Do you hold shares in foreign corporations, or invest in foreign funds? If so, then you might be required to complete IRS Form 8621––a return used to declare an interest in certain foreign assets. Form 8621 is inherently complicated and mistakes can significantly impact your tax return. With this in mind, it’s best if you consult a tax professional from the Gordon Tax team to confirm if you need to file Form 8621; however, in the meantime, here’s a look at how the form works and the most important tax implications.
What Is Form 8621?
Form 8621 is a type of IRS information return you submit alongside your income tax return if you own certain foreign assets––namely, shares in either a Passive Foreign Investment Company (PFIC) or Qualifying Electing Fund (QEF). It’s used by the IRS to prevent individuals from avoiding paying tax on income from companies not subject to U.S. tax rules.
- You need to complete a separate Form 8621 for every PFIC you own, directly or indirectly e.g. through a pass-through entity such as a trust.
- Even if there’s no tax due for a PFIC you own, you still need to file the Form 8621 for IRS purposes.
- A failure to declare foreign assets, including PFIC ownership, can lead to income tax adjustments, tax audits, and even financial penalties.
But what does the IRS consider a PFIC for Form 8621? Let’s take a closer look.
Passive Foreign Investment Companies (PFICs)
The IRS defines a foreign corporation as a PFIC if it meets one of the following thresholds:
- Income Test: 75% or more of the company’s annual income is from passive income streams e.g. annuity payments and interest
- Asset Test: 50% or more of the company’s assets are used to generate passive income
Examples of PFICs include:
- Certain foreign corporations
- Foreign hedge funds
- Investment pools
- Certain insurance products
- Mutual funds
So, for example, if the European company you invest in primarily generates income from royalties or dividends, then you’re probably investing in a PFIC.
It’s crucial to remember that a company’s status is subject to change. Meaning, just because the company you invest in was not a PFIC last year doesn’t mean it’s not a PFIC this year––contact our tax professionals if you’re unsure whether your investment qualifies.
Methods for Calculating PFIC Income Tax Owed
Once you’ve determined that a corporation is a PFIC, the IRS offers three different ways for calculating tax owed on the income you receive. The method depends on how you choose to report the PFIC.
- Excess Distribution: Unless you choose another option, this is the default taxation method. In short, you pay tax on “excess” distributions, meaning distributions which are at least 125% more than those which you’ve received in the last three years (or less, if you’ve held shares for less than three years). Not only will you pay ordinary income tax, but you’ll also pay interest. It’s the most expansion taxation option for PFIC reporting.
- Mark-to-Market (MTM): Does your PFIC trade on a qualified exchange? Then you can elect to treat shares as sold on 31 December of the previous year, even if you didn’t actually sell any shares then. You won’t pay interest but you’ll still pay ordinary taxes.
- Qualified Electing Fund (QEF): Do you have detailed financial information available about your PFIC’s earnings? Then you can elect to pay taxes on only your pro-rata share of these earnings, and you won’t pay interest.
There are pros and cons to choosing each method, but whichever method you opt for, you must be consistent, follow IRS rules, and adhere to any deadlines. Our tax professionals can help you fully understand your options for mitigating tax owed before you submit your Form 8621.
What Is the Difference Between Form 8621 And FBAR?
It’s important not to confuse Form 8621 and another common foreign information return––the Foreign Bank Account Report (FBAR) or FinCEN Form 114 as it’s formally known. Put simply, FBAR is more about where you hold your assets, whereas Form 8621 is more about the type of assets you have.
- You submit FBAR if you have foreign accounts. But you only submit Form 8621 if you have shares in PFICs.
- You file FBAR with the U.S. Treasury Department. You file Form 8621 with the IRS.
- There’s an automatic financial penalty for failing to file FBAR. Missed or late Form 8621 penalties are more variable.
So, you may need to submit Form 8621 and the FBAR, and you may need to declare PFICs on the FBAR.
What Are the Challenges of Filing Form 8621?
Form 8621 is a complex and highly nuanced information return with many tax implications. Specifically, though, here’s why individuals can find it so problematic.
