How to perform IRS PFIC calculations — Inside or outside an Offshore Voluntary Disclosure Program (OVDP)

I've written before about Passive Foreign Investment Company (PFIC) calculations, but that article was more limited to OVDP situations. In this article, I will describe in more detail the types of PFIC calculations that exist. I will describe when certain PFIC calculation types are mandatory and those which are optional in these following scenarios:


  • (1) Standard PFIC options — that is where you are not in any OVDP
  • (2) Standard OVDP with a mark-to-market (MTM) election
  • (3) Standard OVDP with an opt-out or no MTM election
  • (4) Streamlined OVDP


1. Standard PFIC Calculations – the Options

Again, these PFIC calculations are for a taxpayer whose return is not being filed under any OVDP, that is, just like a regular taxpayer making a timely filing.


If an MTM election has previously been made on a 2013 return, Form 8621 is needed to report 2014 mark-to-market gains/losses.


If no MTM election has been made, you must  analyze which of the following options is most beneficial to the taxpayer:

  1. It might be 26 USC § 1291;
  2. Or mark-to-market 26 USC § 1296,
  3. Or be a Qualified Electing Fund (QEF) 26 USC § 1295.


2. Standard OVDP client, that makes a PFIC mark-to-market election as per OVDP FAQ #10

This is fo taxpayers who have made a submission under the 2012/2014 Standard OVDP and are not opting out. That is, are paying the standard 12.5%, 27.5% or 50% Offshore penalty as the case may be.


In this case, no Form 8621 is needed for OVDP years, as calculations are done in accordance with the OVDP FAQ (not sec.1296 of the Code). Spreadsheet with calculations should be attached with the OVDP submission package.

Learn more about the OVDP procedures by clicking on the box below.




3. Standard OVDP client, that either does not make an MTM election or Opts-out of Standard OVDP:


Form 8621 is needed when there is a dividend distribution or sale of PFIC stock (see scenario 4 below for details). However, this form might be neglected by a Revenue Agent. But since Regular OVDP clients automatically get audited, any determinations made as a result of an audit get reflected on Form 4549-A, Form 906 and other forms used by the IRS during an audit.


For information about Opting-Out of a Standard OVDP, read this article.


4. Streamlined OVDP client.

No mark-to-market election is available for tax years with a past due date for such clients if you are in the Streamlined OVDP.


Form 8621 is needed when there is a dividend distribution or sale of PFIC stock.


Even if there is no excess distribution per our calculations, Form 8621 should still be submitted with lines 15a-15e completed in it. This will substantiate the amount of a dividend distribution that should flow onto Schedule B (non-excess distribution).


When Form 8621 is not required — but there is a caveat

In accordance with Treas. Reg. 1.1298-1T, no Form 8621 is needed if the total value of PFICs owned by a taxpayer is less than $25,000 and such taxpayer is not treated as receiving an excess distribution.


However,  preparing and submitting Forms 8621 may be optimal even if the calculations show no excess distribution because of the following reasons:

  • This exception covers reporting requirements under sec. 1298(f), not taxation of 1291 distributions as such.
  • The requirement to calculate and tax excess and non-excess distributions together with the Form 8621 itself and sec. 1298(f) has been in existence since the late 1980s.
  • Merely filing a PFIC form won't do any harm at all. It will even help a Revenue Agent and our client to understand how we came up with a non-excess distribution amount on Schedule B, and will help us to keep a good record of it. Again, no one excluded Section 1291 PFIC distributions from taxation as such. What was excluded is reporting of non-excess distributions on the Form 8621 under certain circumstances.
  • Also, according to a Treasury Regulation, filing a Form 8621 is not required for taxable years ending before 12/31/2013 (meaning, reporting is required starting from year 2013). Again, my suggestion is to prepare these forms for prior years because of the reasons stated above, unless we had a Section 1291 fund with no distributions/sales of its stock at all.


PFIC calculations — not for the faint of heart

PFIC calculations are not for anyone but those who have the most advanced knowledge of both tax and accounting (although we know of a few very ambitious non-tax people who live the challenge of trying to figure it out!)  Please, talk to your tax adviser about which options are open to you.


If you or your client is hung up on PFIC calculations, please feel free to contact us.