Hello from Debra Rudd.
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I received this (lightly edited) question from correspondent A:
A US citizen (let’s call him X) owns a foreign mutual fund directly and has never made any elections with respect to the fund. There were no distributions from or dispositions of the fund in 2014. Is X required to file Form 8621 with Part I filled in for 2014?
A is referring to the (relatively) new annual information reporting requirement with respect to PFICs. It takes place on Form 8621, Part I, and must be done every year if your PFIC meets certain criteria, even if there is no income to report.
The annual information reporting requirement comes from IRC § 1298(f), which came into being on March 18, 2010 with the enactment of the HIRE Act (the annual requirement to file Form 8621 was suspended until tax year 2013, however — see Regs. § 1.1298-1T(c)(3)).
The law itself is quite vague and gives the IRS broad power:
Except as otherwise provided by the Secretary, each United States person who is a shareholder of a passive foreign investment company shall file an annual report containing such information as the Secretary may require.
All the specifics are in the Temporary Regulations.
Regs. §1.1298-1T(b)(1)(i) provides that direct shareholders of a PFIC must file Form 8621:
Except as otherwise provided in this section, a United States person that is a shareholder of a PFIC must complete and file Form 8621, “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund” (or successor form), under section 1298(f) and these regulations for the PFIC if, during the shareholder’s taxable year, the shareholder—
(i) Directly owns stock of the PFIC[.]
X owns the foreign mutual fund stock directly. X must therefore file Form 8621 for 2014.
There is a minimum threshold exception that may apply to X. The exception is described in Regs. §1.1298-1T(c)(2)(i):
A shareholder is not required under section 1298(f) and these regulations to file Form 8621 (or a successor form) with respect to a section 1291 fund (as defined in § 1.1291-1T(b)(2)(v)) if —
(A) On the last day of the shareholder’s taxable year,
(1) The value of all PFIC stock owned directly or indirectly under section 1298(a) and § 1.1291-1T(b)(8) by the shareholder is $25,000 or less[.]
Two other criteria must also apply for X to qualify for the exception:
To summarize, X does not have to file Form 8621 if all of the following are true:
X does not have any income to report for 2014, and X has not made any elections with resect to the fund. I do not know the value of all X’s PFICs, but for the purposes of this example I will assume that the foreign mutual fund in question is X’s only PFIC and that it is worth less than $25,000 on the last day of 2014.
X does not have to file Form 8621 for tax year 2014.
If X otherwise meets the filing requirements for Form 8938 (in other words, if the total value of his specified foreign financial assets is above the applicable threshold), the foreign mutual fund must be reported on that form.
Because X is not filing Form 8621, X cannot skip the Form 8938 reporting by indicating on Form 8938 that a Form 8621 was filed.
By qualifying for the Form 8621 filing requirement exception, X is potentially creating additional work for himself elsewhere.
Unlike other information returns, Form 8621 carries no penalties for not filing. However, failing to file will leave the statute of limitations on all tax matters for the year open indefinitely:
In the case of any information which is required to be reported to the Secretary pursuant to an election under section 1295(b) or under section 1298(f), 6038, 6038A, 6038B, 6038D, 6046, 6046A, or 6048, the time for assessment of any tax imposed by this title with respect to any tax return, event, or period to which such information relates shall not expire before the date which is 3 years after the date on which the Secretary is furnished the information required to be reported under such section. IRC § 6501(c)(8)(A).
Note the language “any tax imposed by this title”. “This title” is Title 26, also known as the Internal Revenue Code. That language means the entire tax return keeps an open statute indefinitely until 3 years after the IRC § 1298(f) information is furnished to the IRS.
For this reason, it may be advisable for X to file Form 8621 if there is uncertainty about the valuation of his PFICs and the total value appears to be close to the $25,000 threshold.
A brief recap, in bulleted list form:
Thank you, as always, for reading. And a very special thank you to those of you who were able to attend this past Friday’s International Tax Lunch where I discussed Form 8621 elections — I very much enjoyed that presentation and I hope that you did, too.
The usual liability disclaimers and requests for your most urgent and burning PFIC questions, of course, stand.