On March 1, 2025, the IRS published it's response to comments submitted for Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund) form renewal. The full response to all submissions can be viewed here: https://omb.report/icr/202502-1545-002/doc/152295400

As a result of Democrat Abroad's formal comment the IRS:

• For 2024, has added mention of Form 8621 to Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad (viewed as the IRS' quintessential guide to how to file a tax return with the IRS from abroad).
• For 2025, will update Publication 54 to add that a foreign mutual fund or ETF may be a PFIC.
• Will update the annual estimated number of people who have to file Form 8621.

See below for the detailed formal response from the IRS.

In response to Democrats Abroad's formal submission, the IRS responded as follows:

1. Comment: PFIC rules are punitive and unfair to U.S. citizens living abroad.
   • (i) IRS Response: The PFIC rules in sections 1291 through 1298 were enacted by the Tax Reform Act of 1986 to discourage U.S. persons from investing in foreign funds to achieve deferral. Further, a U.S. citizen, regardless of where the person lives, is subject to U.S. income tax on income from all sources under sections 1 and 61.  All legislative power, including the enactment of sections 1, 61, and sections 1291 through 1298, is vested in Congress, and thus, the IRS and Treasury do not have discretion to modify any such law.  The regulatory PFIC rules have been promulgated with the statutory authority given to Treasury by Congress under sections 1291 through 1298.  The IRS and Treasury do not have discretion to modify such regulatory requirements without a proper and formal rulemaking process.
2. Comment: PFIC rules / Form 8621 are extremely burdensome, complex, and costly.
   • (i) Publish a simpler “effective annual rate” equivalent to daily compounding interest spread over each year.
     • IRS Response: Congress set forth the rules for computation of the interest in section 1291(c)(3). Such legislative power is vested in Congress, and the IRS and Treasury do not have discretion to modify the rules.
   • (ii) Permit individuals to declare their transactions and either to have the IRS compute the appropriate tax due, or to pay a modest over-estimate of tax due.
     • IRS Response: Congress set forth the rules for computation of the relevant tax due and the PFIC shareholder’s reporting requirement in sections 1291 through 1298. The IRS and Treasury do not have the discretion to overlook, modify, or fail to enforce such statutory rules.  In addition, the IRS does not have, or expect to have, this capability.
   • (iii) Implement safe harbor rules permitting certain “benign” investments (such as funds in foreign retirement accounts or dividend-distributing publicly offered investment produces) to report as either QEFs or ordinary assets subject to capital gain treatment.
     • IRS Response: The authority to collect information with respect to PFICs in Form 8621 comes from sections 1291 through 1298 and the regulations thereunder. The regulatory PFIC rules have been promulgated with the statutory authority given to Treasury by Congress under sections 1291 through 1298.  All of the above three comments require amendments to the current regulations.  The IRS and Treasury do not have discretion to modify such regulatory requirements without a proper and formal rulemaking process.  Any comment on amending a regulatory requirement should be submitted to the Federal Register during a rulemaking process to be considered.
3. Comment: The IRS’s estimate of the burden is not accurate.
   • (i) The burden imposed on individuals is neither estimated nor described in its totality by the IRS. Such information should be provided to OMB.
     • IRS Response: To better meet the burden of the reporting requirement of the PRA of 1980, the IRS sponsored a study by Arthur D Little, Inc (ADL) in 1984. ADL built a mathematical model designed to estimate the taxpayer compliance burden (the ADL Model).  The ADL Model is used to estimate the burden of the IRS Forms.  The estimate of the burden of the collection of information with respect to Form 8621 is measured in accordance with the ADL Model, which does not break out the burden based on categories.
   • (ii) The burden varies wildly by the reporting method used (e.g., a QEF election has much less burden than the burden of section 1291 fund reporting). Provide a separate estimate for each of the different reporting methods used.
     • IRS Response: To better meet the burden of the reporting requirement of the PRA of 1980, the IRS sponsored a study by Arthur D Little, Inc (ADL) in 1984. ADL built a mathematical model designed to estimate the taxpayer compliance burden (the ADL Model).  The ADL Model is used to estimate the burden of the IRS Forms.  The estimate of the burden of the collection of information with respect to Form 8621 is measured in accordance with the ADL Model, which does not break out the burden based on categories.