- Variable Taxation Methods: There are three ways to calculate tax owed on PFIC income. You need to select the right method for your situation, adhering to all deadlines and filing requirements. Knowing which method to use in the first place is inherently challenging!
- Currency Conversions: The IRS only accepts tax returns in U.S. dollars, so you need to accurately convert all foreign monies into U.S. dollars before submission. You must also identify the original currency on the form and keep the conversion rates and methods you use consistent.
- Paperwork Involved: Since each individual PFIC investment requires its own Form 8621, you can easily wrack up significant time just completing each form and attaching any required documentation.
- Impact on Tax Return: PFIC ownership affects the income tax you owe. So, not only does it create additional filing obligations––such as filing the FBAR––but a single mistake can impact your whole return. This could leave you more vulnerable to IRS audits and increased scrutiny.
Our tax team can guide you through Form 8621 submission, ensuring you understand any IRS taxation rules applicable to your situation and helping you reduce the chance of tax audits.
Who Should File IRS Form 8621?
Put simply, you need to file Form 8621 if you own a PFIC directly e.g. shares in a foreign brokerage or fund. But you also need to complete Form 8621 if you have indirect links to a PFIC. Common scenarios are:
- Owning a PFIC through a pass-through entity such as an estate or S-corp
- Owning shares in a foreign company that owns a PFIC
- Owning a PFIC that is, itself, an owner of another PFIC
In some scenarios, such as owning shares in a PFIC that owns another PFIC, you may be required to submit multiple Form 8621s for tax purposes. Our tax professionals can ensure you don’t miss any links in your chain of ownership and fully comply with IRS requirements.
Are There Exceptions to Filing Form 8621 Every Year?
In most cases, if you own a PFIC, you’re required to file Form 8621 annually for each investment.
However, you may be exempt from filing Form 8621 if, for example, you own PFIC stock through certain types of foreign trusts, such as trusts providing pension or retirement benefits. And you may be able to report all PFIC activity through a single form if, for example:
- The value of the stock owned does not exceed $25,000 ($50,000 if it’s a joint return)
- You didn’t dispose of PFIC stock
- There were no excess distributions
The rules around who might be exempt from PFIC reporting through Form 8621 are highly complex. Before assuming you are exempt, consider consulting our tax professionals for personalized advice.
How Do I File IRS Form 8621?
Well, since in most cases, IRS Form 8621 is filed alongside your annual income tax return, you can file IRS online or by mail, whichever is best for you.
Just make sure you leave sufficient time to meet the deadline if you choose to file by post––otherwise, you risk the IRS flagging your return as late. And if you’re concerned about how to attach the supplementary documentation you need, or you’re unsure specifically which documents you should file, it’s best to seek help from experienced tax professionals before filing.
What Other Forms Should I File Alongside Form 8621?
It’s unlikely that Form 8621 is the only foreign information return you’ll file with the IRS. The exact forms you will submit depend on the assets you own, but the most common returns you may need to complete include:
- FinCEN Form 114 (FBAR): Complete the FBAR, or “Report of Foreign Bank and Financial Accounts”, if you owned foreign accounts with a total value of $10,000 or more at any time during the tax year.
- Form 8938: If your foreign interests exceed certain thresholds, then you may need to file Form 8938, or “Statement of Specified Foreign Assets”.
- Form 1116: You may complete Form 1116 if you plan on claiming foreign tax credit for any taxes you pay on income from PFICs.
- Form 5471: If you own 10% or more of a foreign company, particularly one with PFIC interests, you may need to complete Form 5471.
- Form 8858: If you’re an owner of a Foreign Disregarded Entity (FDE), or a non-US entity treated as a sole proprietorship for tax purposes, you may need to file Form 8858.
And remember, you’ll also need to submit your own personal income tax return at the same time.
What Is the Form 8621 Filing Deadline?
The usual deadline for filing Form 8621 is the same as your income tax return, which is April 15 or June 15 for expats. However, this may be extended by six months if you file IRS Form 4868 to request a time-to-file extension for your personal income tax return. So, if you file Form 4868, you’ll have until October 15 to file your income tax return and Form 8621 alongside it.
