Form 8621 Filing (PFIC) – Practical Information For Expats
If you invest overseas, chances are you’ve come across foreign mutual funds or ETFs. For U.S. tax purposes, many of these investments are treated as PFICs, and that means you may have to file PFIC Form 8621 with your tax return.
This form tells the IRS how you hold and report those investments and which tax method you choose. If you fail to file when required, you risk higher tax, interest charges, and an open statute on your return.
In this guide, you’ll see when to file Form 8621, what counts as a PFIC, the filing options you can choose, and how it ties in with Form 8938.
What is Form 8621?
If you hold shares in a Passive Foreign Investment Company (PFIC), you may have to file Form 8621 with your U.S. tax return. PFICs are foreign corporations that earn mostly passive income (like dividends, interest, or capital gains) or hold assets that generate passive income.
For expats, this often includes foreign mutual funds, ETFs, and certain insurance or investment products sold by local banks.
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. For example, PFICs held through another PFIC, a partnership, or a trust.
PFIC Reporting Thresholds
You may need to file Form 8621 even if you don’t receive any income from a PFIC. The IRS requires reporting once your holdings pass certain thresholds:
- Single or Married Filing Separately: Total PFIC value over $25,000
- Married Filing Jointly: Total PFIC value over $50,000
- Indirect ownership: If your share of a PFIC held through another entity (like a trust or partnership) is $5,000 or less at year-end, you may not need to complete Part I of the form.
If you stay below these thresholds and don’t receive any distributions or sell shares, you may qualify for the exception. But once you cross them or make an election, you’ll need to file Form 8621 for each PFIC you own.
When Do You File Form 8621?
Form 8621 must be attached to your annual tax return and filed by the due date, including extensions.
If you don’t otherwise have to file a return, you must send Form 8621 directly to the IRS in Ogden, Utah. Timely filing is critical, as late or missing forms can keep the IRS statute of limitations open indefinitely.
What Qualifies as PFIC?
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.
PFIC Form 8621 and FATCA Reporting
Since 2015, Form 8621 has included a checkbox that helps prevent duplicate reporting with FATCA Form 8938. If you report a PFIC on Form 8621, you don’t need to repeat all the details on Form 8938. However, you must still include the value of all foreign financial assets to see if you meet the Form 8938 filing threshold.
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 those of Form 8938. 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). More importantly, the IRS can keep your tax return open to audit indefinitely until the missing Form 8621 is filed.
Instructions for filing Form 8621
Filing Form 8621 involves choosing how you’ll be taxed on PFIC income:
- QEF election: You include your share of the PFIC’s income and gains annually, similar to U.S. mutual funds.
- Mark-to-market election: If the PFIC is publicly traded, you can elect to recognize annual gains or losses based on market value.
- Section 1291 default rules: If no election is made, PFIC distributions and gains may be treated as “excess distributions,” taxed at higher rates with an interest charge.
Recent updates also added a checkbox for shareholders of qualifying insurance corporations (QICs). In some cases, small shareholders in publicly traded companies are deemed to have made the QIC election automatically.
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.
Why are PFICs especially challenging for expats?
Foreign mutual funds and ETFs are popular investment choices abroad, but they almost always qualify as PFICs. U.S. tax law treats these very differently from U.S. mutual funds, often resulting in higher taxes and complicated reporting. That’s why identifying PFICs early and filing Form 8621 correctly is key to avoiding unpleasant surprises.
FAQs About PFIC Form 8621
1. How do I choose between QEF and mark-to-market?
It depends on the type of fund and the information it provides. If the fund issues a PFIC Annual Information Statement, a QEF election can give you more predictable results. If the stock is publicly traded but no QEF data is available, the mark-to-market method may be the easier choice, while the default rules under section 1291 are usually the most costly.
2. Can I fix past years if I didn’t file or didn’t make an election?
Yes. The IRS allows “purging” elections, such as a deemed sale or deemed dividend, and in some cases, you can request relief for late QEF elections. Often this involves filing Form 8621-A or an amended return, and it’s best to act quickly to limit tax and interest.
3. What records should I keep to support my Form 8621?
Hold on to account statements that show year-end balances, trade confirmations, and any PFIC or intermediary statements. If you made elections, keep every copy of Form 8621 and the schedules that go with it. Clear records will make it easier to explain your calculations if the IRS has questions.
4. How do I value my PFIC at year-end?
Most taxpayers use the values reported on annual account statements unless they have reason to think they’re wrong. Publicly traded funds are valued at fair market price, while some private funds may use adjusted basis if the rules allow. The key is to stay consistent from year to year unless your situation changes.
5. Do PFICs inside pensions or retirement accounts still trigger Form 8621?
In many cases, PFICs inside tax-exempt organizations or certain treaty-qualified pensions do not require reporting. The rules are narrow and depend on the type of plan and how ownership is treated. It’s best to confirm your plan’s status with a tax professional before assuming you’re exempt.
6. I own a small amount – should I still file even if I qualify for a threshold exception?
You may be able to skip Part I if your holdings are small and below the limits. Still, filing early can be useful if you want to make a QEF or mark-to-market election before you sell or get a large distribution. Acting sooner helps you avoid falling under the default rules later on.
Final Thoughts
Form 8621 is one of the toughest compliance requirements for U.S. expats. With complicated elections, cross-reporting rules, and harsh tax treatment, PFIC reporting is not something to guess at. If you own foreign mutual funds or similar investments, professional guidance can save you both money and stress.
Get clarity and peace of mind with your PFIC reporting. Contact us now to book your free, no obligation 30-minute consultation today.
4 Comments
Comments are closed.