Form 8621 for PFICs: when to file, exceptions and missed years

Do I need Form 8621 this year?

A fund needs no Form 8621 for the year if all your PFIC stock together is worth $25,000 or less on the last day of the year ($50,000 on a joint return) and that fund had no sale gain, no excess distribution and no QEF (qualified electing fund) or mark-to-market election. Count all your PFIC stock, including funds with an election, except stock held through another US person or through another fund. Over the limit, each fund needs its own Form 8621 (IRS: Form 8621 instructions). Foreign funds on a US return explains what a PFIC is and how that exception works.

The general rule is a separate Form 8621 for each PFIC you own, directly or through another fund, in any year one of five things happens:

Owning the fund is the trigger people miss: it applies even with no sale and no payout. An excess distribution is the part of a payout above 125% of your average payouts from that fund in the prior three years (or your holding period, if shorter), and any gain on a sale. No payout in your first year with a fund is an excess distribution, but a sale gain that year is (26 U.S.C. 1291(b)). Attach each form to your return by its due date, including extensions; if you have no return to file, send the form to the IRS on its own.

A case is not simple when you hold several funds, a fund that owns other funds, past sales reported as ordinary capital gains, missed years, or funds bought before you became a US resident. Gather each fund's legal documents, every purchase, sale and payout, year-end statements, and the returns you already filed.

Is a money market fund, app savings feature, employee fund or foreign REIT a PFIC?

Any of them can be. What counts is whether you own stock in a foreign corporation that meets the income or asset test. A foreign corporation is a PFIC if 75% or more of its gross income is passive, or at least 50% of its assets on average produce or are held to produce passive income (26 U.S.C. 1297). Passive income means interest, dividends and similar investment income (26 U.S.C. 954(c)).

A wrapper changes the analysis: for a unit-linked or savings policy, see insurance policies bought abroad; for a TFSA or FHSA, see TFSAs and FHSAs for US citizens.

How is the asset test measured for a small foreign company?

A foreign company's passive assets are averaged over the measuring dates in its year, which are the ends of its four quarters unless it elects shorter periods (26 CFR 1.1297-1(d)). A publicly traded company must use market value. A private company that is a controlled foreign corporation must use adjusted basis, and another private company may elect basis (26 U.S.C. 1297(e); IRS: Form 8621 instructions).

Three rules can change the answer:

• Look-through: a company owning at least 25% by value of another corporation is treated as holding its share of that corporation's assets and income (26 U.S.C. 1297(c)). A holding company over an operating subsidiary is tested on the combined picture.
• Start-up year: a company is not a PFIC for the first year it has gross income if no predecessor was a PFIC, it is not a PFIC in either of the next two years, and the IRS is satisfied that it will not be (26 U.S.C. 1298(b)(2)). You only know it applies once those two years pass.
• Once a PFIC, still a PFIC for you: stock you held while the company was a PFIC, with no QEF election, stays PFIC stock in later years even if the company stops meeting the tests, unless you elect a deemed sale (26 U.S.C. 1298(b)(1)). See PFIC elections.

A newly funded company holding investor cash in interest-bearing accounts can meet the asset test, and so be a PFIC, before its business earns revenue. Get its quarterly balance sheets before deciding.

If you own 10% or more of the company, first ask whether it is a controlled foreign corporation: it may need Form 5471, and a company that is both is generally not treated as a PFIC for you during that time (26 U.S.C. 1297(d)). See US owners of foreign companies.

Which funds and layers need a form, and does a loss sale or tiny holding?

Each PFIC gets its own Form 8621, and a fund that owns other PFICs puts you in a chain: you file for each PFIC in the chain when one of the five events applies to it (IRS: Form 8621 instructions). A payout or sale inside the top fund can be an indirect event for you. The fund's annual report usually lists what it holds.

