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FATCA PFIC Reporting | International Tax Attorney

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FATCA PFIC Reporting is an important feature in today’s U.S. tax compliance. In this article, I will focus on the explanation of the FATCA PFIC Reporting requirement for U.S. shareholders of a PFIC.

FATCA PFIC Reporting: FATCA Background

The Foreign Account Tax Compliance Act (“FATCA”) is contained in Chapters 1471–1474 of the Internal Revenue Code (“IRC”) as enacted into law by section 501(a) of the Hiring Incentives to Restore Employments (HIRE) Act 2010. FATCA was enacted specifically to combat offshore tax evasion by US persons with secret foreign accounts.

There are two large parts of FATCA. The first part concerns only foreign financial institutions (FFIs). Under FATCA, the FFIs are now required to identify US accountholders and report their accounts to the IRS. The second part of FATCA requires US taxpayers to report their foreign assets and foreign income on Form 8938, which is filed with the taxpayers’ US tax return.

This article is mostly concerned with the FATCA PFIC reporting on Form 8938.

FATCA PFIC Reporting: PFIC Background

A Passive Foreign Investment Company, commonly known as PFIC, is one of the most complex tax designations in the United States. The annual tax compliance for PFICs (especially default Section 1291 PFICs) can be tremendously burdensome. Furthermore, distributions and capital gains from PFICs may be subject to a much higher PFIC income tax (and PFIC interest on the PFIC tax).

A PFIC is any foreign corporation that falls within the definition of IRC Section 1297(a), which states that a foreign corporation is a PFIC if: “(1) 75 percent or more of the gross income of such corporation for the taxable year is passive income, or (2) the average percentage of assets (as determined in accordance with subsection (e)) held by such corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50 percent.” Foreign mutual funds is one of the most common examples of PFICs; however, other companies may also fall within the scope of the IRC Section 1297(a).

If a U.S. taxpayer has PFICs, he is required to file Form 8621 “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund”. A separate form 8621 should be filed for each PFIC (often, it is more convenient to file a separate Form 8621 for various blocks of the same PFIC; however, one needs to make sure that the same identification number is provided on each Form 8621 filed for the same PFIC).

FATCA PFIC Reporting: Relationship Between Form 8938 and Form 8621

In general, the FATCA foreign financial asset reporting on Form 8938 overlaps with the PFIC reporting obligation on Form 8621, but the relationship between the two forms is fairly clear. If forms 8621 must be filed (and, since 2013, this is pretty much always the case for PFICs), then the PFICs do not need to be reported on Form 8938. The number of forms 8621 must still be specified on Form 8938.

It is also important to remember that PFICs must still be disclosed on FBARs even if they are reported on Forms 8621 and 8938.

Contact Sherayzen Law Office for Help with FATCA PFIC Reporting

PFIC calculations themselves are some of the most complex requirements in the IRC. FATCA PFIC reporting further complicates the already difficult issues surrounding PFICs. It is very easy to make mistakes which result in the imposition of high IRS penalties. The correction of these mistakes will also likely result in additional legal fees.

This is why you need to secure the help of an experienced international tax law firm as early as possible and Sherayzen Law Office is the perfect fit. We have helped numerous US taxpayers around the world with their FATCA PFIC matters and we can help you.

Contact Us Today to Schedule Your Confidential Consultation!

IRS Releases Guidance on Foreign Financial Asset Reporting (Form 8938)

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On December 15, 2011, the Internal Revenue Service stated that it will soon release the final version of a new information reporting form that taxpayers will use starting this coming tax filing season to report specified foreign financial assets for tax year 2011.  Form 8938 (Statement of Specified Foreign Financial Assets) will be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. It is important for taxpayers to determine whether they are subject to this new requirement because the IRS imposes significant penalties for failing to comply.

The Form 8938 filing requirement was enacted in 2010 as part of FATCA to improve tax compliance by U.S. taxpayers with offshore financial accounts.  The scope and the depth of the Form is even more profound that the FBARs.

Individuals who may have to file Form 8938 are U.S. citizens and residents, nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory. Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds.

Form 8938 is not required of individuals who do not have an income tax return filing requirement.

The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR (Report of Foreign Bank and Financial Accounts).

Failure to file Form 8938 when required may result in severe penalties – $10,000 with an additional penalty up to $50,000 for continued failure to file after IRS notification.  Moreover, a 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.  Other penalties may apply.

Finally, a special statute of limitation rules apply to Form 8938.

Contact Sherayzen Law Office For Tax Help with the IRS Form 8938

If you need any help with respect to understanding Form 8938 or to see whether you need to file this Form, contact Sherayzen Law Office.  Our experienced international tax firm will explain to you the requirements of Form 8938 and help you comply with its requirements.