Understanding Form 8621 for Passive Foreign Investment Companies (PFICs)

One of the more difficult US international tax rules has to do with foreign investments, specifically investment funds; what the IRS calls ‘passive foreign investment companies’ or ‘PFICs’. The labelling of these funds doesn’t really matter, they can be mutual funds, ETFs, real estate investment trusts (REITs), unit trusts, or whatever. Unless the security you own is a share in a foreign corporation traded on an open exchange, you probably own a PFIC. If the security is a US investment, even if it is a mutual fund, you can ignore this whole segment. If you do own PFICs, you generally have to have to report each fund on a separate Form 8621 with your US tax return. The rules for reporting are very complicated, and often punitive, so owners of PFICs can expect to have a tax balance to pay to the IRS. Our advice: Watch your holdings carefully if you hold foreign securities, since investment funds are very common, and let your tax advisor know as soon as possible if you think you own these PFICs.

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