If you hold foreign mutual funds, ETFs, or similar investment products, you may have stumbled across one of the most dreaded forms in U.S. international tax compliance (Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company (PFIC)). For Americans abroad and U.S. investors with offshore holdings, this single form can turn an otherwise simple tax filing into a complex and expensive headache.

At Advington, we’ve seen Form 8621 quietly derail well intentioned taxpayers, especially those unaware that their “ordinary” foreign investments fall under PFIC rules. We know how to work with taxpayers to make the best of these situations, contact us today for help.

What Exactly Is a “PFIC”?

A Passive Foreign Investment Company is a non-U.S. corporation that meets either of two tests:

• Income Test – 75% or more of its gross income is passive (like dividends, interest, or capital gains)
• Asset Test – 50% or more of its assets produce or are held to produce passive income.

This extremely broad definition means that most foreign mutual funds, ETFs, and investment trusts are PFICs. Even an overseas savings plan or insurance wrapper can qualify. If you’re a U.S. taxpayer and own any shares in these entities, you are likely required to file Form 8621,  sometimes even if you didn’t sell or receive distributions during the year.

Why Form 8621 Is So Difficult

Unlike most tax forms, Form 8621 doesn’t just report income but also dictates how that income is taxed. The IRS offers three possible regimes:

• Default “Excess Distribution” Method – Harshest option, where gains are spread over your holding period and taxed at the highest marginal rates, with interest charges added (retrospectively)
• Qualified Electing Fund (QEF) – Allows annual inclusion of your share of the PFIC’s earnings, but it requires detailed information from the fund that is almost never provided
• Mark-to-Market Election – Lets you report annual unrealized gains as ordinary income, but again, strict conditions apply

Choosing incorrectly (or most commonly, not choosing at all)  can lead to punitive tax rates and compounding interest charges. A fund that one believes is taxed at 15% long term capital gain rates could be taxed at 40% or more under this system.

Common Traps for the Unwary

“I Didn’t Know My Fund Was a PFIC”

Many foreign investors assume that the U.K., Canadian, or EU mutual funds work the same way as their U.S. equivalents. They don’t. The IRS classifies most of these as PFICs, even when professionals manage and fully regulate them overseas. Its very frustrating but even funds investing back into US markets can potentially be PFICs.

“My Accountant Never Mentioned It.”

Most tax preparers do not specialize in international filings, but this is cold comfort and understandably frustrating for clients. We frequently guide clients to correct multiple years of missed PFIC reporting using programs such as the IRS Streamlined Foreign Offshore Procedures (though in many cases, that may not even be necessary).

“I Thought My Gains Were Tax-Free Overseas.”

Local tax treatment doesn’t matter unfortunately. The U.S. taxes PFIC income under its own rules, often leading to double taxation unless handled carefully through foreign tax credits or strategic restructuring. This often conflicts with tax beneficial accounts like the UK’s stocks & shares ISA as an example, where the host country applied no tax but a US person must still report income and gains.

The Compliance Burden

Each PFIC typically requires its own separate Form 8621, meaning that a portfolio of 10 foreign funds might require 10 forms. Complex calculations can make PFIC forms dozens of pages long. Filing incorrectly or omitting a form can keep your entire tax return open indefinitely for IRS audit,  one of the lesser-known but serious consequences. There is one saving grace for PFICs in a sea of bad news; late PFIC forms do not receive the hefty fines that other international forms do simply for being late (although the tax assessed is punitive by nature).

How We Help

At Advington Stone, we take the guesswork out of PFIC compliance. We:

• Review your investment portfolio to identify PFIC exposure
• Model potential tax outcomes under each election method
• Prepare and file Form 8621 accurately, minimizing IRS risk
• Advise on restructuring or replacing PFIC-tainted investments to simplify future filings (almost always the best option!)

Final Thoughts

Form 8621 is one of those areas where the IRS expects precision and punishes ignorance. What looks like a routine foreign investment can quickly become a tax nightmare if not handled properly.

If you suspect you might own PFICs or have never heard the term before but invest outside the U.S., it’s time to get professional advice. At Advington Stone, we know the details that make or break compliance. Contact us for help today.