Tax Form 8621 for Shareholders of Passive Foreign Investment Companies

Tax Form 8621 guide

Tax season is upon us once again, and that means it’s time to file your taxes. Specifically, if you are an individual taxpayer, it’s time to file Tax Form 8621. This form is responsible for tracking your business income and expenses. In this blog post, we will take a look at everything you need to know about Form 8621. We will cover topics like what counts as a business expense, how to track your profits and losses, and more. So whether you are a first-time filer or a seasoned pro, read on for all the details you need to know about this important tax form.

Its ownership of the passive foreign investment companies needs to be reported by the US owners of PFIC as required by the IRS. These commonly include foreign mutual funds and other holding companies. The enforcement has been recently increased by the IRS, in the case of offshore reporting. Generally speaking, it is required by the Internal Revenue Services for the owners of the offshore account, income, investment and assets to report annually on different forms.

This is where form 8621 comes into the picture. This is among the more difficult international information returns. In this case, the difficulty is compounded as the filer also has excess distributions. In case the taxpayers fail to file the forms, the penalties and fines will be issued by the IRS. Here the IRS tax amnesty programs can mitigate the said penalties, which is also collectively termed voluntary disclosure. Here the PFIC is referred to as a Passive Foreign Investment Company, which simply implies the fact that in case you have a PFIC and the threshold requirement is met satisfactorily, it is required by the individual to report the same.

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IRS Form 8621: The Filing Requirements

Technically speaking, the 8621 is termed as ‘Information Returns by a Shareholder of a Passive Foreign Investment Company or a Qualified Electing Fund’. This is generally used in cases where a person has a PFIC (Passive Foreign Investment Company). In case one fails to file the 8621 form, one can face the toughest of the penalties existing. This is generally an income tax return that implies the fact that the IRS could feasibly audit the returns forever. As and when this happens, your return may be subjected to several different penalties.

So, you see there are various complexities associated with form 8621

The Foreign Investment Reported on Form 8621

Here, the foreign investment is a PFIC in case it meets either the asset test or the income as referred to below:

  • Income Test

Usually, 75% or more of the corporation’s gross income is categorized as passive income for a taxable year; as defined in section 1297 (9).

For example: There are certain foreign corporations, where all the earnings of their income are sourced from investments arising from the investing in stocks, ETFs, Securities, and more. Later all the income is further generated through passive methods, in this case, it will be categorized as PFIC under the Income tax. On the contrary, if you own your very own consulting firm which is categorized as a corporation, in this case, all the income is earned through consulting skills then you are earning ‘earned Income’. In such a situation, you will be required to kind of ‘sidestep’ the PFIC moniker-absent of other facts.

  • The Asset Test

There are cases when at least a minimum of 50% of the average asset as determined under section 1297 (e) is held by the foreign corporation for a taxable year. Hence these are categorized as assets that generate passive income or that can be further used for passive income. This is generally categorized as a PFIC because a minimum of 50% of the assets are utilized to generate passive income

Reporting the PFIC: The Threshold

The year 2012 bought about various changes in the general rules. In this case, all the PFICs are required to be reported within each year as and when the threshold requirement is met. Whether the income has been distributed or not. This comprises minimum threshold requirements, that differ according to whether the person is filing as single or married; separate versus jointly. 

For the individual who is married or single, the filing has to be done separately within the form 8621 for any year, for their total number of PFIC to exceed $25000. Hence, in case you have a single PFIC worth $50000 or eight PFICs worth $5000 each, the threshold requirement is met either way. Here all the PFICs will have to be reported likewise. 

For instance, if an individual opts for married filing jointly and it was worth $19000, then unless they are distributions, it may not be reported. Likewise, the same concept is applied in the case of individuals filing for married filing jointly, when combined, they will own more than $50000 in PFIC ownership. 

Note: One has to bear in mind that there is a certain discrepancy between regulations and instructions, whether Form 8621 (pre-part1) is necessary when the taxpayer is below the 25K/50K sans distributions

The 8621 Reporting: The Complete Guide

Now, let us take a look at the various steps involved to supplement the Form 8621 instructions:

Step 1: The Number of PFICs you own

Start by determining the total number of PFICs you have and the total value within the year. Here, it is allowed to use any reasonable exchange rate but most people use either the published department of the treasury exchange rate or the published IRS exchange rates, either of both is available online.

Step 2: Determining the PFIC Values

At this step, it is required that you need to confirm that you have exceeded the threshold requirements used for filing. In case you fall below the threshold requirements for filing, then it is required that you confirm the fact that you have not received any distributions from the PFIC. In case you have received the distributions, then it is required that you file the form anyway whether you are below $25000 or jointly below the $50000 threshold requirements

Step 3: The Basic Information

On the top part of Page 1, you need basic details like: 

  • The Shareholder Name
  • The Address
  • The Filing year of the shareholder 
  • The Shareholder type
  • The name and Address of the PFIC

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Step 4: Summarizing the PFIC

This step is slightly more complex. Here it is required to offer the basic annual information summary on the form. This generally includes details like:

  • The specific class of the shares held by the Shareholders
  • The date on which the shares have been acquired during the taxable year.
  • The total number of shares owned at the end of each year. 
  • The value of each share
  • Any excess distributions, if in case.

