What is the IRS Form 8621?
The IRS Form 8621 is a two-function form that must be filed by US persons who own an interest in a Passive Foreign Investment Company. The Form both (1) collects information and (2) calculates what is in most cases a special (unfavorable) rate of tax on the dividends and capital gains from shares, units or other interests in passive asset-holding foreign corporations.
The most common example of an interest in a PFIC is shares in a foreign mutual fund or units of a foreign unit trust. However, PFICs can also include an interest in non-publicly traded foreign entities in which 75% or more of its income is of a passive nature (e.g. dividends, interest, royalties, etc.) or 50% or more of its assets (by value) produce such passive income.
If you currently, or at any time from 2007 forward, owned any part of a PFIC, call (415) 745-1924 for a free consultation with Form 8621 tax attorney Andrew L. Jones.
A foreign fund, to be clear, is a legal entity which owns multiple stocks, bonds or other assets, and then issues shares in itself (with the result that the investor is indirectly buying a small sliver of all of the assets owned by the fund). The appeal of such an investment is the instant diversification offered with a single purchase. For example, an investor seeking the diversification of the S&P 500 need not actually buy one share of every company in the S&P 500 (an expensive and time-consuming proposition). Instead, the investor need only buy as many shares as desired of an S&P 500 fund – and by so doing, instantly acquire (indirectly) the components of that index, but with far lesser administrative and purchase cost.
Such funds are a popular part of many US persons’ investment portfolios. They only become a problem when the US person invests in a fund (again, legally a corporation or trust) which is organized in a foreign country, and that fund holds interests in assets (like stocks or bonds) which produce passive-type income.
Among the most punitive elements of the US PFIC rules (and they are voluminous in number and punitive characteristics) is what happens if the taxpayer fails to make a special election at the outset of the PFIC investment. If the taxpayer is considered to have received an “excess distribution” from the PFIC investment, then the investment will be subject to the default PFIC rules, which impose on that excess distribution the highest possible ordinary income tax rates (in existence for the tax year, even if it would not otherwise apply to the taxpayer) plus a ‘lookback’ interest charge.
Additionally, such a non-electing US taxpayer also must pay ordinary income tax rates upon selling the investment, rather than paying the lower capital gains rate that could apply to an identical investment in a US-organized mutual fund!
The Form 8621 and its underlying tax and interest-charge calculations are extremely complex. It consists of six different Parts and requires fourteen pages of Instructions to (in theory) explain and guide compliance with this sprawling reporting regime.
Rather than recite, the calculation and reporting of PFIC assets, we recommend consulting with a Form 8621 tax attorney if you have any involvement with anything of value outside the United States, call (415) 745-1924 for a free consultation with Form 8621 tax attorney Andrew L. Jones, who can promptly help you determine whether you have to file a Form 8621 or any of the following forms:
Form 8621 Tax Attorney and Form 8621 Tax Lawyer
If you failed to file a Form 8621, or filed one that was incorrect, incomplete, or late/delinquent, your tax return is now potentially subject to a ‘frozen’ statute of limitations. This special rule gives the IRS unlimited time to detect and punish your noncompliance, rather than the standard three to six year statute of limitations for most tax errors and omissions.
The failure to file a Form 8621 also means that the IRS can always demand unpaid tax from any year (from 2007 forward), both from the earnings of the foreign fund-type asset that should have been reported on a Form 8621, and from any other kind of error or omission on the entire income tax return.
We invite you to read onward, but the surest way of determining if you have a Form 8621 problem is to actually talk with Form 8621 tax attorney and tax lawyer Andrew L. Jones. Call (415) 745-1924 now to determine:
- Did you actually have a Form 8621 filing obligation?
- If you did, has the Form 8621 deadline passed?
- If you filed before the deadline, was your Form 8621 filing incorrect or incomplete?
- And, whether you filed an incorrect or incomplete Form 8621, or didn’t file one at all, are you subject to the statute-freezing effect of a Form 8621 non-filing?
- Reasonable cause is a total defense to the main negative effect of the Form 8621, which is the frozen statute of limitations as to the entire tax return. Effectively arguing reasonable cause for your failure to file a Form 8621 will prevent the IRS from demanding unpaid tax from any sources other than the asset(s) which you should have reported on Form 8621. In other words, finding reasonable cause as to the failure to file a Form 8621 will ‘un-freeze’ the statute of limitations as to any unreported income from sources other than your foreign fund-type assets.
