Our consistent advice to U.S. taxpayers is “Sell all of your foreign mutual funds.” Foreign mutual funds are almost always Passive Foreign Investment Companies — PFICs. We tell people to get rid of foreign mutual funds and buy individual stocks and bonds.
The advice has nothing to do with investment strategy. It has everything to do with preventing brain damage and huge tax return preparation bills. Form 8621 is a bear to prepare.
For kicks, download the Instructions to Form 8621. (PDF). Flip to the bottom of the last page of the Instructions. There the IRS gives you the estimated amount of time required for you to prepare Form 8621:
The time needed to complete and file this form will vary depending on individual circumstances. The estimated burden for individual taxpayers filing this form is approved under OMB control number 1545-0074 and is included in the estimates shown in the instructions for their individual income tax return. The estimated burden for all other taxpayers who file this form is shown below.
Here are the time estimates by the IRS:
Recordkeeping: 13 hrs., 37 min.
Learning about the law or the form: 8 hrs., 38 min.
Preparing and sending the form to the IRS: 9 hrs., 14 min
Grand total? 31 hours, 29 minutes. YMMV. I personally have spent more than 8 hours learning about the law this week. And I live on Planet Tax and frolic in the PFIC playground, so I am somewhat acclimatized. For those of you without a lot of background in PFICs and Form 8621, the damage is probably worse.
Philip D. W. Hodgen is the principal attorney of HodgenLaw PC, an international tax law firm based in Pasadena, California. He earned his undergraduate degree from Claremont McKenna College and his law degree from the School of Law at the University of California, Los Angeles. He then went on to earn a Master of Laws degree with a specialty in taxation from the University of San Diego School of Law. Admitted to the California bar in 1982, Phil spent nine years in law firms and with a large U.S. bank before starting his own firm in 1991.
Phil is a past chair of the International Tax Committee of the State Bar of California's Tax Section and was a member of the Executive Committee of the State Bar of California's Tax Section for 2004-2007. Phil frequently speaks on a variety of international tax, trust and estate topics to attorneys, accountants, and real estate professionals.
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Tax laws change over time, and the information in this post above may be less accurate today than it was at the time of the last revision. This post is not tax advice for your specific situation. Please contact an international tax professional to get personalized advice for your situation.