IRS Form 8621: Reporting PFICs and Foreign Investments as a U.S. Taxpayer

If you’re investing internationally, you might not realize that some foreign assets come with extra IRS reporting requirements. Enter Form 8621—the form U.S. taxpayers must file when they own Passive Foreign Investment Companies (PFICs).

PFICs can include foreign mutual funds, ETFs, and even certain foreign corporations. The IRS keeps a close watch on these investments, and failing to file Form 8621 can lead to higher taxes, interest charges, and penalties—even if you don’t owe any additional tax.

Understanding how and when to file Form 8621 is key to staying compliant and avoiding unnecessary costs. Here’s what U.S. citizens, expats, and indirect shareholders need to know.

What is IRS Form 8621?

Form 8621, officially titled Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, is required for U.S. taxpayers who own shares in a Passive Foreign Investment Company (PFIC).

PFICs include many foreign mutual funds, ETFs, and certain foreign corporations, often catching investors off guard. If you have indirect ownership of a foreign corporation or hold investments through foreign accounts, you may still be subject to PFIC rules and reporting requirements.

Filing Form 8621 ensures that gross income from PFICs is properly reported on your federal income tax return. Failure to comply can result in higher tax obligations, interest charges, and penalties—making it essential to understand how international tax laws apply to your current year investments.

Who must file Form 8621?

U.S. shareholders, indirect shareholders, and expats must file Form 8621 if they:

• Own PFIC investments that generate passive income or capital gains.
• Receive distributions from PFIC stock or sell PFIC shares.
• Have an aggregate excess distribution or other reportable transactions.
• Make a Qualified Electing Fund (QEF) election or Mark-to-Market election to manage their PFIC tax treatment.

Even if no tax is due, shareholders of a PFIC must still file Form 8621 for tax purposes when required. Additionally, if the investment is held in foreign accounts, taxpayers may also have to file an FBAR (Foreign Bank Account Report) to report overseas holdings.

Key reporting requirements for PFICs

Navigating PFIC reporting can feel overwhelming, but understanding the basics makes it easier to stay compliant. The IRS applies specific tests to determine if your foreign investments qualify as Passive Foreign Investment Companies (PFICs)—and if they do, you’re required to report them on Form 8621.

Does your investment qualify as a PFIC?

The IRS uses two key tests to determine PFIC status:

• The Income Test: If 75% or more of the company’s gross income comes from passive sources (like dividends, interest, or capital gains), it’s a PFIC.
• The Asset Test: If 50% or more of its assets generate passive income, it’s a PFIC.

Indirect ownership still counts

You might not hold PFIC stock directly, but if you own shares through a foreign partnership, trust, or corporation, you still need to report it.

• If you invest in a foreign partnership that holds PFIC shares, you may have to file Form 8621 for your portion of those investments.
• If your PFIC is held through foreign accounts, the FBAR (Foreign Bank Account Report) may also apply.

Breaking down the reporting process

Filing Form 8621 isn’t just about checking a box—it’s about telling the IRS how you want your PFIC taxed.

• Part I: Basic details about the PFIC and your ownership.
• Part II: Whether you’re making an election (like Mark-to-Market or QEF) to control how your investment is taxed.

While PFIC reporting might not be simple, being proactive can help you avoid unexpected tax bills and penalties. The key is knowing what you need to report—and when.

Understanding PFIC taxation: How Form 8621 affects your taxes

Not all investments are taxed the same way, and PFICs come with their own set of IRS rules. How you choose to report them—intentionally or by default—directly impacts your tax bill. Here’s what you need to know:

Excess Distribution Method (the default rule)

If you don’t make an election, the IRS assumes this method, and it’s rarely in your favor:

• Any excess distributions (dividends or gains over 125% of the average from the past three years) get hit with retroactive taxes.
• The IRS spreads the income across prior years and applies the highest tax rate from each year.
• Interest charges stack up on deferred gains, making this an expensive default.

Mark-to-Market Election

This method lets you pay taxes annually rather than letting liabilities pile up:

• You report unrealized gains each year based on the fair market value of your PFIC investments.
• Any increase in value is taxed as ordinary income, while losses can only offset prior gains.

Qualified Electing Fund (QEF) Election

The QEF election allows you to treat the PFIC like a regular U.S. mutual fund, making taxes more predictable:

• You pay taxes annually on your share of the fund’s earnings—either as ordinary income or capital gains.
• Requires the PFIC to issue a PFIC Annual Information Statement (not all do).

Choosing the right taxation method can make a huge difference in what you owe. If you’re unsure which is best, working with a tax professional can help you optimize your tax strategy.

How to file IRS Form 8621

Form 8621 is how the IRS tracks your foreign investments and ensures they’re taxed correctly. While the process can seem daunting, breaking it down step by step makes it more manageable. Here’s what you need to do:

1. Gather your documents first

Before you even look at Form 8621, make sure you have:

• Investment income records (dividends, capital gains, and distributions).
• Details on your foreign assets, including ownership structure.
• Foreign tax credit documentation, if applicable.
• A breakdown of your PFIC shares and transactions for the tax year.

2. Fill out Form 8621

Now for the paperwork:

• Report ownership details of the PFIC.
• List any excess distributions or sales of PFIC shares.
• Choose a taxation method: Excess Distribution, Mark-to-Market, or QEF Election (each with different tax consequences).

3. Attach it to your U.S. tax return

• Form 8621 is filed along with your income tax return (Form 1040 or 1120).
• If you own more than one PFIC, you’ll need a separate Form 8621 for each—there’s no shortcut here.

Penalties for failing to file Form 8621

Unlike some IRS forms that come with hefty fines for non-compliance, Form 8621 doesn’t carry direct monetary penalties. But that doesn’t mean skipping it is consequence-free.

Here’s what can happen if you fail to file:

• IRS processing delays: Your entire federal income tax return may be held up, potentially affecting refunds or triggering follow-up inquiries.
• Higher taxes and interest charges: Without Form 8621, the IRS applies the default Excess Distribution Method, leading to retroactive taxation at the highest rate plus interest charges on unreported investment income.
• Increased audit risk: If you have foreign accounts or PFIC investments but don’t file, the IRS may flag your return for further review, increasing the likelihood of an audit.

Staying compliant with PFIC reporting

For U.S. expats and investors with foreign holdings, filing Form 8621 is a critical part of staying compliant with IRS regulations. Properly reporting PFIC shares ensures that you avoid unexpected tax bills, interest charges, and potential IRS audits.

Given the complexity of PFIC taxation and filing requirements, working with an experienced tax professional can help you navigate the process with confidence. Bright!Tax specializes in expat tax compliance, including PFIC reporting, ensuring your investments are properly accounted for while you remain in good standing with the IRS.

If you’re unsure how to file Form 8621 or need expert guidance, reach out today—we’re here to help you stay compliant and protect your financial future.

Frequently Asked Questions (FAQ)