86 thoughts on “IRS says it’s “OK” to own PFIC’s through a “US” tax deferred account”
My foreign retirement accounts are full of PFICs. The IRS left them alone under the OVDP review. Previously they said you didn’t have to file 8621 for these accounts.
They really don’t have a choice unless they want to ignore one of the major protections of the tax treaties. That would be really bad for business.
I see it says US accounts. I thought people already put some Canadian funds that are PFIC’s in their retirement accounts.
Yes it refers to “US” tax deferred account such as IRA’s and 401K’s.
@Neill
Your experience in OVDP is encouraging news re PFIC’s. We are in OVDI and have been waiting over 2 years to have our submission dealt with. Are you in the 2012 OVDP, or the 2009?
Paranoia has led us to divest in PFIC’s within our RRSP’s.
April 15, 2014, 07:51 pm
GOP marks Tax Day with challenge to IRS
What a good find. That should be front-page material of interest to every USA taxpayer — does anyone know if their US tax return was done accurately? I had several years of returns that had to be re-done at mucho dollars. It’s all a crap shoot / the luck of the draw as all the rest of US citizenship-based taxation law for those outside the US walls.
Can we at least get it somewhat simplified by just having the USA move to residence-based taxation as the rest of the world? A good start it would be!
@bubblebustin,
I was in the later OVDP. I assume that was 2012. The IRS examiner let us carve out all account that had no tax due. So any employment pension, life insurance etc. The killer for us was my wife’s ISAs. All PFICs and quite large in value. We even managed by using the statutory default set 1291 rules for PFIC’s to show we had no income from one account and it escaped the penalty (they fought us because the account didn’t have a different account number but they caved). The IRS agent tried to convince me we would have a hard time complying with sec 1291 and it would be expensive. We could use the mark to market method offered in OVDP as it generated a large loss in 2008 which the IRS promptly denied (the rules changed all the time). I had to put a huge amount of effort in to understand the rules and do the calculations. It paid off. I found a rule my attorney wasn’t aware of and in fact our IRS agent didn’t know about at first. This rule is that when not a US person the days attributable to that period become non-PFIC days and so become ordinary income (like the current year). They escape the Sec 1291 tax and interest. There is a bug in form 8621 where PFIC tax cannibalizes AMT that helped a great deal.
I spent $8k having my 8 years of taxes done by a pro only to buy myself a copy of Lacerte and do the 8 years again myself. The IRS at first question the returns but after some back and forth on the tax laws they took my numbers without changes. A very minor victory in a totally crap year and a half.
I paid the OVDP penalty to avoid any risk after I got it to the point where my gains from opting out were realistically in the multiple thousands of dollars. I was willing to opt out at the last second if they became unreasonable.
I found the video of Rumsfelds comments on The Today Show. Most interesting coming from the war monger himself
Bravo for you, that you have the knowledge and willingness to hold your ground with the IRS – and carve out a better deal for yourself than had you let them dictate the outcome to you.
Interesting timeline here. You’ve reached a conclusion with 2012 OVDP submission, whereas our entry into the 2011 OVDI has made very little progress. I’m not looking forward to having to negotiate with an organization that habitually moves the goal posts on shifting sands, but the sooner I put this behind me the better.
@bubblebustin,
My advise to anyone is to not enter this program. It was the biggest mistakes of our lives. It’s hell to get the data and deal with the taxes. The IRS seems to change the rules at a drop of the hat and the rules don’t make much sense. OVDP extends your requirement to pay taxes due in say 2003 but doesn’t let you get a refund in 2008. Stay in the program for more than a couple of years and they just keep any money you pay even if you change how you report the taxes. It’s just theirs to keep. Even if you opt out they keep the money you paid up front. got a bank account with 1 dollar in interest with zero taxes due because of tax credit and rounding. Doesn’t matter. It’s unreported income not tax due and they want 27.5% of the balance. We actually had this case for a forgotten account.
