PFIC Reporting: Form 8621 & QEF Elections

Part I: Shareholder Information

• Your name, address, and taxpayer identification number
• Tax year covered

Part II: Elections
Check boxes for applicable elections:

• Box A: QEF election
• Box B: Mark-to-market election
• Box C: Deemed sale election
• Other specialized elections

Part III: PFIC Information

• PFIC name and address
• Reference ID number (you assign)
• Country of incorporation
• Whether PFIC is a "Controlled Foreign Corporation"

Part IV: Income and Gain Information

• Distributions received
• Gain on disposition (if any)
• For QEF: Ordinary earnings and net capital gains

Part V: Calculation Sections

• Excess distributions (if applicable)
• QEF inclusions
• Mark-to-market adjustments

Filing Instructions:

• Attach to your Form 1040 or applicable return
• File by your tax return deadline (including extensions)
• File a separate Form 8621 for each PFIC owned

When to Make the Election:

• Ideally in the first year you own the PFIC
• Attach Form 8621 with Box A checked to your return
• The election is effective for that tax year forward

What You Need from the Fund:
An Annual Information Statement (PFIC Annual Information Statement) containing:

• Your pro-rata share of ordinary earnings
• Your pro-rata share of net capital gains
• Other required information per Treasury regulations

Tax Treatment Under QEF:

• You include your share of ordinary earnings as ordinary income
• You include your share of net capital gains as long-term capital gains
• Taxed annually, whether distributed or not
• Basis increases by amounts included in income

Subsequent Years:

• Continue to include your share of earnings annually
• File Form 8621 each year
• Track your basis carefully
• When you sell, your basis reflects prior inclusions

If the Fund Doesn't Distribute:
You owe tax on your share of earnings even without receiving cash. This "phantom income" requires planning—ensure you have liquidity to pay taxes on undistributed amounts.

When It Applies:
If you don't make a QEF or mark-to-market election, the excess distribution method applies by default. This is the most punitive treatment.

How It Works:
When you receive a distribution or sell PFIC shares:

1. Determine "Excess Distribution"
   Excess = Current distribution minus (125% × average of prior 3 years' distributions)

2. Allocate Excess
   The excess is allocated ratably to each day in your holding period

3. Tax Calculation

   • Current year allocation: Taxed at current rates
   • Prior year allocations: Taxed at highest rate for each year
   • PLUS interest on deferred tax from each prior year

Example Impact:
A $100,000 gain held for 7 years might result in:

• Federal tax at 37% (highest rate): $37,000
• Interest charges: $5,000-$15,000 (depending on rates)
• Total effective rate: 42-52%

Why to Avoid:
The combination of highest rates plus interest makes this significantly worse than QEF treatment. This is why verifying QEF availability before investing is critical.

Investment Year:

• Make QEF election in your first year of ownership
• File Form 8621 even if no income in first year
• Document election carefully for future reference

Ongoing Years:

• Receive Annual Information Statement from fund
• Include your share of earnings/gains in income
• File Form 8621 annually
• Track cumulative basis adjustments

Exit Year:

• Report disposition on Form 8621
• Your basis should reflect all prior QEF inclusions
• Gain should be minimal if earnings were taxed annually
• Document final calculations carefully

Extensions:
Form 8621 follows your return's extension. If you file an extension for your 1040, Form 8621 deadline extends as well.

Late Elections:
If you failed to make a timely QEF election, options are limited:

• May be able to make "protective" elections
• Consult a tax professional about remediation options
• "Purging" elections exist but have costs

Always Seek Help If:

• You're making your first PFIC investment
• You have multiple PFICs with complex interactions
• You failed to file in prior years and need to remediate
• You're making elections affecting prior periods
• You have questions about IRA or other qualified account treatment

Finding the Right Professional:

• Look for CPAs with international tax experience
• Ask specifically about PFIC experience
• Request references from other PFIC filers
• Expect to pay $500-$1,500+ annually for proper filing

What to Provide Your CPA:

• Annual Information Statements from your fund
• Purchase documentation (date, amount, cost)
• Prior year Form 8621 filings
• Documentation of any elections made
• Distribution records

Red Flags in Tax Preparers:

• Unfamiliar with PFIC rules
• Suggests ignoring foreign investments
• Unable to explain Form 8621 requirements
• Significantly below-market pricing for complex international returns