Articles Posted in FIRPTA Withholding Taxes

By: Michael W. Brooks (President DIRECTS)

The revised IRS Forms 8288 and 8288-A became effective January 1, 2023. The Form 8288 and 8288-A are extremely important forms in any non-seller (of US real estate) transaction. Proper preparation of these forms can mean the difference in a non-US seller receiving their refund a handful of months after sale (if the forms are prepared properly), to maybe years after the sale or maybe even never receiving it all (which absolutely can happen if there are big mistakes on the forms which bury the withholding tax/refund in bowels of the IRS). And with 15% of the sale price being withheld at the time of close, the refund amount held by the IRS is often in the hundreds of thousands of dollars. Finally, these forms are extremely important to avoid penalties being assigned by the IRS (to the buyer). Again, THESE FORMS ARE IMPORTANT. Let’s take a look at the ley changes to the Form 8288, most of which are in the introduction and Part I of the revised Form 8288.

How Does Part I of the New Form 8288 differ from Part I of the Old Form 8288?

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.

Despite the IRS “ordering” over 10,000 employees back into IRS offices a couple weeks ago, it appears many IRS employees have respectfully declined to follow this IRS directive. Recall on April 27, the IRS ordered its “mission critical” employees back into the IRS offices. This request for employees to return to the IRS offices came only about a month after the IRS ordered most of its employees out of the IRS offices. In late March, the IRS, which employs around 75,000 people across the country, sent many workers home as a precaution against the spread of Coronavirus. Around 44,000 started working from home, with around 30,000 or so continuing to be paid but not working. And then on April 27th, the IRS “ordered” around 10,000 employees (presumably amongst the group not already effectively working from home) to go back into the IRS offices, however a closer look at that “order” reveals the IRS merely requested the employees to go back to work in various IRS offices, and tried to tantalize them back into the offices with incentive pay.  Not surprisingly, the offer of a little extra incentive pay does not appear to have done the trick, and apparently many IRS employees declined this order/request. Of course it didn’t help that the IRS did not even have face masks (at all its offices…it did have them at some) to give to its employees for their safety in this terrible time of Coronavirus.

Now over two weeks after the April 27 “order”,  it appears that the IRS still needs many more “volunteers” to return to work in their IRS offices. It’s unclear if the IRS is offering extra incentive pay (above what they offered in the first go-around, which was reported to be a bump of between 10% to 25% of base salary for the near-term) to further entice the employees who have decided not to return. But my guess is even extra incentive pay is unlikely to do the trick for many IRS employees. IRS Commissioner Chuck Rettig told congressional staff late last month that 100 IRS employees had contracted Coronavirus, and four had died. Would an IRS employee (or anyone for that matter) really want to go back into a cramped IRS office when they were already being paid their full salary (and in many cases not actually being required to work for their full salary) during the Coronavirus pandemic? Compliments to them if they do, but I doubt many are retuning (even with incentive pay). The IRS is probably going to have to order them back into their offices (a real order, not a request) in order to complete all the tax refund work in 2020, and such an order may not be easy to issue or enforce.

Our work at DIRECTS focuses exclusively on foreign sellers of US real estate and their tax refunds from 2019 (or earlier) sales of US real estate, or withholding certificate applications for 2020 sales, or procuring ITIN’s (Individual Taxpayer ID Numbers) for the foreign sellers. Although we assist foreign investors selling real estate throughout the entire United States, the majority of the foreign sellers we assist are selling US real estate in California (for example Los Angeles, San Gabriel Valley, Orange County and the Palm Springs area are big hotspots for foreign investment in real estate). We rely heavily on two IRS offices (in particular) to function at high efficiency. The most important IRS office for FIRPTA (foreign seller tax) work is the IRS office located in Ogden, Utah, where the IRS’ “FIRPTA Unit” is located. This is the office that reviews our withholding certificate (8288-B) applications. The other office we rely heavily upon is the IRS office in Austin, Texas, where the IRS processes both ITIN requests and tax return/ withholding tax refund requests. Both offices appear to be having significant challenges in terms of bringing back employees into the IRS offices, largely because of local conditions and/or local stay-at-home ordinances. You can see the challenge for the IRS higher officials looking to get the refunds back on track- how can we order our employees back in the offices when local stay-at-home orders (see for example the May 8th Austin, Texas stay-at home order, which was extended despite the State of Texas lifting its stay-at-home order on May 1st) are keeping the general population at home for safety reasons?

Following up on DIRECTS’ most recent blog post, where I discussed the concerning issue of IRS employees who had become frightened to go into the (cramped) IRS offices and do work which I really believe can only be accomplished in their offices, the story has taken a profound and potentially confrontational turn. Starting Monday (April 27), the IRS has ordered its “mission critical” employees back into the IRS offices. To reassure the employees (I guess), the IRS is requiring PPE to be utilized at all times within the IRS offices, but the IRS may not be able to provide such PPE to the employees. A leaked IRS internal memo suggests the employees consider “utilizing cloth face coverings fashioned from household items or made at home from common materials at low cost” if they have no other PPE available. Ugh. The head of the Treasury Employees Union stated “the initial wave [of employees returning to the IRS offices] will include about 10,000 employees at 10 locations who will be opening taxpayer correspondence, handling tax documents, taking taxpayer telephone calls and performing other functions related to the filing season.” At least some employees are being offered incentive pay, and (at this point) the employees are not being forced to return (they are permitted to turn down the order to return to the office). Many IRS employees had been permitted to work from home recently (given the current health crisis ravaging the country), but from the what we’ve been seeing recently at DIRECTS, working at home does not lead to the speediest of results from the IRS. Nobody has been able to call the IRS for about a month, and mail sent to the IRS “has been piling up in trailers”, according to the Wall Street Journal.

The issue of whether the IRS employees work from the actual IRS offices is of particular interest to us at DIRECTS (Domestic and International Real Estate Closing Services), because we focus on non-US sellers of US real estate, who are always awaiting large tax refunds this time of year, plus our 2020 foreign sellers  who are applying for ITIN’s and applying for 8288-B/ withholding certificates are very much interested in speedy IRS compliance as well. Our FIRPTA-related work requires the IRS employees to be in their offices and on their game, there is no doubt in my mind. This push by the IRS has been prompted by the need to inject the stimulus checks into the economy, but really the IRS needs its employees back in the offices for all reasons, including processing tax returns and issuing refund checks (such as the large refunds typically due non-US sellers from the prior year). We have seen the time for the IRS to process refunds, ITIN’s and 8288-B withholding certificates really start to drag sharply in the last month, so for us this (push back into the IRS offices) really is needed.

Is this the end of it; the IRS employees are just going to go back to the IRS offices, no problem? I doubt it. As of Monday, they are not actually required to go back in (it appears to be just a request from the IRS officials). What if there are not many IRS employees who agree to simply return to the the IRS offices?  Plus members of Congress have already begun openly complaining that the employees are not being given PPE by the IRS. Moreover, I have no doubt these people are scared. One incident of Coronavirus in one over-stuffed IRS processing center and this could become a huge mess. It might not even take an incident for this to become a huge mess.