I guess since I did tax years 2003-2010 we must have entered OVDP in 2011. We exited maybe a month ago.
Cost skyrocket as the IRS agent asks stupid questions your tax people have to deal with. We had to explain to our agent how the pensions were protected by the tax treaty. How National Financial Services was actually the name Fidelity has on their tax forms and so she couldn’t take 27.5% of our US assets.
The forms just keep coming. Every few days it’s more stuff to put together and more details they want. She would ask for just some years from some accounts statements then complain later that she only had the statements she asked for and not other years and accounts.
One nice thing is the agent went looking for money and double checked my account balances. One replacement statement we had was in dollars rather then GBP and I didn’t notice. She ended up saving me a load of money on the balance penalty. She made it up on recalculated PFIC tax that she had to reverse later as I mentioned earlier.
I think at the end she must have either had enough or she felt bad about the system and she seems to get more lenient.
@Neill @bubblebustin – I also think that entering OVDI was the biggest mistake of my life. The one thing that Neill said that was not true for me was that I received almost all taxes and all penalties paid back with interest. However, I opted out. So in addition to Neill’s comment, whenever the IRS deigns to finally give you a chance to get out of its claws by looking at your case, I hope this gives you a little hope and encouragement for not playing along with their inappropriate rules for “US Persons” who live outside of the US borders. The waiting and uncertainty drove me crazy. I wanted to be fighting back. It is hard to fight back when you are in limbo.
@Neill ….
how did you explain the pensions were protected by the tax treaty…. I assume you filed Form 8833 ?
How much should I budget for the CPA when it seems that the examiners make a habit of asking stupid questions ?
Lucky us we have a few checking accounts with $0.49 p.a or even less of interest.
@bubblebustin …….. over 2 years now in limbo that will soon be a record…. maybe they forgot about you or your submission got lost . I am waiting for 16 month now but have TAS dealing with the current “normal” examination…..lets see when I get a notice about an audit.
@Neill, did they letyou exclude accounts from penalty base that had no tax due or accounts that had no unreported income (thinking of a situation where you have a foreign account for which tax was paid on income and thus due to FTCs, no US tax was due but there was still technically unreported income)?
@ChearsBigEars
Nice one from Donald Rumsfeld.
@Neill
I didn’t quite understand what you had discovered. Is it the case that your wife wasn’t a U.S. person and then became one?
“This rule is that when not a US person the days attributable to that period become non-PFIC days and so become ordinary income (like the current year). They escape the Sec 1291 tax and interest.”
The loosening up of the PFIC rules in U.S. recognised plans can only be a good thing, since it gives us more grounds to make arguments.
@ Publius, “The loosening up of the PFIC rules in U.S. recognised plans can only be a good thing, since it gives us more grounds to make arguments.”
Very true. An argument can now be made especially if the “foreign” (local) retirement plan is referenced in a dual tax treaty.
Personally, I have completely avoided funds for retirement plans because of this prior fear and stuck with fixed income corporate bonds individually and not as funds. Prior to my life off the plantation, I owned lots of funds so that was what I preferred, Forced investing in corporate bonds because of PFIC fears has cost me a bundle the last ten years.
@Calgary411, “Can we at least get it somewhat simplified by just having the USA move to residence-based taxation as the rest of the world? A good start it would be!”
One other idea would be if the USA simply went to its tax treaty “partners” and agreed that the sole filing requirement for US Citizens in their respective countries would be to attach the local return to a single page IRS Form that indicates you filed and paid tax with the local tax treaty partner.
That way they would save face by keeping everyone “in the system” so you just did not drop off.
@George
I am actually not required to fill a return in Britain, although do pay tax at the 20% rate here; however, my husband does it as a higher rate payer and it takes him a fraction of the time that I spend on my IRS return, so I would be in favour. It would be easier for all concerned.
Between 1926 and 1962, when the U.S. government didn’t tax foreign source income, they still required some paperwork to be filed.
@Not That Lisa!, I chose to be compliant forward. The uncertainty of being audited was difficult too.
