Understanding IRS Form 8621 to Avoid 8 Common Mistakes

Understanding IRS Form 8621 

While there are many different types of international information reporting forms that taxpayers may have to file to disclose their foreign accounts, assets, investments, and income — one of the most complicated and misunderstood forms is IRS Form 8621. Form 8621 is used to report PFIC (Passive Foreign Investment Companies). The reason most taxpayers file IRS Form 8621 is because they have foreign mutual funds or foreign ETFs. From a technical perspective, a foreign mutual fund or foreign ETF will typically qualify as a foreign corporation — and these form corporations are designed to generate passive income, thus leading to foreign mutual funds and ETFs to being designated as PFIC. And even though the Taxpayer may own only a few hundred or thousand units of the foreign fund (aka ‘fractional ownership), there is no threshold requirement for having to file a Form 8621 — similar to how there is a threshold requirement for having to file a Form 5471. Thus, fractional ownership may lead to a Form 8621 filing requirement. Let’s walk through eight (8) common mistakes that taxpayers make regarding Form 8621.

First, No Form 8621 Monetary Penalty

Unlike many other international reporting forms such as the FBAR and Form 8938, there is no direct monetary penalty for failing to file Form 8621. In other words, just because the form was not included in the tax return does not mean the taxpayer will be penalized. Indirectly though, not filing Form 8621 can lead to other issues involving Form 3520, 8938, and FBAR — that can lead to international reporting penalties.

Not all Distributions are Excess

Just because a taxpayer receives distributions from foreign mutual funds does not mean the distributions are excess. In other words, not all distributions from foreign mutual funds or ETFs will qualify as an excess distribution.

Form 8621 Reporting vs FBAR

The reporting requirements for a foreign account that contains mutual funds or ETFs are different from an FBAR perspective as opposed to a Form 8621 and generally, Form 8621 requires much more extensive reporting — even when there are no excess distributions.

Late Elections are Not Easy

For the Taxpayer to qualify to receive more beneficial tax treatment than the default position for a PFIC, the taxpayer may have the opportunity to make certain elections. Typically, to receive the maximum benefit the Taxpayer must make the election during the first year of reporting. While later elections can be made, it also requires a ‘purging election’ — which may result in significant taxes. Therefore, if the election was not made in the first year, taxpayers should not simply mark the box for an election in a subsequent year without going through the proper protocols.

QEF Election Requires Specific Information

To make a QEF election, the taxpayer must have the necessary information to do so. Many Foreign Financial Institutions will not provide this information to U.S. persons, so the QEF election may not be available. Alternatively, taxpayers can make an MTM election but the tax outcome is typically not as good as for the QEF election.

Form 8621 is Required Even if no Tax Return

Taxpayers who are required to file Form 8621, are required to file the form in any year they meet the threshold requirements even if they are not required to file a tax return in that year (for example, if they are below the threshold for having to file a tax return)

$25,000/$50,000 Exception

There is some discrepancy between the regulation and the instructions as to the exception for having to file Form 8621 in any year that the taxpayer does not have excess distributions and falls below the 25,000 or $50,000 filing exception. To err on the side of caution, most taxpayers will file the top part of Form 8621, even if they are below the threshold.

Form 8621 Attachments are Required

Finally, taxpayers with excess distributions are also required to include an attachment breaking down the tax and interest for each excess distribution. Unfortunately, most commercial software such as TurboTax or Tax Act does not have Forms 8621 and does not generate these attachments. Therefore, taxpayers who have excess distributions have to be careful to ensure that they prepare these attachments.

Late Filing  Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.