We are often asked “Is a PFIC still a good investment strategy based upon IRS taxation and recent offshore developments?” The answer is simple: the income it generates must be substantial enough to pay a heavy tax which the IRS levies on PFICs. The Passive Foreign Investment Company or PFIC strategy has changed in recent years due to FATCA and resulting IRS FBAR reporting requirements. Your investment in a foreign corporation will be taxed as a PFIC if more than 75% of the foreign corporations gross income for its taxable year is considered by the IRS to be passive income, or if 50% or more of the assets held by that foreign corporation either produced passive income or were held for the purpose of producing passive income.
It can be even more confusing when a PFIC is held as part of a Controlled Foreign Corporation or CFC. In and of itself, a CFC is not necessarily a PFIC. However, the PFIC assets held by a CFC could override the CFC calculations resulting in the higher burden of PFIC taxation. Many PFICs were originally sold as a tax haven.
A common mindset is: “Isn’t a PFIC still a good investment strategy going forward? It will be too difficult for the IRS to determine who owns what and how that traces back to me as a taxpayer.” This is simply untrue in today’s reciprocal information sharing agreements between the IRS and foreign banks, investment houses and sovereign tax authorities. The IRS is receiving direct electronic information concerning your holdings associated to your unique taxpayer identification number. It’s only a matter of time before the IRS connects the dots and you face an audit and draconian penalties, or worse, criminal charges.
PFIC calculations are incredibly complex. The reporting for CFCs and PFICs require different reporting forms with potential overlapping. Mistakes are easy and frequent, even for automated software packages (if they catch the issue at all). This is why it is important to consult the integrated tax, legal and accounting experts at Allen Barron. Our tax attorneys provide accurate insight and counsel. Our tax preparation and accounting teams ensure your foreign investments are properly reported. If you are contacted for an IRS audit we will represent you and aggressively advocate for your interests. If you have offshore investments or are asking yourself “Is a PFIC still a good investment strategy going forward?” or if you need help with tax returns or an IRS audit we invite you to contact Allen Barron or call us today at 866-631-3470 to schedule a free consultation.
