If you are living and working abroad as a U.S. citizen, it is likely that at one point you may open up a foreign mutual fund and begin earning income from this account. As a U.S. taxpayer, you are required to report this income and your foreign mutual fund on Form 8621. As with many of the other forms you likely must file with your tax return each year, Form 8621 can be complicated and confusing if you are not a seasoned international tax attorney. The team at Evolution Tax and Legal are here for you to break down Form 8621: who needs to file it, how to file it, and the penalties incurred for failure to file.
What is Form 8621?
Tax Form 8621 is also referred to as the Information Return for Shareholders of Passive Foreign Investment Companies. This form is used to report income from foreign mutual funds, also referred to as passive foreign investment companies.
What Is a Passive Foreign Investment Company (PFIC)?
Most foreign mutual funds are also qualified as Passive Foreign Investment Companies. Typically, mutual funds that are established outside of the U.S. are deemed corporations, under U.S. tax law. A PFIC is not limited to just foreign mutual funds, but can also include any pooled investment that is established outside of the U.S.
A foreign corporation is classified as a PFIC if either 75% or more of its gross income for an entire year is classified as passive income or at least 50% of its assets are held to produce passive income throughout the year. Passive income is generally investment income, earned from stocks or investments. Passive income includes royalties, dividends and interest earned. A PFIC can also become reportable even if the passive income threshold is not met. This can happen if the PFIC is worth more than the threshold of $25,000 for one taxpayer.
Who Files Form 8621?
If you are a direct or indirect shareholder of a PFIC, you may be required to file Form 8621. You are required to file if you meet any of the following qualifications:
- You receive direct or indirect distributions from a PFIC.
- You saw a gain on a direct or indirectly owned PFIC stock.
- You are reporting information about a QEF or section 1296 market to market election.
- You own more than $25,000 worth of PFIC stock or assets.
As an indirect shareholder, you are required to file Form 8621 if you meet the following qualifications:
- You are a 50% or more shareholder in a foreign corporation that is a direct shareholder in a PFIC.
- You hold shares of a PFIC that holds shares in another PFIC.
- You are a 50% or more shareholder in a domestic corporation that is a shareholder in a 1291 fund.
- You are a direct or indirect shareholder or a pass-through-entity that is a shareholder in a PFIC.
If you meet any of the qualifications above to be a direct or indirect shareholder of a PFIC, it is likely you are required to file Form 8621.
Form 8621 Filing Requirements
To file Form 8621, you should begin by determining how many qualifying PFICs you are a shareholder of, and the value you hold in each PFIC. You will be required to share basic information, such as name, address, and what type of shareholder you are. The complexities of the form lie in the summary section. Each filer is required to provide a basic summary of the PFIC annual report. This includes each class of shares you hold as a shareholder, the date each share was acquired throughout the year, the number of shares owned at the end of the year and whether there were any excess distributions or gains throughout the year. The information required on this form may be difficult to determine if you are working as an individual who has not filed international tax forms before. It is recommended to seek guidance of a professional who has experience with international tax forms to ensure this form is filed correctly.
Form 8621 Penalties
Failure to file Form 8621 does not have the direct penalties that other international tax forms have made readily available. There is not a minimum fine listed, or criminal charges detailed. However, it is made very clear that failure to file this form will result in audits down the road, and these may bring up other issues and penalties that could cause difficulties in the future. It is recommended to file this form properly and in a timely fashion to avoid being audited by the IRS in the coming years.
How Evolution Tax and Legal Can Help You File Form 8621
Form 8621 is a complicated information return and many experts recommend seeking guidance before trying to file this form on your own. The complex nature of the information required could leave you open to making mistakes that may incur penalties down the road. The team at Evolution Tax and Legal has experienced professionals who are international tax experts. They are ready to help you file your forms properly and in a timely manner. Contact our team today to learn more about our international tax services, and how we can help you file Form 8621.