   • (iii) The estimated number of respondents in the Notice of Action [1] is 1,333, and such estimate is incorrect because the supporting statement to OMB on Form 8621 in 2022 [2] states that the estimated number of respondents is 1,372,333 and such estimate is likely to be closer to the actual number. The IRS incorrectly concluded that it would not offer electronic filing due to “the low number of filers” because of such error (1,333 instead of 1,372,333).
     • IRS Response: We agree that the estimated number of respondents in the Notice of Action is incorrect. However, such incorrect number did not result in the IRS incorrectly concluding that it would not offer electronic filing.  The IRS does provide electronic filing on Form 8621.  IRS is improving its burden evaluations moving from the ADL model towards a taxpayer compliance burden model, as described in Publication 5743.  This change in evaluating burden involves consolidating collection requirements and their associated burdens by filer type. The burden for individual, business, tax-exempt organization filers using Form 8621 is included in the new taxpayer compliance burden model.  The request for comments was for the trust and estate filers using the Form 8621, as the new burden model was not yet completed.  Recently, the IRS has completed the consolidation and burden evaluations for trust and estate filers, and received OMB approval.  Therefore, IRS will discontinue OMB #1545-1002 in the future. 
4. Comment: Provide plain language guidance and simplify the instructions so non-professional individual taxpayers can understand.
   • (i) IRS Publication 54 makes no mention of the PFIC rules even though it is intended as the definitive source of information for international taxpayers.
     • IRS Response: Publication 54 (2024) mentions Form 8621 and provides that Form 8621 must be filed with an individual’s Form 1040 if the individual is a U.S. person that is a direct or indirect shareholder of a PFIC. Publication 54 (2024) also provides a link to the Form 8621 page.  We will update Publication 54 for taxable year 2025 to add that a foreign mutual fund or ETF may be a PFIC.
   • (ii) There is no guidance on Form 8621 for non-professional taxpayers.
     • IRS Response: We recognize that the PFIC rules can be complicated, and investments in PFICs do create additional tax implications that may require professional guidance. However, such complexity comes from sections 1291 through 1298 and the regulations thereunder.  We believe that the instructions for Form 8621 provide guidance to the public on such complicated PFIC rules in the simplest manner possible. 
   • (iii) “Who Must File” section in the instructions is not understandable by ordinary individuals.
     • IRS Response: We recognize that the PFIC rules can be complicated. However, such complexity comes from sections 1291 through 1298 and the regulations thereunder.  We believe that the description in the “Who Must File” section is as simplified as it can be while remaining accurate.  Further, the relevant technical terms are explained in the “Definitions and Special Rules” section.  If commenters have any suggested language that is clearer, we are willing to consider it.   
   • (iv) The definitions and special rules section of the instructions is impenetrable for non-experts.
     • IRS Response: The complexity of the PFIC rules comes from sections 1291 through 1298 and the regulations thereunder. We believe that the “Definitions and Special Rules” section is as simple as it can be while remaining accurate.  If commenters have any suggested language that is clearer, we are willing to consider it.  
   • (v) Non-professional taxpayers cannot determine which reporting regime is applicable.
     • IRS Response: The complexity related to the three separate regimes – the interest charge regime, the QEF election, and the mark-to-market election – comes from sections 1291 through 1296 and the regulations thereunder. We believe that the relevant description in the instructions for Form 8621 is as simple as it can be while remaining accurate.  If commenters have any suggested language that is clearer, we are willing to consider it.
   • (vi) Determination of whether there is an excess distribution is indecipherable to average taxpayers.
     • IRS Response: The complexity related to the determination of whether there is an excess distribution comes from section 1291 and the regulations thereunder. We believe that the description of such rules in the instructions for Form 8621 is as simple as it can be while remaining accurate.  If commenters have any suggested language that is clearer, we are willing to consider it.
5. Comment: Offer an automated version of Form 8621 to reduce the taxpayer burden.
   • (i) IRS Response: We recognize that international taxpayers may not always have access to high quality filing options. We will consider the needs of international taxpayers in any future IRS efforts to expand filing options.
6. How Form 8621 and Form 8621-A are Affected: We will update the estimated number of respondents. We will also update Publication 54 for taxable year 2025 to add that a foreign mutual fund or ETF may be a PFIC.

[1] https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202203-1545-003#.

[2] https://omb.report/icr/202203-1545-003/doc/119295700.