But yesterday, my statute of limitation were over for my tax returns. I am hopeful I won’t ever be audited for the first 3 years of FBARs.
The toll on me was not so much financial but on my health. I think I can start to put this past me.
@anon100percent
Form 8833 does not have to be filed for retirement accounts. There is a list of exceptions:
>Sec. 301.6114-1(c)(iii) That a treaty reduces or modifies the taxation of income derived from dependent personal services, pensions, annuities, social security and other public pensions, or income derived by artistes, athletes, students, trainees or teachers;
We just pointer here to article 17 (I think it was) of the UK US tax treaty. I would have expected an examiner in OVDP to be aware that pretty similar language is going to be in all the treaties.
Budget for spending $20k or more on fees. It’s going to kill you.
@Not that Lisa,
Our unpaid taxes on PFIC’s were quite large. ~$32k (and this was the final value, maybe close to $45k the original way and doesn’t include penalties). There was no way I could escape the PFIC taxes. Penalty started out at $70k. I had to find a way to lower the tax and the penalty, which I did. I didn’t have to beg though I feel they robbed me with these rules. If it’s clear you have money the begging don’t work either. My agent was trying to get my US assets!
@uscitizenshipnightmare, We could only exclude accounts with no reported income as I said before. So we had accounts with income, no tax and they wanted the balance penalty. They would not budge on this rule for us. They only counted 2003-2010 though and one PFIC we sold in 2011 and it had no income in the period.
@Publius,
Buried in the deemed dividend election law done by the IRS is a mention that when not a US person the PFIC is not a PFIC. So if you purchased a PCI in 2001 but became a US person in 2004 then the days you held the PFIC from 2001-2004 become non-PFIC days and are treated like the days in the current tax year. So just normal income tax on the gains for those days.
This section didn’t have the ‘for this section only’ statement and it looks like it was done on purpose by the IRS. It’s more clear in their temporary regs. Of course once your fund is a PFIC it stays that way and once you become a US person it stays that way. This saved us a lot of money but I had to find this law myself and do all the calcs. I had to convince my lawyer and the IRS (the IRS was easier than my lawyer).
Here is the relevant section:
26 CRF 1.1291-9 (j) Definitions—
(1) Passive foreign investment company (PFIC). A passive foreign investment company (PFIC) is a foreign corporation that satisfies either the income test of section 1296(a)(1) or the asset test of section 1296(a)(2). A corporation will not be treated as a PFIC with respect to a shareholder for those days included in the shareholder’s holding period when the shareholder, or a person whose holding period of the stock is included in the shareholder’s holding period, was not a United States person within the meaning of section 7701(a)(30).
@George @Calgary411
The big problem with completely residency-based taxation is a country like Monaco. Except for J.K. Rowling and James Dyson, British billionaires have ended up residing in that tiny principality for tax purposes, usually while still profiting from their British businesses. I note that there is as of yet no IGA with Monaco, nor would I ever expect one. Because of Monaco, Italy and a few other countries require former residents who still have ties to the country to file tax returns if they move to a known tax haven. I think that the Yates & Co. proposal made some very sensible proposals about greatly reducing who the U.S. actively tracks.
At present, the U.S. IRS just comes off looking very odd. My pensions scheme, which covers only the employees of British universities, was very perplexed, noting in 2011 that “If any individual were seeking to avoid US tax, they would be seeking to use a far more flexible and less regulated vehicle for the purpose.”
My foreign retirement accounts are full of PFICs. The IRS left them alone under the OVDP review. Previously they said you didn’t have to file 8621 for these accounts.
They really don’t have a choice unless they want to ignore one of the major protections of the tax treaties. That would be really bad for business.
I see it says US accounts. I thought people already put some Canadian funds that are PFIC’s in their retirement accounts.
Yes it refers to “US” tax deferred account such as IRA’s and 401K’s.
