive Foreign Investment Company (PFIC) Definition
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 held for the production of passive income.
Penalties For Failure To File Form 8621
Section 1298(f) and the regulations do not impose a specific penalty for failure to file Form 8621. However, tax law coordinates the Form 8621 filing requirements with the Form 8938 filing requirements. Section 6038D requires a U.S. individual to disclose any directly held foreign financial assets on Form 8938 if the individual’s foreign financial assets’ aggregate value exceeds the filing threshold. An exception to the disclosure requirement applies to any foreign financial asset the individual reports on another disclosure form such as Form 8621.
A U.S. individual shareholder who fails to disclose a directly held PFIC investment on either Form 8621 or Form 8938 when required can be subject to a $10,000 penalty under §6038D(d).
Statute Of Limitations
Failure to file this required form can result in the suspension of the statute of limitations concerning the U.S. shareholder’s entire tax return until the shareholder files Form 8621.
This means the IRS could have an unlimited amount of time to audit the U.S. shareholder’s tax return and assess tax if the U.S. shareholder fails to file a required Form 8621.
However, the statute of limitations is suspended only for the unreported PFIC investment. Not to other unrelated portions of the U.S. shareholder’s tax return if the shareholder has reasonable cause for the failure to file Form 8621.
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The most important, and perhaps the most difficult, step in complying with the new §1298 Form 8621 filing requirements is simply identifying investments that qualify as PFIC stock.
Taxpayers should pay particular attention to foreign mutual funds investments, mainly when investing through foreign banks and brokerages. Foreign mutual funds are generally a PFIC holding.
To learn more about this topic, please check out our article on “What Is A PFIC”.