Step 5: Excess Distribution

In the previous article, the excess distribution had been detailed. Essentially, in case the person falls below the $25000/$50000 PFIC reporting threshold, in case there have been any ‘Excess Distributions’ the taxpayers will still be entitled to report the PFIC. 

For example: Say an individual named Jack is originally an Indian but resides in the States currently. However, with the help of his father back home in India, Jack was able to invest $200000 in foreign mutual funds. For a couple of years, there were no distributions, like Dividends or Interests, from the foreign mutual fund. Additionally, Jack had not sold any shares of the funds, hence could never make any US tax elections. 

Five years later, Jack received a huge distribution. It was worth a $200000 dividend distribution and the first and the only distribution received by him from a foreign mutual fund.

Here is a breakdown of the tax analysis for this distribution type:

  • The Excess Distribution:

This can be termed as a catalyst that in fact ‘ignites’ the complexity of this analysis. Most importantly, the excess distribution in the present year exceeds 125% of the average of the three previous years. In the case suggested above, there are no previous distributions and it is also not the first year of investment, hence, excess distribution.

  • Is this a case of Excess Distribution?

Yes, in this case, it is. Despite it being the first distribution from a foreign mutual fund, nevertheless, it is not the first year of investment. In this case, it cannot be categorized as an excess distribution as it does not qualify as an ‘excess in any of the previous distributions.

  • How to Analyze the Distribution for Tax Purposes?

This is going to be rather difficult. Programs like Tubo Tax, do not generally carry the said forms. There are chances that your CPA has never heard of the same. To make things tough, the instructions also simply instruct the individual to use a separate statement to determine the annual tax liability for the previous year and to block out the section of the 8621 form itself.

  • What Does the Additional Tax imply?

It is required by the IRS to pay back for the time the Foreign Mutual Fund had been sitting idle overseas and growing, without being taxed. However, it would have been distributed annually, in case the investment had been under the US mutual funds. This is applicable even in the case of immediate reinvestment where you would have been taxed- at a lower tax rate. This is a case when the IRS has an opportunity to acquire the money back from the individual.

  • Is it that Bad?

Well sort of, yes. This is because you are going to be taxed by the IRS every year, that you have held the investment. Also, you will be imposed with more tax at the highest ordinary income tax rate, which is available for each year for the portion of the investment earnings allocated for that year, irrespective of whether you fall under the highest tax bracket. Additionally, the IRS will also impose interest for the unpaid allocations that were not paid on time according to the amount of the tax that has been allocated for every tax year for the total tax amount, despite the tax amount only being determined for the first time as of now with the initial distribution.

Step 6: In Case you Wish to Make a Late Election

Late Election? What is this? Firstly, it is quite difficult to next-to-impossible, because of the threshold requirements that are mandatory for the individual to ‘show’. In this case, every individual’s facts and circumstances differ. There are also cases when the person might have relied upon Professional help to advise them to not qualify as the PFIC. Later, it might come to your knowledge that they did qualify and hence, might be able to qualify for late elections. 

In the case of most individuals, to make the late elections, they need to enter the traditional OVDP. This is assuming that they have disclosed foreign income, investments and assets.

When you have Never Filed the Forms- The Offshore Voluntary Disclosure

In case you have never filed this form previously, then you are out of compliance. Additionally, there are chances that there exist other forms that you have not filed as well. Most of these forms and failing to file them accompany severe Fines and Penalties for not reporting them. 

In case the individual wishes to get into compliance and is considering making a late election, they will need to submit to the traditional OVDP. This is as stated in November 2017 when it is not permitted by the Streamlined Program to make late PFIC

The Solution

In this case, assuming that the money is from legal sources, the best options available are either the Traditional IRS Voluntary Disclosure Program or one of the Streamlined Offshore Disclosure Programs.

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So, there you have it people, these are some of the prime facts, features and aspects that one needs to take care of when dealing with Tax Form 8621. However, in case you still have doubts, feel free to reach out 1800 964 3096 to our team of experts and we will be more than happy to guide you accordingly.

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💠Frequently Asked Questions💠

What are the main applications of Form 8621?

This is generally the Information Return by a Shareholder of a Passive Foreign Investment Company. This can also be termed a Qualified Electing Fund and is utilized to report income through foreign mutual funds. These are also known as Passive Foreign Investment Companies-PFICs

Which Individuals need to File Form 8621?

The individual needs to be a resident of the US and either a direct or an indirect shareholder of Passive foreign investment Company-PFIC. You need to be able to identify the direct or indirect disposition of the PFIC stock.

Does an Individual need to File the 8621 every Year?

This has to be done by people, single or married who are filing separately for any year that the total number of PFICs has exceeded $25000.

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