IRS consents to a retroactive QEF election after the taxpayer's accountant failed to flag a foreign holding as a PFIC

Plain-English summary

A U.S. taxpayer owned shares in a foreign corporation. That corporation was a
"passive foreign investment company" (PFIC), a category of foreign holding that
carries harsh U.S. tax rules unless the shareholder makes a "qualified electing
fund" (QEF) election, which instead lets the owner report the company's earnings
currently. The taxpayer's longtime CPA prepared his returns but never tested the
foreign corporation for PFIC status and so never made or advised the QEF election.
The taxpayer only learned the company was a PFIC years later when a second advisor
spotted it during estate planning. He asked the IRS for permission to make the QEF
election retroactively. The regulation allows a late QEF election when the
shareholder reasonably relied on a qualified tax professional, the government is not
prejudiced, the request comes before the IRS raises the PFIC issue on audit, and
the procedural steps (including sworn affidavits) are met. The IRS found all those
conditions satisfied and consented to the retroactive election back to the first
relevant year, together with a closing agreement covering the now-closed tax years.

Ruling snapshot

• Question: May the taxpayer make a retroactive QEF election for a foreign corporation his accountant failed to identify as a PFIC?
• Outcome: Approved (consent granted, with a closing agreement for closed years)
• Key authorities: IRC § 1295(a), (b); § 1297(a) (PFIC definition); Treas. Reg. § 1.1295-3(f), (g)

Full text (IRS public release)

Internal Revenue Service                        Department of the Treasury
                                                Washington, DC 20224

Number: 202551038                               Third Party Communication: None
Release Date: 12/19/2025                        Date of Communication: Not Applicable
Index Number: 1295.00-00, 1295.02-00
                                                Person To Contact:
------------------                              ------------------, ID No. -----------------
------------------------------                  Telephone Number:
-----------------------------------             --------------------
                                                Refer Reply To:
                                                CC:INTL:B02
                                                PLR-110349-24
                                                Date:
                                                July 29, 2025


                 TY: -------


Legend

Taxpayer                      =   ---------------------------------------------
FC                            =   ------------------------------------
Country X                     =   ---------------------------
Tax Professional 1            =   ----------------------------
Tax Professional 2            =   -----------------------------
Year 1                        =   -------
Year 2                        =   -------
Date 1                        =   --------------


Dear --------------:

This is in response to a letter submitted on Taxpayer's behalf by an authorized
representative requesting the consent of the Commissioner of the Internal Revenue
Service ("Commissioner") to make a retroactive qualified electing fund ("QEF") election
under section 1295(b) of the Internal Revenue Code (the "Code") and Treas. Reg.
§ 1.1295-3(f) with respect to Taxpayer's investment in FC.

The ruling contained in this letter is based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
an appropriate party. While this office has not verified any of the material submitted in
support of the request for ruling, it is subject to verification on examination.

FACTS

Taxpayer is a U.S. person who, prior to Year 1, acquired shares in FC, a Country X
entity treated as a corporation for U.S. federal income tax purposes. However,
Taxpayer did not become a U.S. person, within the meaning of section 7701(a)(30),
until Year 1.

For all tax years relevant to this ruling, Taxpayer engaged Tax Professional 1 to prepare
his U.S. federal income tax returns, including with respect to Taxpayer's ownership in
FC. Tax Professional 1 is a certified public accountant with over 30 years of experience
in tax preparation which includes U.S. international tax compliance and advice for
individuals, corporations, and partnerships. Taxpayer believed that Tax Professional 1
was competent to render tax advice with respect to Taxpayer's ownership of FC shares.
Further, Taxpayer believed that Tax Professional 1 had access to all relevant facts and
circumstances regarding FC and had no reason to believe otherwise.

With respect to Taxpayer's investment in FC, Tax Professional 1 prepared Forms 5471
for Year 1 through Year 2, treating FC as a "non-controlled" foreign corporation and
treating Taxpayer as a category 2 and 3 filer. Tax Professional 1 did not test FC to
determine whether it was a passive foreign investment company ("PFIC"), as defined
under section 1297(a) of the Code. As a result, Tax Professional 1 failed to identify FC
as a PFIC.

