PFIC Form Requirements: What the IRS Expects from Expats with Foreign Funds

If you’re a U.S. citizen living abroad and investing locally, there’s a decent chance the IRS has its eye on your portfolio—even if you’ve never heard of a PFIC.

PFICs, or Passive Foreign Investment Companies, sound like something you’d only encounter in a finance textbook. In reality, they include many common investment vehicles like non-U.S. mutual funds, ETFs, and certain foreign insurance products. The catch? These funds come with some of the harshest tax treatment in the U.S. code—and missing the required PFIC form can mean big penalties.

For U.S. taxpayers abroad, the rule is simple: if you hold foreign funds, the IRS expects you to report them. In detail. Every year.

Here’s what you need to know.

What is a PFIC (Passive Foreign Investment Company)?

A PFIC, or Passive Foreign Investment Company, is the IRS’s way of labeling certain foreign investments that generate passive income—think interest, dividends, or capital gains. Two main tests determine PFIC status under U.S. tax law:

• Income Test: If 75% or more of the entity’s gross income is passive (like dividends or interest), it’s a PFIC.
• Asset Test: If at least 50% of the company’s assets produce or are held to produce passive income, it’s also a PFIC.

Common examples? Foreign mutual funds, non-U.S. ETFs, certain investment trusts, and even some foreign insurance products with cash value.

PFICs differ from Controlled Foreign Corporations (CFCs)—which are defined by ownership structure—whereas PFIC status is based entirely on income and assets. That means you can own a small slice of a PFIC and still face steep reporting requirements.

Who needs to file IRS Form 8621?

If you’re a U.S. person who owns shares in a Passive Foreign Investment Company, chances are Form 8621 is on your to-do list. The IRS requires it in several scenarios:

• You receive a distribution from a PFIC (even small ones count).
• You sell or dispose of PFIC shares, triggering a gain or loss.
• You elect to treat the PFIC as a Qualified Electing Fund (QEF) or choose the mark-to-market method.
• You hold more than $25,000 in PFIC investments ($50,000 if married filing jointly)—even if there’s no income to report.

The filing also applies to indirect shareholders—for example, if you invest in a foreign fund through another non-U.S. entity or account.

What the PFIC form (Form 8621) requires

Form 8621 isn’t just a formality—it’s how the IRS makes sure your foreign fund investments are fully transparent (and taxed accordingly). If you’re a U.S. person with PFIC investments, here’s what this tax form covers:

Part I – Shareholder Information

Details who you are, what kind of PFIC you hold, and how you acquired it. If you’re an indirect shareholder (e.g., through a foreign trust), this is where it gets flagged.

Part II – Elections

The IRS wants to know: Are you making a QEF election? A mark-to-market election? Or no election at all? This section sets the tone for how your PFIC will be taxed—and which parts of the form you’ll need to complete next.

Part III – Income from a Qualified Electing Fund (QEF)

If you’ve made a QEF election, report your share of the PFIC’s ordinary income and net capital gains here. QEFs are the “least painful” option tax-wise, but only if your fund provides the required annual information.

Part IV – Mark-to-Market Election

Didn’t elect QEF treatment? This section kicks in if you’ve opted to treat your PFIC like a U.S.-style mutual fund—reporting annual unrealized gains as ordinary income.

Part V – Gain on Disposition or Excess Distribution

If you sold a PFIC or received a large distribution, this is where the IRS calculates the infamous “interest charge” and punitive tax rate under the default PFIC regime. (Spoiler: It’s not pretty.)

Part VI – Summary of Annual Information

A snapshot of what you’ve reported above—used to calculate the total inclusion in your income for the year.

Filing the PFIC form: When and how to submit

If you hold a PFIC, Form 8621 must be filed with your annual federal tax return for the relevant tax year. It’s an information return—but not filing it can delay your return or trigger penalties.

Here’s what to keep in mind:

• Deadline: Submit it with your Form 1040 by the usual April 15 deadline (or June 15 for expats).
• Multiple funds? You’ll need a separate Form 8621 for each PFIC you hold—no bundling allowed.
• Details required: Include cost basis, fair market value, holding period, and any income or distributions.

Most consumer tax software (like TurboTax) can’t handle PFIC forms or elections like mark-to-market or Qualified Electing Fund (QEF). If you try to DIY without the right tools, you could miss crucial reporting requirements.

PFIC elections and tax strategies

Once you’ve identified a PFIC in your portfolio, the next step isn’t panic—it’s choosing a tax strategy.

U.S. taxpayers have three main election options under PFIC rules:

1. Qualified Electing Fund (QEF) Election

Lets you include your share of the PFIC’s earnings on your U.S. tax return each year—taxed at regular income rates. You’ll need detailed annual statements from the fund (which aren’t always easy to get).

2. Mark-to-Market Election

Allows you to report gains and losses based on the fair market value at year-end. Easier to manage than QEF, but it only applies to marketable stock and still requires annual Form 8621 filings.

3. Excess Distribution Method (Default)

Didn’t make an election? The IRS will assume this one. It’s often the most punitive, applying interest charges and higher tax rates to portions of your investment income.

Choosing the right approach can significantly impact your tax bill—and your stress level.

What happens if you don’t file?

PFIC reporting isn’t just red tape—it’s a legal requirement with real consequences.

If you fail to file Form 8621 when required, the IRS can deny tax benefits like the Foreign Tax Credit, trigger interest charges on unreported income, and flag your return for audit. Worse, the penalties can stack with those from FBAR or FATCA violations—especially if you’ve also failed to report other foreign financial assets.

Even a missed filing from a prior year can ripple into your current year return, impacting your gross income and opening the door to increased IRS scrutiny.

Catching up: What if you missed a PFIC filing?

If you’ve just realized you should’ve filed Form 8621 in a prior tax year, take a deep breath—you’re not alone, and it’s fixable. Most U.S. expats who missed a PFIC filing can correct the issue by submitting amended returns.

Depending on your situation, you may be eligible for programs like the Streamlined Domestic Offshore Procedures (for non-willful non-compliance) or, in higher-risk cases, Voluntary Disclosure.

Both routes come with strict eligibility criteria and documentation requirements, which is why it’s crucial to work with a tax professional experienced in PFIC taxation and offshore compliance. They’ll help you meet current filing requirements while minimizing penalties and potential tax liability.

Don’t let a PFIC form derail your expat taxes

PFICs aren’t just obscure acronyms—they’re some of the most aggressively taxed and most commonly misfiled investments for U.S. expats. One wrong step with Form 8621 can trigger penalties, interest charges, or IRS scrutiny you didn’t see coming.

That’s where Bright!Tax comes in. We help U.S. persons abroad file confidently, correctly, and without the guesswork. Whether you’re holding a foreign mutual fund or inherited a PFIC by accident, our CPAs know how to handle it—so you don’t have to.

Ready to skip the PFIC panic? Reach out to Bright!Tax and let’s get you fully compliant—before the IRS asks questions.

Frequently Asked Questions