What Is Form 8621 and Who Needs to File?

Form 8621, “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund,” is a tax form used by U.S. persons to report ownership in Passive Foreign Investment Companies (PFICs) and calculate the tax on income from them. The regulations for these investments were established to prevent the deferral of tax on income earned through foreign corporations. This form is a complex but necessary part of tax compliance, ensuring the IRS can track these foreign assets and the income they generate.

Understanding PFIC and Filing Requirements

A foreign corporation is classified as a Passive Foreign Investment Company (PFIC) if it meets either an income test or an asset test. Under the income test, 75% or more of the corporation’s gross income for the year must be passive, which includes earnings like interest, dividends, and royalties. For the asset test, at least 50% of the average value of the corporation’s assets must produce or be held to produce passive income.

Common examples of investments often classified as PFICs include foreign mutual funds, foreign exchange-traded funds (ETFs), and certain foreign holding companies. The PFIC classification is broad and can apply to various foreign corporate structures, not just traditional funds.

A U.S. person who is a direct or indirect shareholder of a PFIC is required to file Form 8621. This includes individuals who own shares through a pass-through entity like a partnership or a trust. The filing requirement is triggered by events such as receiving distributions from the PFIC, recognizing a gain on the sale of PFIC stock, or making certain tax elections.

An exception to the filing requirement is the de minimis rule. A shareholder is not required to file Form 8621 if the total value of all their PFIC stock is $25,000 or less at the end of the tax year ($50,000 for joint filers). This exception only applies if the shareholder did not receive an “excess distribution” and has not made a tax election like a Qualified Electing Fund (QEF) election.

Information and Elections Needed for Form 8621

To complete Form 8621, a taxpayer must gather specific details for each PFIC investment, as each one requires a separate form. Information needed includes:

• The full name and address of the foreign company
• A detailed description of the shares owned
• The dates on which the shares were acquired
• The original cost basis of the investment

A shareholder who wishes to make a Qualified Electing Fund (QEF) election must obtain a “PFIC Annual Information Statement” from the PFIC. This statement contains the shareholder’s pro-rata share of the PFIC’s ordinary earnings and net capital gains for the year. Without this document, the shareholder cannot use the QEF tax treatment method.

The tax code provides three methods for handling PFIC taxation, and the shareholder must choose one:

• Section 1291 Fund: This is the default method and can be the most costly. It applies special, higher tax rates and an interest charge on distributions that exceed a certain threshold, as well as on gains from selling the shares.
• Qualified Electing Fund (QEF) Election: A more favorable option where the shareholder agrees to be taxed annually on their share of the PFIC’s income. This method treats the income as if it were earned directly by the shareholder, allowing for taxation at regular income and capital gains rates. This election is most effective when made in the first year of ownership.
• Mark-to-Market (MTM) Election: This is available only for PFIC stock that is “marketable,” meaning it is regularly traded on a qualified exchange. The shareholder includes in their income each year the difference between the stock’s year-end fair market value and their adjusted basis. This gain is treated as ordinary income, and any loss is deductible only to the extent of previously recognized MTM gains.

Completing Form 8621

The form is structured into several parts corresponding to different aspects of PFIC reporting and taxation.

Part I of the form requires a summary of annual information for the specific PFIC being reported. This is where the taxpayer will enter descriptive details like the name of the PFIC, a description of the shares, and the number of shares held at the beginning and end of the tax year.

Part II is where a shareholder formally makes or reports certain elections. If a taxpayer is making a new QEF or MTM election for the current tax year, they will check the appropriate boxes in this section.

For those who have a QEF election in effect, Part III is used to report their share of income. The shareholder will report their pro-rata share of the fund’s ordinary earnings and net capital gains, which are then transferred to their main tax return.

If a Mark-to-Market election was made, the calculations are reported in Part IV. The resulting gain or loss is reported as ordinary income or an ordinary loss on the taxpayer’s return, subject to specific limitations on losses.

Parts V and VI are reserved for shareholders using the default Section 1291 regime. These parts guide the calculation and reporting of “excess distributions.” This involves a complex computation to determine the portion of a distribution or gain that is allocated to the current year versus prior years in the holding period. Amounts allocated to prior years are taxed at the highest ordinary income rate for those years, plus an interest charge.

Filing the Completed Form

Form 8621 is not filed as a standalone document. Instead, it must be attached to the shareholder’s annual income tax return, such as the Form 1040 for individuals, or other relevant returns for partnerships or corporations.

The deadline for filing Form 8621 is the same as the due date for the tax return to which it is attached, including any extensions. For most individuals, this means the standard April tax deadline, or the October deadline if a six-month extension is obtained.

Maintaining thorough records for all PFIC investments is a continuous responsibility. This includes keeping copies of purchase and sale confirmations, the PFIC Annual Information Statements, and all filed Forms 8621. These records are necessary to substantiate the figures reported to the IRS in the event of an audit.

The consequences for failing to file a required Form 8621 can be substantial. The IRS can impose significant penalties for non-compliance, even if no tax was ultimately due from the PFIC investment. Furthermore, a failure to file Form 8621 can keep the statute of limitations open indefinitely for the taxpayer’s entire tax return, exposing them to potential IRS examination without the usual time restrictions.