Vermont Bar Journal, Vol. 40, No. 2 Spring 2015, Vol. 41, No. 1 | Page 18
International Tax Rules Frequently Encountered in Vermont
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At a minimum, the IRS has the power to issue a proposed assessment based upon a
foreign provided Form 1099 (which is what
some UK banks are using) or Form 8966
(which is the general FATCA report).
This explanation here is greatly simplified. The instructions to the 2014 Form
8966 are a concise source of official information on how the reporting system
is designed to work in much more detail.
Be aware that, if IRS makes an adjustment
(seeking income tax, interest, and penalties), periodic reports are then made by IRS
to the Vermont Department of Taxes.
3. PFICs
Passive Foreign Investment Companies
were carved out of the forest of financial
products by the Tax Reform Act of 1986
and subjected to a strict compliance system designed to collect tax at ordinary income rates. The definition of PFICs (found
at IRC section 1297) is technical, but they
are most easily categorized as all non-US
based mutual funds. The ownership of such
non-US mutual funds by US taxpayers is required to be reported on IRS Form 8621,
and the income from a PFIC is subject to a
tax rate and deemed interest charge that
could well be higher than straightforward
taxation of US mutual fund income. In addition, a variety of rather complex elections
must be made in a timely manner or their
benefits are lost.
In our experience, few Vermont tax accountants and return preparers are willing
to learn the complexities of PFIC reporting.
Form 8621 has eleven pages of detailed instructions on the eight elections that can
be made and their reporting consequences. The cost and complexity of PFIC reporting is not the only problem. An individual who owns securities through a PFIC may
well be taxed more severely in many cases
than if the stocks and bonds were owned
directly by the individual. For example,
PFIC rules can make it difficult to obtain
capital gains treatment for long-term capital gains that pass through a PFIC.
Prior to