A Form 8621 tax lawyer is best equipped to gather the relevant facts to that determination and then write the explanatory attachment arguing against this unwanted statute-freezing effect of Form 8621 non-compliance.
- Finally, Form 8621 tax attorney Andrew L. Jones can also work with you to consider a final, critical question: should you file a delinquent/late or amended Form 8621 – or should you simply begin complying on a ‘go-forward’ basis, doing nothing about prior noncompliance?
In working with a Form 8621 tax expert, all options are on the table, and your discussions with tax attorney Andrew L. Jones – who will be your direct point of contact – are protected by the robust attorney-client privilege.
Finally, understand that the US tax calculations and US tax reporting of interests in PFICs and Form 8621 are extremely complex. The full details of this area of tax law are well outside the scope of this general informational article. Once you know you have PFICs, you want to work with accountants with expertise in this area. Tax attorney Andrew L. Jones offers this accounting service through qualified tax CPAs and experienced international tax staff – a necessary (but difficult-to-meet) requirement for serving clients with this unusual tax reporting need.
How to identify if you own Passive Foreign Investment Company (PFIC) assets
Identifying which of your foreign assets (typically in an investment account) are PFICs is sometimes easily done where the foreign fund-type assets literally contain the phrase “fund” (or an abbreviation of that word) in their title.
However, many PFICs are not so easily identified. Rather, they can only be identified by more subtle clues, such as the inclusion in their name of geographical regions, various global stock exchanges, or an economic sector or organizing financial institution.
As an example for each of those category types:
- ‘DAX 50 Investment’ – this is almost certainly a fund tracking the DAX 50 market index (the DAX being the German stock exchange)
- ‘Eurozone Bond’ – the Eurozone is, of course, a region, and this asset would almost certainly contain, in some manner, a collection of bonds from the European geographical region of the world
- ‘Technology Sector’ – this is almost certainly a fund tracking, in some manner, the technology sector of some part of the world. While not all such funds will include the obvious term of ‘sector’ their names will nonetheless contain the name of a sector, such as “Natural Resources” or the like
- ‘Commerzbank Bank’ – this last category of asset name is potentially the most tricky. It is possible for an investment portfolio to contain a direct stock investment in a financial institution, such as Commerzbank itself. However, if the name of the institution is followed by additional terms (like geographical regions, stock exchange names, or economic sectors), the asset is almost certainly a fund simply organized and marketed by that institution, and is recognizable for this reason as a PFIC
As a final warning point, many PFIC investments are actually hidden – most often inside retirement accounts.
As discussed in our review of Form 3520 and Form 3520-A, a typical foreign ‘personal life insurance,’ foreign ‘personal annuity,’ or foreign ‘personal pension’ product of the kind sold around the globe, will most typically be reportable and currently taxable in the US via a Form 3520 and a Form 3520-A. Then, if the policy/product holds identifiable investment asset(s)and the policy’s performance varies based on the performance of those identifiable assets, then the policy/product is virtually certain to be diversified investment assets.
In other words, most foreign personal life insurances, annuities or pensions contain foreign fund-type assets that are subject to PFIC reporting and tax.
The names of the assets held internally inside such policies/products are even less likely than normal foreign mutual funds to be identifiable as foreign funds. Nonetheless, this is exactly what they are. Generally, the simple way to determine if the identifiable asset(s) held inside a foreign retirement arrangement fund is to review the name(s) of the asset(s). Unless the asset’s names are clearly the name of individual operating companies, they are virtually certain to be PFICs.
Form 8621 Deadline and Form 8621 Statute of Limitations
The Form 8621 is filed as an attachment to the US person’s annual income tax return. It is due, therefore, on April 15 (or, if properly extended, October 15) of the year following the reporting year.
The Form 8621 statute of limitations (the period of time in which the IRS may audit or examine the filing) typically expires 3 years from that April 15th date – or the later date if the due date of the tax return was timely extended.
Critically, if the required Form 8621 was never filed, the statute of limitations for filing that return – and the tax return to which it is attached – will (from the 2007 year forward) both never expire. The statute for the Form 8621 and the overall tax return itself, will instead only expire three years after that Form 8621 is filed late or delinquent.
Thus, the danger from an incorrect or unfiled Form 8621 is that the IRS can always assess more tax for any error or omission on the entire return, even if the error or omission is unrelated to the assets reported on the Form 8621.
Finally, in a related matter, if a US person fails to report $5,000 or more of income derived from a specified foreign financial asset, then the tax return’s statute of limitations is extended to six years.