@Neill
Your experience in OVDP is encouraging news re PFIC’s. We are in OVDI and have been waiting over 2 years to have our submission dealt with. Are you in the 2012 OVDP, or the 2009?
Paranoia has led us to divest in PFIC’s within our RRSP’s.
April 15, 2014, 07:51 pm
GOP marks Tax Day with challenge to IRS
Read more: http://thehill.com/blogs/on-the-money/domestic-taxes/203635-gop-marks-tax-day-with-court-challenge-to-the-irs#ixzz2z0TgrkJD
Follow us: @thehill on Twitter | TheHill on Facebook
April 15, 2014, 04:30 pm
Rumsfeld: ‘I know I don’t know’ if my tax return was done accurately
Read more: http://thehill.com/blogs/blog-briefing-room/203605-rumsfeld-i-know-i-dont-know-if-my-taxes-are-accurate#ixzz2z0Ub1BkQ
Privacy group warns “even if you have never been arrested you could be implicated as a criminal suspect”.
http://www.infowars.com/fbi-will-have-up-to-one-third-of-americans-on-biometric-database-by-next-year/
Chears,
What a good find. That should be front-page material of interest to every USA taxpayer — does anyone know if their US tax return was done accurately? I had several years of returns that had to be re-done at mucho dollars. It’s all a crap shoot / the luck of the draw as all the rest of US citizenship-based taxation law for those outside the US walls.
Can we at least get it somewhat simplified by just having the USA move to residence-based taxation as the rest of the world? A good start it would be!
@bubblebustin,
I was in the later OVDP. I assume that was 2012. The IRS examiner let us carve out all account that had no tax due. So any employment pension, life insurance etc. The killer for us was my wife’s ISAs. All PFICs and quite large in value. We even managed by using the statutory default set 1291 rules for PFIC’s to show we had no income from one account and it escaped the penalty (they fought us because the account didn’t have a different account number but they caved). The IRS agent tried to convince me we would have a hard time complying with sec 1291 and it would be expensive. We could use the mark to market method offered in OVDP as it generated a large loss in 2008 which the IRS promptly denied (the rules changed all the time). I had to put a huge amount of effort in to understand the rules and do the calculations. It paid off. I found a rule my attorney wasn’t aware of and in fact our IRS agent didn’t know about at first. This rule is that when not a US person the days attributable to that period become non-PFIC days and so become ordinary income (like the current year). They escape the Sec 1291 tax and interest. There is a bug in form 8621 where PFIC tax cannibalizes AMT that helped a great deal.
I spent $8k having my 8 years of taxes done by a pro only to buy myself a copy of Lacerte and do the 8 years again myself. The IRS at first question the returns but after some back and forth on the tax laws they took my numbers without changes. A very minor victory in a totally crap year and a half.
I paid the OVDP penalty to avoid any risk after I got it to the point where my gains from opting out were realistically in the multiple thousands of dollars. I was willing to opt out at the last second if they became unreasonable.
I found the video of Rumsfelds comments on The Today Show. Most interesting coming from the war monger himself
Are US Citizens Required to Pay Income Tax?
http://investmentwatchblog.com/attorney-larry-becraft-takes-the-fight-to-the-irs/
“Individual income tax self- assessment has always been voluntary.”
http://www.cnet.com/news/tax-dodgers-beware-irs-could-be-watching-your-social-media/
@Neill
Bravo for you, that you have the knowledge and willingness to hold your ground with the IRS – and carve out a better deal for yourself than had you let them dictate the outcome to you.
Interesting timeline here. You’ve reached a conclusion with 2012 OVDP submission, whereas our entry into the 2011 OVDI has made very little progress. I’m not looking forward to having to negotiate with an organization that habitually moves the goal posts on shifting sands, but the sooner I put this behind me the better.
