SIP plan - Mutual Funds - Growth Funds - OVDI

udyfery · Post by **udyfery** » Fri Aug 19, 2011 10:47 am

I've invested Rs 60K every month in Growth Funds (No Interest/Dividends) - My investment planner said that there is no long term tax on growth funds which I think is wrong in US tax system. If it's considered PFIC. How should I calculate penalty? Can someone help me with example? I invested from 2005-2011 - every month fixed amount (different NAV) - Yearly it went up and down in 2007-2008. Do I pay tax 20% on gain every year? Is is accumulative?
For e.g. if I've paid taxes for 2006 from NAV 100 to 200 (20 tax) , Year 2007 NAV 300 - how much would be tax in 2007? Should I also include penalty and interest? How should I calculate that?

Please help me!!! Thank you!!!

zen · Post by **zen** » Fri Aug 19, 2011 11:05 am

I'm no expert on how PFICs need to be reported but here is a blog that might help.

http://hodgen.com/phils-blog/

greyfri · Post by **greyfri** » Fri Aug 19, 2011 6:09 pm

udyfery;405687I've invested Rs 60K every month in Growth Funds (No Interest/Dividends) - My investment planner said that there is no long term tax on growth funds which I think is wrong in US tax system. If it's considered PFIC. How should I calculate penalty? Can someone help me with example? I invested from 2005-2011 - every month fixed amount (different NAV) - Yearly it went up and down in 2007-2008. Do I pay tax 20% on gain every year? Is is accumulative?
For e.g. if I've paid taxes for 2006 from NAV 100 to 200 (20 tax) , Year 2007 NAV 300 - how much would be tax in 2007? Should I also include penalty and interest? How should I calculate that?

Please help me!!! Thank you!!!

In the US tax system, there are a complicated set of rules to estimate tax on foreign mutual funds (called PFICs). You have 2 options:

1) If there is NO, and I mean not a penny of explicit income (no dividends, no sales), then you can defer paying any tax till you sell. But when you do sell, you will have to pay tax at the highest marginal tax rate for that year (35%) + an interest charge. And your calculation will be horrifically, incredibly complex.

2) Or you can use mark to market. In OVDI, the IRS allows you to calculate tax at 20%. Even with a penalty on extra tax (20% of tax due), you would pay tax at 24% + interest. That would still be less than using method 1.

As to how to use MTM, basically you have to calculate gain and loss each year. Gain (or loss) = Market Value at end of year - (Basis at the start of year + additional investments in that year). Gain is taxed at 20% (since you bought within the OVDI period, there should be no interest charge), losses can be deducted at 20%, but only up to the extent of 'unreversed gains' in the PFIC. This has to be done for each PFIC independently.

You can read some of my earlier posts on PFICs which have some simple examples. But basically this is complicated enough that you should get a CPA to do this, and moreover a CPA who understands PFICs (unless you think you can figure out the instructions).

If you use method 1) above, the calculation is even more complex when you sell and you pay more tax. That just postpones the pain. I just saw in another post that you did sell, so you can really only use method 2.

zen · Post by **zen** » Fri Aug 19, 2011 6:44 pm

If you defer taxes on PFICs, are you supposed to mention that in your OVDI application? Or is it understood when you do not show any gains in the proper schedule form?

udyfery · Post by **udyfery** » Sat Aug 20, 2011 12:01 am

I can't thank you enough greyfri for clarifying it. This was a turning point to make a case to file OVDI. Surprisingly I contacted two CPAs and they had no clue on PFIC and IRS expects new immigrant to know about it. I have further questions:
1. You said you can defer it and pay 35% when you sold it? So, if I sold part of it in 2010 with capital gain of 25000 do I pay 35% of it? Is it schedule D?
2. You said #2 method MTM may be lower. I still have to calculate it. I was thinking if I'm paying 24% from 2005-2010 every year then it should be higher.
Also, please take a look at IRS OVDI FAQ 10 - A rate of 7% of the tax computed for PFIC investments marked to market in the first year of the 2011 OVDI application will be added to the tax for that year
This is very confusing. What is 7% and where do I add if I started in 2006?

udyfery · Post by **udyfery** » Sat Aug 20, 2011 4:44 am

Extract from another blog (which is Greyfri's option 1):
If you invested in growth funds i.e. if there was no dividend received on PFIC and no sale of any PFIC interest you could not do the MTM. Then you would be subject to excess distribution rules (Sec 1291) when you sell the PFIC or if you receive dividends in the future. You will be taxed at maximum marginal tax rate for all the years you held the PFIC by spreading your gain over the term of your holding. Also there will be interest due on the taxes due for prior periods. OVDI gives you an option to use MTM but you could also not do MTM if there was no unreported income and then face the punitive Sec 1291 when you sell the PFIC stock in the future. It depends on the materiality of your gains as noted in the FAQ.

greyfri · Post by **greyfri** » Mon Aug 22, 2011 5:03 pm

zen;405743If you defer taxes on PFICs, are you supposed to mention that in your OVDI application? Or is it understood when you do not show any gains in the proper schedule form?

If you have included them in your FBAR, and used the deferral method, then technically there is nothing to report if no dividends or dispositions. If you want to, you could write a brief note explaining that in your submission. Note that if you want to make the argument that the PFICs should be excluded from FBAR penalty since there was no income, then you would need to write that up too.

greyfri · Post by **greyfri** » Mon Aug 22, 2011 5:07 pm

udyfery;405858I can't thank you enough greyfri for clarifying it. This was a turning point to make a case to file OVDI. Surprisingly I contacted two CPAs and they had no clue on PFIC and IRS expects new immigrant to know about it. I have further questions:
1. You said you can defer it and pay 35% when you sold it? So, if I sold part of it in 2010 with capital gain of 25000 do I pay 35% of it? Is it schedule D?
2. You said #2 method MTM may be lower. I still have to calculate it. I was thinking if I'm paying 24% from 2005-2010 every year then it should be higher.
Also, please take a look at IRS OVDI FAQ 10 - A rate of 7% of the tax computed for PFIC investments marked to market in the first year of the 2011 OVDI application will be added to the tax for that year
This is very confusing. What is 7% and where do I add if I started in 2006?

1) You need to fill this in on Form 8621 (which is incredibly complex, though only 2 pages). However, the rate is not just 35%. You need to allocate the gain properly to previous years and then add an an interest charge from that year on. Its extremely complex.
2) 24% is lower than 35%, so it would be lower under IRS MTM. Even if you don't pay explicitly now (if you defer), you would have to pay at some time in the future at 35% + interest charge, and have a massive paperwork headache too. Presumably the reason you joined OVDI was to clear everything up, and using the IRS's MTM is the best way of doing that.
There is no interest charge if you bought in the OVDI period.

udyfery · Post by **udyfery** » Sat Aug 27, 2011 11:27 am

Can I use MTM method for non-OVDI (Traditional VD or amendments) purpose? Or I have to file Form 8621? Do I need prior election for MTM? Should I do it now for Year 2011 return?

udyfery · Post by **udyfery** » Sun Aug 28, 2011 1:50 pm

Thank you all Guru's! So does that means I have to amend all prior years returns and attach 8621 and MF statements? Unfortunately I couldn't find a single example of Form 8621 on internet. I invested from Aug 2005 - June 2011. Sold around 70% of portfolio in June 2010. How should I MTM elect rest 30% portfolio?
Do I have to amend 2005, 06, 07 08 09 10? On 2010 return, can I do MTM election for 2011 as well as "excess distribution" for past?