Late Form 8621 and Delinquent Form 8621
As described above, the Form 8621 is late or delinquent if it was due but not filed timely. From at least 2007 forward, this Form will always be due until filed, and if not timely filed, the frozen statute of limitations previously described will keep the entire tax return exposed to IRS assessments for any error or omission.
However, this statute-freezing effect can be limited to only the Form 8621 (and any potentially unreported income from this asset) if the taxpayer can make a showing of reasonable cause. This, of course, is something that a Form 8621 tax attorney is best equipped to do, as discussed below.
Form 8621 Audit and Form 8621 Examination
A Form 8621 filing or non-filing may be audited by the IRS at any time within the statute of limitations. Since the non-filing or incorrect filing of this Form is not subject to a financial penalty, the damage from such a violation is limited to the frozen statute of limitations previously discussed.
Assuming that the IRS audit finds that the US person was required to file the Form 8621 but didn’t (or didn’t file timely or correctly), then the IRS looks to a second question.
This question is whether the failure to file a timely, correct and complete Form 8621 is excused by reasonable cause. If reasonable cause exists, the frozen statute of limitations is limited in scope to the Form-filing requirement itself, and any tax calculated as due on that Form – but not tax due from sources other than the PFIC asset.
By contrast, if there is no reasonable cause excuse for the failure, then the statute of limitations on the entire tax return (not just the assets reported on the Form 8621) is open and the IRS may assess tax and penalties for any error or omission on the return.
Form 8621 Penalty and Form 8621 Fine
The failure to timely file a Form 8621 (or timely filing a Form 8621, but one which was incorrect or incomplete) is not subject to a financial penalty. Instead, as already described, the failure to file the Form will ‘freeze’ the statute of limitations for the tax return to which this Form should have been attached. In turn, a frozen statute of limitations for the tax return means that any unpaid tax due that year – whether from the PFIC or any other source – can always be assessed by the IRS. This only changes until three years have passed after the delinquent Form 8621 is filed.
For this reason, the PFIC noncompliance penalty is usually not a highest-level financial threat, at least compared to the penalties for other international information returns (like the $10,000 penalties that apply to FinCEN Form 114 (FBAR), Form 3520, Form 3520-A, Form 5471, Form 8865 or Form 8938 violations). Nonetheless, many US taxpayer’s returns contain major errors, and the frozen statute of limitations (arising from the failure to file the required Form 8621) exposes those returns to IRS assessments for unpaid tax forever.
Failure to File Form 8621: Was It Negligence (Non-Willful) or Reasonable Cause?
The fact-gathering and analysis of the circumstances of a late, incomplete, incorrect or non-filed Form 8621 is best left to a Form 8621 expert tax attorney. Such a Form 8621 tax lawyer will know what facts matter for determining whether the Form 8621 filing violation was (1) willful, (2) negligent (also referred to as non-willful), or (3) occurred for reasonable cause.
Remember as already explained that whether a Form 8621 violation was willful or negligent does not change the penalty outcome (although a willful failure to file a Form 8621 may be penalizable under other general Internal Revenue Code provisions, such as a fraudulent return filed with the IRS, a false statement to the IRS, etc.)
The only question that matters for purposes of Form 8621 violations is whether the reasonable cause defense to the statute-freezing effect (of non-filing or incorrect filing) applies.
To understand reasonable cause, it will be helpful to contrast it against the legal concept of negligence. Generally stated, negligence is characterized by sloppiness, non-diligence, ‘missing’ clues, ‘failing to put two and two together,’ and/or a failure to make reasonable inquiries or otherwise failure to become aware of generally known facts or law.
By contrast, reasonable cause can (generally and simplistically) be said to exist where there was no reasonable pathway to become aware of an obligation. At a bare minimum, it requires that the taxpayer have missed no reasonably-apparent clues to his or her obligation, particularly clues that he or she documentably encountered at any point. Additionally, the taxpayer cannot have failed to become aware of an obligation which was broadly and generally known to individuals of average sophistication. The US person, to meet the reasonable cause standard, must demonstrate ‘ordinary business care and prudence.’
Notably, we think it is fair to say that the actions of the average US taxpayer would not meet this standard; the average US taxpayer is routinely sloppy and non-diligent and misses clues to his or her obligations. For this reason, we can say (again, generally and simplistically) the reasonable cause standard requires that the taxpayer have behaved in an above-average manner, arguably in a manner well above that of the average US taxpayer.