On Date 1, Taxpayer first became aware that FC was a PFIC when he engaged Tax
Professional 2, who identified FC as a PFIC during the course of reviewing Taxpayer's
investments for estate planning purposes. Prior to Date 1, Taxpayer had no knowledge
of, or reason to have knowledge of, the existence of the PFIC regime. Further,
Taxpayer had no reason to question the manner in which Tax Professional 1 had
reported his investment in FC for U.S. federal income tax purposes.

Taxpayer submitted affidavits, under penalties of perjury, describing the events that led
to the failure to make the QEF election by the election due date; the discovery of the
failure; the engagement and responsibilities of Tax Professional 1; and the extent to
which Taxpayer relied on Tax Professional 1. In addition, Taxpayer represents that, as
of the date of his request for ruling, the PFIC status of FC had not been raised by the
IRS on audit for any of the taxable years at issue.

RULING REQUESTED

Taxpayer requests the consent of the Commissioner to make a QEF election retroactive
to Year 1 under Treas. Reg. § 1.1295-3(f) with respect to his investment in FC.

LAW

Section 1295(a) provides that a PFIC will be treated as a QEF with respect to a
shareholder if (1) an election by the shareholder under section 1295(b) applies to the
PFIC for the taxable year; and (2) the PFIC complies with the requirements prescribed
by the Secretary for purposes of determining the ordinary earnings and net capital gains
of the company.

Under section 1295(b)(2), a QEF election may be made for a taxable year at any time
on or before the due date (determined with regard to extensions) for filing the return for
the taxable year. To the extent provided in regulations, the election may be made after
the due date if the shareholder failed to make an election by the due date because the
shareholder reasonably believed the company was not a PFIC.

Under Treas. Reg. § 1.1295-3(f), a shareholder may request the consent of the
Commissioner to make a retroactive QEF election for a taxable year if:

       1. the shareholder reasonably relied on a qualified tax professional, within the
          meaning of Treas. Reg. § 1.1295-3(f)(2);
       2. granting consent will not prejudice the interests of the United States
          government, as provided in Treas. Reg. § 1.1295-3(f)(3);
       3. the request is made before a representative of the Internal Revenue Service
          raises upon audit the PFIC status of the company for any taxable year of the
          shareholder; and
       4. the shareholder satisfies the procedural requirements of Treas. Reg.
          § 1.1295-3(f)(4).

The procedural requirements include filing a request for consent to make a retroactive
election with, and submitting a user fee to, the Office of the Associate Chief Counsel
(International). Treas. Reg. § 1.1295-3(f)(4)(i). Additionally, affidavits signed under
penalties of perjury must be submitted that describe:

       1. the events that led to the failure to make a QEF election by the election due
          date;
       2. the discovery of the failure;
       3. the engagement and responsibilities of the qualified tax professional; and
       4. the extent to which the shareholder relied on the professional.

Treas. Reg. § 1.1295-3(f)(4)(ii) and (iii).

CONCLUSION

Based on the information submitted and representations made with Taxpayer's ruling
request, we conclude that Taxpayer has satisfied Treas. Reg. § 1.1295-3(f).
Accordingly, consent is granted to Taxpayer to make a retroactive QEF election with
respect to FC for Year 1 provided that Taxpayer complies with the rules under Treas.
Reg. § 1.1295-3(g) regarding the time and manner for making the retroactive QEF
election. We have, consequently, approved a closing agreement with Taxpayer with
respect to those issues affecting his tax liability for closed years on the basis set forth
above. Pursuant to our practice with respect to such agreements, the agreement
contains a stipulation to the effect that any change or modification of applicable statutes
enacted subsequent to the date of this agreement and made applicable to the taxable
period involved will render the agreement ineffective to the extent that it is dependent
upon such statutes.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

In accordance with the Power of Attorney on file with this office, copies of this letter
ruling are being sent to your authorized representatives.


                                                     Sincerely,

                                                     /s/ Kristine A. Crabtree

                                                     Kristine A. Crabtree
                                                     Senior Counsel, Branch 2
                                                     Associate Chief Counsel (International)

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