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  1. This article is saying that finally the IRS is requiring Form 8621 for all PFICs (mutual funds) but there is an exemption for RRSPs, RRIFs, RPPs. There is no exemption for RESPs or TSFAs – for these accounts you have to report the mutual funds inside them and file Form 8621.

  2. PFIC inside an RRSP. That is sort of like Churchill’s riddle wrapped inside an enigma.

    Good question. I will put it on my blog topic list to write about.

  3. So I’m wondering about a PFIC held within a RRSP where income has been deferred under the US/Canadian Tax Treaty.

    Too bad about UCLA also …

  4. Asher

    Thanks for your comments.

    The excess distribution (default) method should be timely as long as there have been no reportable events (distributions, dispositions). If there were any distributions, then presumably the account may be rendered non compliant under OVDI/OVDP. Of course, if the distribution was not an ‘excess’ distribution, then there should not be any income. But without past records or some identification of lots, it would be hard to show what was excess and what was not. Just some random thoughts ..

  5. Mark, I was offering what I believe to be the reason for the IRS applying the PFIC rules to voluntary disclosures. Some taxpayers entered the OVDP, and then, when the foreign account statements arrived, the taxpayers saw that the securities had not been sold. If the securities had not been sold, there was no taxable income realized. The taxpayer would then withdraw from the OVDP without paying the 20% penalty. By applying the PFIC rules, taxable income is created even though the security is not sold. As a result, the taxpayer would have to pay tax on the PFIC income, remain in the program, and pay the 20% penalty.

    I understand your point that a taxpayer can elect the method of PFIC taxation (MTM, excess distribution . . .) but one issue is whether the taxpayer made a timely election. Presumably, if the foreign securities were undisclosed in past years, then the election was not timely made.

  6. Asher, I don’t know about OVDP 2009, but in OVDI 2011, the IRS says that you can use the default method if you don’t want to use the IRS method. So if one funded a PFIC account with untainted funds AND there were no dispositions (distributions or sales), then it could be excluded from FBAR penalty calculation as there was no taxable event. The taxpayer would still have to pay a large amount of tax at some point since the deferred tax would now be paid at the maximum rate, plus the interest charge.

    That would be a rare condition, but are you saying that the IRS wants to penalize PFIC accounts even if they meet the conditions above ?

  7. Mark, in the 2009 OVDP, the IRS didn’t apply the PFIC rules until about a year into the OVDP. Until that point, taxpayers who had not realized foreign income because they held investments without selling them, even though the investments appreciated in value, were able to exit the OVDP (see OVDP FAQ 9) without penalty. By applying the PFIC Mark-to-Market rules, the IRS was able to arrive at taxable income, even though the investment was not sold. Thus, the IRS was able to cut down the number of people leaving the OVDP, and apply OVDP penalties. I’m not as certain that the PFIC rules are quite a gift.

  8. ACtually, for people in OVDI, the PFIC issue is much simpler than normal because of a method the IRS offers. And its actually quite good in some ways since PFIC gains are taxed at only 20%, rather than your 35%.

  9. So effectively this penalizes anyone for holding stocks in foreign stock exchanges? Hold a Canadian mutual fund share or ETF, jail time for you! Americans are going to hold blame canada marches through the streets.

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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.