Lower-layer funds are left out of the small-holding total, and when that total is within the limit, the exception covers them too. Over the limit, each lower fund gets its own test: no Part I if your share of it is worth $5,000 or less at year-end and there is no excess distribution, gain or QEF election (26 CFR 1.1298-1(c)(2), (g) Examples 3 and 4).

A sale at a loss is not an excess distribution. If you held nothing else at year-end, or stayed under the small-holding limit, that fund may need no form. If your other PFIC stock is over the limit, the regulation's general rule still covers a fund you owned during the year. Work out the loss in dollars: cost and proceeds are converted at their own dates, so a loss in euros can be a gain in dollars.

A tiny holding has no exception of its own: it escapes Part I only through the small-holding rule or one of the exceptions below. Any sale gain, however small, needs Part V.

Which other exceptions apply: IRAs, 529 plans, HSAs, treaty pensions, short holdings?

These exceptions can also remove the annual filing (26 CFR 1.1298-1(c)):

The regulation also has two narrower exceptions: stock marked to market under a Code provision other than the PFIC election, and certain domestic partnerships.

PFIC inside an HSA: not on the list. A fund inside a health savings account (HSA) is not on the exempt list, which names IRAs, 401(a), 403(b) and 457(b) plans, 529 and ABLE accounts and Coverdell accounts. Neither the regulation nor the Form 8621 instructions say how a fund held inside an HSA is treated. That question is unsettled; get a reviewed position before relying on either answer.

What does a missed Form 8621 cost?

The Form 8621 instructions list no separate penalty for failing to file it, but a missed year can bring four costs:

• PFIC tax and interest: a past sale gain or excess distribution is spread over your holding days. The share for earlier PFIC years is taxed at the highest rate in effect for each year, plus interest from that year's return due date to the due date of the return for the year of the sale or payout (IRS: Form 8621 instructions, line 16).
• Accuracy penalty: 20% of an underpayment caused by negligence or a substantial understatement (IRS: accuracy-related penalty), or 40% when it comes from a foreign asset that was not disclosed on Form 8938 (IRS: Form 8938 instructions). Negligence includes failing to keep adequate records (IRS: Publication 550). If you amend before the IRS first contacts you about an examination of that return, the added tax counts as tax shown on the return, so the penalty generally does not reach it unless the original position was fraudulent (26 CFR 1.6664-2(c)).
• Form 8938 penalty: if you meet the Form 8938 threshold, a fund not reported on a timely Form 8621 must be listed on Form 8938 instead, and a missing Form 8938 can bring a $10,000 penalty (IRS: Form 8938 instructions).
• An open year: the IRS can assess tax on that return until three years after you supply the missing information. If the failure was due to reasonable cause and not willful neglect, the open period covers only items related to it (26 U.S.C. 6501(c)(8)). This reaches tax years ending on or after December 31, 2013, the first years the annual report was required (26 CFR 1.1298-1(c)(9)).

Amended returns also carry regular interest on any added tax from each return's original due date (IRS: Form 1040-X instructions). Filing late does not create past elections; late QEF and mark-to-market options are in PFIC elections.

PFIC sale reported on Form 8949 by mistake: what has to be redone?

The sale comes off Form 8949 and Schedule D and goes through Part V of Form 8621 on an amended return. Under the default rules, the entire gain is an excess distribution, even if you held the shares for years (IRS: Form 8621 instructions, line 15f).

1. Split the gain by holding period: complete Part V separately for each block of shares bought on a different date.
2. Spread each block's gain over its days held. The current-year and pre-PFIC shares are ordinary income on the "other income" line, not capital gain. Each earlier PFIC year's share is taxed at that year's highest rate plus interest: the added tax goes on the tax line of your Form 1040, marked "1291TAX", and the interest goes on Schedule 2. Line numbers change by year, so use the instructions for each year you amend.
3. Check prior payouts too: any excess distribution in an earlier year needs its own Part V.
4. Recompute anything that depended on the old figures, such as the foreign tax credit and capital loss carryovers.