@bubblebustin,
My advise to anyone is to not enter this program. It was the biggest mistakes of our lives. It’s hell to get the data and deal with the taxes. The IRS seems to change the rules at a drop of the hat and the rules don’t make much sense. OVDP extends your requirement to pay taxes due in say 2003 but doesn’t let you get a refund in 2008. Stay in the program for more than a couple of years and they just keep any money you pay even if you change how you report the taxes. It’s just theirs to keep. Even if you opt out they keep the money you paid up front. got a bank account with 1 dollar in interest with zero taxes due because of tax credit and rounding. Doesn’t matter. It’s unreported income not tax due and they want 27.5% of the balance. We actually had this case for a forgotten account.
I guess since I did tax years 2003-2010 we must have entered OVDP in 2011. We exited maybe a month ago.
Cost skyrocket as the IRS agent asks stupid questions your tax people have to deal with. We had to explain to our agent how the pensions were protected by the tax treaty. How National Financial Services was actually the name Fidelity has on their tax forms and so she couldn’t take 27.5% of our US assets.
The forms just keep coming. Every few days it’s more stuff to put together and more details they want. She would ask for just some years from some accounts statements then complain later that she only had the statements she asked for and not other years and accounts.
One nice thing is the agent went looking for money and double checked my account balances. One replacement statement we had was in dollars rather then GBP and I didn’t notice. She ended up saving me a load of money on the balance penalty. She made it up on recalculated PFIC tax that she had to reverse later as I mentioned earlier.
I think at the end she must have either had enough or she felt bad about the system and she seems to get more lenient.
@Neill @bubblebustin – I also think that entering OVDI was the biggest mistake of my life. The one thing that Neill said that was not true for me was that I received almost all taxes and all penalties paid back with interest. However, I opted out. So in addition to Neill’s comment, whenever the IRS deigns to finally give you a chance to get out of its claws by looking at your case, I hope this gives you a little hope and encouragement for not playing along with their inappropriate rules for “US Persons” who live outside of the US borders. The waiting and uncertainty drove me crazy. I wanted to be fighting back. It is hard to fight back when you are in limbo.
@Neill ….
how did you explain the pensions were protected by the tax treaty…. I assume you filed Form 8833 ?
How much should I budget for the CPA when it seems that the examiners make a habit of asking stupid questions ?
Lucky us we have a few checking accounts with $0.49 p.a or even less of interest.
@bubblebustin …….. over 2 years now in limbo that will soon be a record…. maybe they forgot about you or your submission got lost . I am waiting for 16 month now but have TAS dealing with the current “normal” examination…..lets see when I get a notice about an audit.
@Neill, did they letyou exclude accounts from penalty base that had no tax due or accounts that had no unreported income (thinking of a situation where you have a foreign account for which tax was paid on income and thus due to FTCs, no US tax was due but there was still technically unreported income)?
@ChearsBigEars
Nice one from Donald Rumsfeld.
@Neill
I didn’t quite understand what you had discovered. Is it the case that your wife wasn’t a U.S. person and then became one?
“This rule is that when not a US person the days attributable to that period become non-PFIC days and so become ordinary income (like the current year). They escape the Sec 1291 tax and interest.”
The loosening up of the PFIC rules in U.S. recognised plans can only be a good thing, since it gives us more grounds to make arguments.
@ Publius, “The loosening up of the PFIC rules in U.S. recognised plans can only be a good thing, since it gives us more grounds to make arguments.”
Very true. An argument can now be made especially if the “foreign” (local) retirement plan is referenced in a dual tax treaty.
Personally, I have completely avoided funds for retirement plans because of this prior fear and stuck with fixed income corporate bonds individually and not as funds. Prior to my life off the plantation, I owned lots of funds so that was what I preferred, Forced investing in corporate bonds because of PFIC fears has cost me a bundle the last ten years.
@Calgary411, “Can we at least get it somewhat simplified by just having the USA move to residence-based taxation as the rest of the world? A good start it would be!”
One other idea would be if the USA simply went to its tax treaty “partners” and agreed that the sole filing requirement for US Citizens in their respective countries would be to attach the local return to a single page IRS Form that indicates you filed and paid tax with the local tax treaty partner.
