By: Michael W. Brooks, Esq.
Probably the trickiest area in the whole of FIRPTA is just who is a foreign seller to begin with. Foreign seller- 15% withholding tax gets sent into the IRS; US seller- no 15% goes into the IRS. Stakes are pretty high it seems….
First, remember it is the seller himself (or herself) who tells escrow (or title, or an attorney, depending on where in the US the sale is taking place) whether he or she is a foreign seller; it all starts with the seller and the seller’s declaration on the Certification of Nonforeign Status. It’s probably fair to assume the seller generally does not want to be considered a foreign seller (the seller does not want the 15% withheld and sent into the IRS at the time of closing). The seller probably wants to complete and sign the Certification of Nonforeign Status (and avoid the withholding), if that was proper. But completing the Certification of Nonforeign Status is not without its downside. Any person completing the Certification of Nonforeign Status is telling the IRS that they are a US person for tax purposes. US persons for tax purposes are legally required to complete their IRS 1040’s annually and on that IRS form 1040 they must declare their worldwide income (non-US persons for tax purposes need only file US income tax returns in any year in which they earn income in the US, plus they need only declare their US sourced income…big difference from having to inform the IRS as to your worldwide income in a given year). US persons for tax purposes are also required to annually disclose their non-US bank accounts (if they have any) via their annual FBAR (Report of Foreign Bank Accounts) filing, and if they don’t do that the IRS can impose heavy penalties. Non-US persons for tax purposes have no annual FBAR obligation. So it’s probably safe to say that, except for the required 15% withholding tax at closing on a real estate transaction, most persons would prefer to be considered a non-US tax person, and not a US tax person for tax purposes. So completing the Certification of Nonforeign Status is a big deal, and comes with a significant potential downside for those who are simply trying to avoid sending in the withholding tax to the IRS.