A fund bought and sold in the same year has all its gain in the current year, so it is ordinary income with no added interest. A loss is not an excess distribution: if the fund still needs a Form 8621, show the loss in brackets on Part V line 15f and skip line 16. The loss itself stays on Form 8949 and Schedule D, usually as a capital loss (IRS: Form 8621 instructions, line 15f). For the full calculation, see PFIC elections and the section 1291 calculation.

Never filed Form 8621 for years: which route fixes it?

The route depends on where you live, whether income or tax was missed, and whether the failure was non-willful.

Sources: streamlined procedures, residing outside the US, residing in the US, delinquent procedures. Both streamlined routes require certifying that the failures were non-willful, and neither is open once the IRS has started an examination of any year. If the failure may have been willful, the IRS points to its Criminal Investigation Voluntary Disclosure Practice instead; get advice before filing anything. To choose, see streamlined or delinquent procedures. If you live in the US, see catching up on missed foreign reporting.

Which records rebuild each fund's history, and what if statements are gone?

Rebuild each fund from purchase to today before amending anything. You need:

• the fund's legal documents: where it is organized, its legal form, and whether it holds other funds
• every purchase and sale, with dates, units and amounts in the original currency
• every payout, including reinvested ones, with dates
• year-end values; the Form 8621 instructions let you rely on account statements issued at least annually unless you know they are unreasonable
• exchange rates for each transaction date
• any PFIC annual information statement the fund issued
• the returns and forms you already filed

You must keep records of everything that affects basis (IRS: Publication 551). If statements are gone, ask the fund manager, the platform and the bank for transaction histories first. The Form 8621 instructions give no fallback method for a missing purchase price, so keep a note beside each rebuilt figure saying where it came from, and mark any estimate for review.

Example

These examples are illustrative. Amounts are in US dollars except the third, which is in euros.

Two funds over the limit, nothing sold

A US citizen in Italy holds $14,000 in a European index fund and $16,000 in a money market fund bought through a payment app's savings feature. She files single, sold nothing, and no payout exceeded the prior-year average. Her PFIC stock totals $30,000 at year-end, over the single limit, so each fund needs its own Form 8621 with Part I. Payouts that are not excess distributions are reported as ordinary dividends, not qualified dividends.

Fund sales reported as capital gains

A green card holder sold four foreign funds over three years, bought after he became a resident, and reported them on Form 8949 as long-term gains. He never filed Form 8621.

• Year 1: fund A sold at a $2,000 gain.
• Year 2: funds B and C sold at a combined $4,000 gain.
• Year 3: fund D sold at a $3,000 gain.

Assume each fund was a PFIC for his whole holding period. Each gain, $9,000 in total, is an excess distribution. Each amended return moves that year's gain from Form 8949 to Part V: the share for the sale year becomes ordinary income, and the shares for earlier years he held the fund are taxed at those years' highest rates plus interest. Each of those years can stay open until three years after the forms are filed, or only for the related items if the failure was due to reasonable cause.

A loss sale with nothing left

A US citizen in Germany buys €4,000 of one fund in March and sells it in November for €3,700. She owns no other PFIC at year-end and received no payout. With no gain, no excess distribution and no election, the small-holding exception may apply, so she may need no Form 8621 for that year. She first confirms the result is still a loss after converting cost and proceeds to dollars at their own dates.

Different for you?

• You need to choose, purge or make a late election: see PFIC elections.
• You bought the funds before becoming a US resident: see PFIC rules when moving to the US.
• The funds are inside a foreign pension: see foreign pension reporting.
• The funds sit inside an insurance policy: see insurance policies bought abroad.
• You hold Canadian ETFs in a TFSA or FHSA: see TFSAs and FHSAs for US citizens.
• You hold Canadian funds in an RRSP or other registered account: see Canadian registered accounts on a US return.
• You plan to renounce US citizenship: see renouncing and tax compliance.
• You have several funds, a fund of funds, or missed years: each year's tax, interest and route need a full rebuild; get cross-border tax help.