That way they would save face by keeping everyone “in the system” so you just did not drop off.
@George
I am actually not required to fill a return in Britain, although do pay tax at the 20% rate here; however, my husband does it as a higher rate payer and it takes him a fraction of the time that I spend on my IRS return, so I would be in favour. It would be easier for all concerned.
Between 1926 and 1962, when the U.S. government didn’t tax foreign source income, they still required some paperwork to be filed.
@Not That Lisa!, I chose to be compliant forward. The uncertainty of being audited was difficult too.
But yesterday, my statute of limitation were over for my tax returns. I am hopeful I won’t ever be audited for the first 3 years of FBARs.
The toll on me was not so much financial but on my health. I think I can start to put this past me.
@anon100percent
Form 8833 does not have to be filed for retirement accounts. There is a list of exceptions:
>Sec. 301.6114-1(c)(iii) That a treaty reduces or modifies the taxation of income derived from dependent personal services, pensions, annuities, social security and other public pensions, or income derived by artistes, athletes, students, trainees or teachers;
We just pointer here to article 17 (I think it was) of the UK US tax treaty. I would have expected an examiner in OVDP to be aware that pretty similar language is going to be in all the treaties.
Budget for spending $20k or more on fees. It’s going to kill you.
@Not that Lisa,
Our unpaid taxes on PFIC’s were quite large. ~$32k (and this was the final value, maybe close to $45k the original way and doesn’t include penalties). There was no way I could escape the PFIC taxes. Penalty started out at $70k. I had to find a way to lower the tax and the penalty, which I did. I didn’t have to beg though I feel they robbed me with these rules. If it’s clear you have money the begging don’t work either. My agent was trying to get my US assets!
@uscitizenshipnightmare, We could only exclude accounts with no reported income as I said before. So we had accounts with income, no tax and they wanted the balance penalty. They would not budge on this rule for us. They only counted 2003-2010 though and one PFIC we sold in 2011 and it had no income in the period.
@Publius,
Buried in the deemed dividend election law done by the IRS is a mention that when not a US person the PFIC is not a PFIC. So if you purchased a PCI in 2001 but became a US person in 2004 then the days you held the PFIC from 2001-2004 become non-PFIC days and are treated like the days in the current tax year. So just normal income tax on the gains for those days.
This section didn’t have the ‘for this section only’ statement and it looks like it was done on purpose by the IRS. It’s more clear in their temporary regs. Of course once your fund is a PFIC it stays that way and once you become a US person it stays that way. This saved us a lot of money but I had to find this law myself and do all the calcs. I had to convince my lawyer and the IRS (the IRS was easier than my lawyer).
Here is the relevant section:
26 CRF 1.1291-9 (j) Definitions—
(1) Passive foreign investment company (PFIC). A passive foreign investment company (PFIC) is a foreign corporation that satisfies either the income test of section 1296(a)(1) or the asset test of section 1296(a)(2). A corporation will not be treated as a PFIC with respect to a shareholder for those days included in the shareholder’s holding period when the shareholder, or a person whose holding period of the stock is included in the shareholder’s holding period, was not a United States person within the meaning of section 7701(a)(30).
@George @Calgary411
The big problem with completely residency-based taxation is a country like Monaco. Except for J.K. Rowling and James Dyson, British billionaires have ended up residing in that tiny principality for tax purposes, usually while still profiting from their British businesses. I note that there is as of yet no IGA with Monaco, nor would I ever expect one. Because of Monaco, Italy and a few other countries require former residents who still have ties to the country to file tax returns if they move to a known tax haven. I think that the Yates & Co. proposal made some very sensible proposals about greatly reducing who the U.S. actively tracks.
At present, the U.S. IRS just comes off looking very odd. My pensions scheme, which covers only the employees of British universities, was very perplexed, noting in 2011 that “If any individual were seeking to avoid US tax, they would be seeking to use a far more flexible and less regulated vehicle for the purpose.”