As should be apparent even from this brief discussion, whether the reasonable cause defense to the Form 8621 penalty exists, and whether it can be proven to the IRS is a hyper-technical matter. The fact-gathering, analysis, and (ultimately) write-up for IRS review is thus best left to a Form 8621 tax lawyer.
In short, the reasonable cause defense is beyond the limits of self-advice or self-help – get a professional involved.
Form 8621 Penalty Abatement and Form 8621 Amnesty
‘Standard’ IRS penalty abatement is available for three types of common Form 1040 penalties – the failure-to-file, failure-to-pay, and failure-to-deposit tax penalties. They are routinely granted on a ‘just this once’ basis, provided a handful of other conditions of good tax-related behavior are met.
The statute-freezing effect (on the entire tax return) resulting from the failure to timely and correctly file the Form 8621 are, by contrast, not granted on a similar ‘for the asking’ or ‘just this one time only’ basis.
Instead, this effect can only be ‘abated’ by a finding by IRS that the failure is due to reasonable cause, a legal concept described immediately above.
In summary, Form 8621 abatement or Form 8621 amnesty are not truly correct terms to describe the actual law or the reasonable cause defense. We mention them here to aid the layman in understanding that a positive outcome (of no frozen statute of limitations) for delinquent or incorrect/incomplete Form 8621 filing is available where reasonable cause has been proven (as required by the statutory or written law and judicial decisions, known as the common law).
Form 8621 Amendment
While Form 8621 amendments are rare, there are certain instances in which it might become necessary or at least advisable to amend an original and timely-filed Form 8621 – perhaps the filer receives corrective source documents from the foreign trust, or discovers that his calculations of income (as originally reported) were incorrect.
Filing a Form 8621 amendment is a problematic act, insofar as the IRS’ automated systems are generally set up to detect a ‘late’ filing (here, the amendment itself) and to potentially impose the statute-freezing effect arising from such a filing.
For this reason, we typically recommend that when submitting a Form 8621 amendment, the filer also submit (physically attached to the amendment) a detailed legal argument for why it is not the filer’s fault that the original filing contained inaccurate, incomplete, or missing information.
Such a statement should cite to the concepts of reasonable cause as outlined above – indeed, we can call it, for simplicity, a reasonable cause statement.
Since this statement is a legal argument with significant tax consequences, the person considering a Form 8621 should give serious consideration to consulting with and/or hiring a Form 8621 tax lawyer to determine whether filing a Form 8621 amendment is, strategically, the best course of action at all, and if it is, to gather facts and write that reasonable cause statement to avoid Form 8621’s statute-freezing effect.
Form 8621 Voluntary Disclosure
A Form 8621 voluntary disclosure is a filing of an amended or delinquent/late Form 8621 to the IRS – literally, the person is voluntarily disclosing a failure to either file a timely Form 8621 by the deadline, or voluntarily disclosing the filing of a timely Form 8621 which contained substantial errors or omissions.
Any US person considering submitting a late/delinquent or amended Form 8621 to the IRS should strongly consider hiring a Form 8621 voluntary disclosure attorney to draft a reasonable cause statement as a defense to the statute-freezing effect of such a late or amended filing.
Knowing that (1) a Form 8621 voluntary disclosure submitted late and without a reasonable cause statement is likely to be noticed by the IRS and draw an audit, and knowing that (2) you’ll want to fight back against that audit and a claim of a frozen statute of limitations by making an argument of reasonable cause, it makes logical sense to simply submit a reasonable cause statement at the same time you submit the late Form 8621.
To do anything else is simply delaying the inevitable confrontation, and wasting your time and mental bandwidth.
Form 8621 Quiet Disclosure and Form 8621 Silent Disclosure
In a Form 8621 quiet disclosure or Form 8621 silent disclosure, the filer will submit an amended or late Form 8621, and hope that the IRS simply (somehow) doesn’t notice the delinquency and institute an audit for this or other years.
As just described above, the IRS is increasingly aware of late or amended Form 8621 filings and has programmed its data management systems to automatically detect such late filings which contain no explanation of why the IRS shouldn’t impose the frozen statute of limitations on this tax return. Thus, simply stated, Form 8621 quiet disclosure and Form 8621 silent disclosure doesn’t work.
The smart choice is working – from the beginning – with a Form 8621 tax attorney who can make a winning Form 8621 reasonable cause argument. Every single client for whom Andrew Jones has submitted a delinquent or amended return and a reasonable cause statement has avoided IRS penalty assessments.
Expertise is at a premium here. Make the call and speak now – for free – with Form 8621 expert Andrew L. Jones at (415) 745-1924.