How Do I Complete Form 8621?
The exact steps depend on your reporting requirements. But in short, the steps are as follows:
- First, gather any financial information you might need to complete the form. This might include annual statements, PFIC details, purchase information, and currency conversion rates.
- Next, complete the shareholder information section with the correct details.
- Then, summarize the number of shares held, their collective value, and when you acquired the shares.
- The next step is calculating any excess distributions, meaning any distributions exceeding 125% of the average during the last three years. This step is complex but can significantly affect your tax return, so don’t hesitate to seek assistance if you’re unsure how to proceed here.
- Then, choose how you’re electing to treat the PFIC shares. For example, you might opt for the MTM, QEF, or excess distribution method.
- Depending on your selecting, complete the relevant part(s) of the Form 8621. You will fill in, for example, Part III for QEF and Part IV for MTM elections.
Double-check your form for accuracy before filing it following the IRS instructions.
Can I Ignore Form 8621?
Put simply, no. The IRS uses Form 8621 to track foreign investments and to prevent tax evasion. If you deliberately fail to file Form 8621, not only do you leave your entire income tax return open to IRS scrutiny indefinitely, but you could face financial or even criminal penalties.
If you overlooked Form 8621, or you didn’t realize you were required to file the form, then you have a couple of options for proceeding:
- File an amended tax return using Form 1040-X. Attach the completed Form 8621 to your amended return.
- Check if you qualify for the IRS Streamlined Filing Procedure. If you didn’t deliberately fail to file Form 8621, then you may be eligible to file your overdue form (or forms, if multiple years are affected) through this program. You’ll need to certify that your conduct wasn’t intentional, though, or you could still face IRS penalties.
- Disclose previously unreported foreign income and investments through the IRS Voluntary Disclosure Program, if you chose to forego submitting Form 8621. In exchange for full disclosure, the IRS may elect to waive penalties.
If you have any concerns over failing to file IRS Form 8621, don’t hesitate to contact our tax professionals for advice tailored to your unique situation.
Can I File IRS Form 8621 Late?
Technically, yes, but you should file your overdue form urgently to minimize the likelihood of an IRS tax audit or further IRS scrutiny. Again, your main options are to file an amended return for the relevant tax year with your Form 8621 attached, or you can file under the IRS Streamlined Filing Procedures.
Will the IRS Audit My Tax Return for Failing to File Form 8621?
It’s possible. Failing to file Form 8621 leaves your entire tax return for that financial year open indefinitely. So, yes, the IRS could choose to audit your return, and propose adjustments, at any point. If you’re facing an IRS audit or you’re worried about possible tax adjustments, our tax professionals can help.
Do I Need A Tax Professional to File Form 8621?
Although you can file Form 8621––and your income tax return––alone, here’s why it’s worth seeking professional help before you hit “send”.
- Filing Form 8621 correctly requires accurate PFIC reporting. Without professional support, it’s easy to make a miscalculation, or overlook taxable income, which makes you more vulnerable to IRS scrutiny.
- Form 8621 is one of the more complex foreign tax returns. A professional can ensure you understand how to complete the form and what supplementary information you need to provide.
- Your Form 8621 is part of your wider tax return. Our tax professionals can help you comply with IRS requirements while finding ways to reduce your overall tax burden.
The Gordon Law tax team won’t just help you file Form 8621 correctly. We’ll work with you to devise a comprehensive tax strategy for reducing the tax you owe, budgeting for tax payments, and planning for the future.
Contact Our IRS Tax Professionals Today
Do you need help completing or filing IRS Form 8621? Or are you dealing with IRS penalties for failing to file on time? Whatever tax problem you’re having, we’re here to guide you through it. Whether it’s supporting you through IRS negotiations or helping you appeal tax penalties, our team is ready and waiting to assist. So don’t let foreign tax disclosures overwhelm you. Instead, let the Gordon Law team help you face any tax issue with confidence. Contact us online or by phone to learn more about our services.