In response to individual comments, most of which were a result of the campaign Democrats Abroad ran in October/November 2024, the IRS responded as follows:

Comment Letters from Individual Expatriates

1. Comment

In addition to the above, we received over 1150 comment letters, almost all of which came from U.S. citizens living and working overseas on a more or less permanent basis. The content of these letters was generally out of scope with respect to the specific concerns for which comments were requested, including, inter alia, whether the collection of information is necessary for the proper performance of the functions of the agency, or whether the information has practical utility.  They did not identify ways to enhance the quality, utility, and clarity of the information to be collected or ways to minimize the burden of the collection of information on respondents.

These writers nearly universally protested against the onerous taxation entailed by the PFIC regime and appealed for relief.  Many of these investors reported being inadvertently exposed to PFIC taxation due to being unaware that their investments constitute PFICs.  They argued that by virtue of living abroad, they are subjected to a different and more punitive tax system than U.S. citizens living inside the United States, who have access to more investment options that do not trigger the PFIC regime. 

Nearly all writers protested the need to prepare Form 8621, which in their view poses an intolerable burden due to its complexity.  Upon realization of the steps involved in completing Form 8621, many reported that they were unable to prepare the form on their own. 

Writers also noted that the complexity of U.S. tax compliance also typically results in incurring professional tax preparer fees that far exceed the cost of preparing the tax returns alone.  Many reported incurring substantial tax preparation costs that are disproportionate to taxes ultimately owed, which for many, is often minimal due to the foreign earned income exclusion and foreign tax credits.

Finally, the letter writers almost universally expressed dissatisfaction that the PFIC regime, and more specifically, their determination to avoid investing in PFICs, makes it far more difficult for them to effectively save for retirement than their peers residing within the United States.  That is because foreign managed funds, which is the type of managed investment product offering broadly available in their home markets, are generally classified as PFICs for U.S. tax purposes.  Meanwhile, these writers report being unable, as a practical matter, to access U.S. managed funds because of the refusal of both U.S. and foreign financial institutions, due to regulatory constraints, to allow them to maintain accounts holding U.S. investments from an overseas address. 

Therefore, the writers explain, for American citizens residing overseas, unlike their U.S.-resident counterparts, investment companies registered abroad may be the only investment vehicles they are eligible to acquire.  Many writers acknowledged that it is possible to avoid the costs of owning PFICs by purchasing equities directly on a foreign exchange.  However, this was regarded as an inadequate solution, as many investors find it difficult to achieve appropriate levels of diversification by investing directly in equities. For many writers, the upshot is that all of their retirement savings end up being deposited in low-yielding savings accounts.

2. IRS Response

The foregoing concerns essentially replicate concerns expressed in the three more substantive letters already addressed above (I, III, and IV).

The PFIC rules are arguably working as intended.  They are meant to discourage U.S. taxpayers from deferring U.S. income tax by investing in non-U.S. investment companies.  Non-U.S. mutual funds may not be subject to rules that require current distribution of realized income, which potentially makes them an attractive vehicle for tax deferral. As a result, virtually all foreign managed funds are treated as PFICs for U.S. tax purposes.  Legislative power to enact and amend sections 1291 through 1298 is vested in Congress, and thus, the IRS and Treasury do not have discretion to modify any such law.

Moreover, the PFIC regime is not the sole reason that financial and retirement planning may be burdensome for Americans abroad.  As described in the letters, an issue for expatriates is that, while PFICs by design are generally not intended to be suitable investments for U.S. investors, investing directly in U.S.-managed funds may not be a practical alternative for reasons unrelated to the PFIC regime.  Many of the writers cited practical constraints, such as U.S. institutions that offer brokerage and mutual fund accounts barring non-U.S. residents from opening a new investment account or maintaining an existing one.      

U.S. taxpayers residing abroad can generally avoid the PFIC regime by purchasing shares of non-PFICs directly on a foreign exchange.  However, investors may find it difficult to achieve their preferred level of diversification by investing directly in equities.  In addition, it may also be possible to avoid the PFIC regime by acquiring interests in U.S.-domiciled ETFs on a foreign exchange.

3. How Form 8621 and Form 8621-A are Affected

As discussed, the foregoing concerns replicate concerns expressed in the three more substantive letters addressed above (I, III, and IV).  Updates to Form 8621 and 8621-A will be made as described in “How Form 8621 and Form 8621-A are Affected” for those prior comment letters.