By Josh Whitworth, CPA-Dallas
Taxpayers and tax practitioners should be aware of the new proposed regulations on Passive Foreign Investment Companies (PFIC) issued in January 2022. If these regs become final, they will potentially increase the compliance obligations of individual taxpayers significantly.
Under current regulations, partnerships are treated as a shareholder under the entity approach. Under the new proposal, domestic partnerships will no longer be treated as shareholders of PFICs. The new proposed regs will treat any partner who is NOT a partnership as a direct shareholder under an aggregate approach. Therefore, if these proposed regs becomes final in their current form, individuals will be responsible for making the applicable elections and complying with the appropriate compliance obligations by filing Form 8621.
Many individual taxpayers may hold extremely small indirect PFIC interests through domestic partnerships. Individuals may have difficulty obtaining the necessary information to make an applicable election such as a Qualifying Electing Fund (QEF) election or complying with disclosure requirements.
This should be concerning to taxpayers and practitioners if the regs become final as the PFIC rules are extremely complex and the individual taxpayer may not be in a position to obtain the necessary information to make the most efficient tax election or even complete the Form 8621 filings.