We have many foreign individuals (or foreign entities) who sold their US real estate in a prior year (say 2020 or 2019), and simply can’t obtain their refund. Hugely frustrating of course. And this refund is very often a large amount (15% of the gross sales price of a US real estate transaction is going to be a lot of bucks for almost anyone). Let’s say, for example, a non-US person sold US real estate in August 2019 for $1,400,000. So $210,000 went into the IRS in August 2019, and depending on the amount of profit the foreign seller made on the sale, the foreign individual is probably entitled to a large refund, and here we are in August 2022 and the individual hasn’t received a penny. Three years since the sale and the withholding tax of $210,000 being submitted into the IRS, and still no refund. That’s a long time. We call refunds which have not been obtained years after the original date of sale “SOS refunds”. Happens so frequently, but what caused it, and what to do now about the SOS refund?
Did the Foreign Seller File a US Tax Return to Claim the Refund?
The obvious first question in reviewing the SOS refund scenario is, has the foreign seller even filed a US tax return yet? Although it’s a really long timeframe, there is a limit on when the tax return must be filed in order for the person to be eligible to receive the refund. Generally, in order to be eligible for the tax refund, a tax return must be filed not later than three years from the date of the original deadline for the tax return. In the case of a non-US person selling US real estate, the tax return is due on June 15 of the year after the real estate transaction. So, in the case of our August 2019 sale, the original deadline was June 15, 2020, and the latest the non-US person can file a tax return and still be eligible for a tax refund is June 15, 2023. Even now in this hypothetical sale, the individual still has the better part of year to file the tax return to be eligible to obtain a refund (but after that, the refund will be time-barred). Final note here, be careful that if a tax return has been filed that the IRS actually acknowledges their receipt of such tax return. So often we call the IRS to check on the status of a refund and (according to the IRS agent) the IRS has simply never received the tax return. Yikes, better mail it right back in there to ensure no question that the tax return filed was timely.