Potential pitfalls in PFIC reporting.

• Author: Smith, Annette B.
• Position: Passive foreign investment company

As part of the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147, enacted in March 2010, Congress expanded the passive foreign investment company (PFIC) reporting requirements by adding new Sec. 1298(f). Under this provision, "[e]xcept as otherwise provided by the Secretary, each United States person who is a shareholder of a passive foreign investment company shall file an annual report containing such information as the Secretary may require" (emphasis added).

The broad language of this provision could cause many more shareholders to be subject to the PFIC reporting requirements than historically have been subject to them. Before Sec. 1298(f) was enacted, the only taxpayers who were required to file Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, were U.S. persons who were direct or indirect shareholders in a PFIC for each tax year in which such persons (1) recog-nized gain on a direct or indirect disposition of PFIC stock, (2) received certain direct or indirect distributions from a PFIC, or (3) were making an election on Part I of the form (e.g., a deemed sale election) (Form 8621 instructions (rev. December 2011)). To date, the IRS has issued limited guidance regarding the expanded reporting requirement; thus, the impact of the rule on taxpayers who invest in PFICs remains unclear.

Current Guidance

In Notice 2010-34, the IRS clarified that the new provision is effective only for tax years beginning on or after March 18, 2010. Thus, for a calendar-year taxpayer, the first tax year that could be affected by the new filing requirements is the tax year ending Dec. 31, 2011.

Notice 2011-55 informed PFIC investors that the annual report required under Sec. 1298(f) is expected to be in the form of a revised Form 8621 attached to the PFIC investor's income tax return or information return. This notice suspended the filing requirements for PFIC investors not otherwise required to file a Form 8621 under the current instructions to the form until the revised form is released.

After the revised Form 8621 is released, PFIC investors whose filing requirements were suspended under Notice 2011-55 will be required to attach Form 8621 for the suspended tax years to their next income tax or information return required to he filed. Due to this potential for future filing requirements related to past years, PFIC investors who currently are not required to file a Form 8621...