U.S. Tax Form 8621 for Shareholders of Passive Foreign Investment Companies

As a U.S. citizen living and working abroad, you may have opened a foreign mutual fund investment account. If you’ve received any income from these funds in the past year, you’re required to report it using U.S. tax Form 8621.

Below we’ll explain the basics of this form, including what it’s used for, who has to file it, penalties for not filing, and how to file Form 8621 online with H&R Block. Know you need help with your expat taxes? Start with H&R Block today and we’ll make sure your taxes are done right. No matter where in the world you are, we’ve got a tax solution for you — whether you want to DIY your expat taxes or file with help from an advisor.

What is IRS Form 8621 used for?

Tax form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, is used to report income from foreign mutual funds, also referred to as passive foreign investment companies (PFICs).

What qualifies as a PFIC?

The term PFIC applies to most foreign mutual funds. Under U.S. tax law, mutual funds based outside the U.S. are typically set up as or deemed corporations. A PFIC isn’t limited to mutual funds, however—any pooled investment that is registered outside of the U.S. would qualify as a passive foreign investment company, including multiple types of funds, investment trusts, ETFs, and more.

A foreign corporation qualifies as a PFIC if it meets one of the following two qualifications:

• 75% or more of its gross income for the taxable year is passive income (generally investment income such as interest, dividends, royalties, rents and annuities), or
• At least 50% of its assets are held to produce passive income.

PFICs are also reportable even if there is no income so long as the appropriate filing threshold is met. For example, a taxpayer with no PFIC income but whose PFICs together are worth more than $25,000 must file Form 8621 to report the PFICs. There are three methods of PFIC taxation: excess distribution, mark to market (MTM), and qualified electing fund (QEF).

Who files Form 8621?

If you’re a direct or indirect shareholder of a PFIC and you either received a distribution of income or have met the appropriate filing threshold, you may have to file tax Form 8621.

You qualify if:

• You receive certain direct or indirect distributions from a PFIC
• You saw a gain on a direct or indirect disposition of PFIC stock
• You are reporting information about a QEF or section 1296 mark-to-market election
• You are making an election reportable in Part II of the form
• You’re above the $25,000 threshold

Here’s what qualifies you as an indirect shareholder:

• You are a 50%-or-more shareholder of a foreign corporation that is not a PFIC and that directly or indirectly owns stock of a PFIC
• You hold shares of a PFIC and that PFIC itself is a shareholder of another PFIC
• You are a 50%-or-more shareholder of a domestic corporation and that domestic corporation owns a section 1291 fund
• You are a direct or indirect owner of a pass-through entity and the pass-through entity itself is a direct or indirect shareholder of a PFIC. For more information on determining whether a U.S. person is an indirect shareholder, see Regulations section 1.1291-1(b)(8).

Penalties for not filing

If you’re supposed to file Form 8621 and you don’t, there may be consequences. Form 8621 penalties for not filing aren’t that straightforward. While you don’t get directly punished for not filing if you’re supposed to, you do open yourself up for potential audits down the road.

How to file tax Form 8621 with H&R Block

You can file Form 8621 online with H&R Block’s Expat Tax Services. You may have to file more than one form—if you’re required to file Form 8621, you must file a form for each PFIC in which stock is held. For example, if you have five funds in your portfolio, you need to file five forms 8621.

Because the Form 8621 instructions are incredibly detailed and technical, we don’t recommend you try to fill out this form on your own. You may also have to complete additional forms depending on your situation. Common forms that may accompany this one include your FBAR, Form 8938, and Form 5471.