In emailed advice released today on Tax Notes Today (2010 TNT 137-56 for you TNT fans) the IRS issued a rare written piece of information on FIRPTA withholding.
When a nonresident sells U.S. real estate, Uncle Sam wants to be sure to collect tax on the capital gain that the nonresident makes. This is achieved by forcing the buyer to withhold 10% of the purchase price. The buyer then gives that money to the IRS. The nonresident seller files a U.S. income tax return, and reports the capital gain and his/her/its actual tax liability. If the tax liability is less than the amount of tax withheld and remitted to the IRS, the nonresident seller gets a refund of the difference.
What happens if the buyer withholds the 10% but never pays it over to the IRS?
In the email reproduced below, the IRS says that the nonresident seller will get credit for the tax withholding from the IRS. And in this case, the nonresident seller was entitled to a tax refund.
The buyer has a problem
The IRS won’t get caught short. Don’t worry. The buyer is sitting on 10% of the purchase price, money that should have gone to the U.S. government but didn’t. That buyer is going to visit the House of Pain soon. “It’s Uncle Sam’s money, you have it, so gimme. Now.” (More or less that’s what will happen when the IRS comes knocking at the buyer’s door.)
The IRS email advice
The text of the email follows:
Release Date: 7/16/2010
Office: * * *
From: * * *
Sent: Tuesday, June 15, 2010 5:38:37 PM
To: * * *
Subject: advice on FIRPTA
Thanks for your patience while I coordinated with the IRC section 1445 experts within Counsel (* * *). Here is a written explanation that you can provide to the Service Center in bringing resolution to your case.
A nonresident alien sold real property located in the United States, which is a United States real property interest (USRPI) as defined in IRC section 897(c)(1)(A)(i) and Treas. Reg. section 1.897-1(c)(1)(i). The buyer withheld 10% of the amount realized on the sale, as required under IRC section 1445(a) and Treas. Reg. section 1.1445-1(b)(1). However, the buyer did not pay over the amount withheld to the IRS. Consequently, the nonresident alien seller did not receive a stamped copy of Form 8288-A from the IRS.
The seller filed a U.S. tax return on which it sought a credit in the amount withheld against his tax liability, and sought a refund of the excess amount withheld. To date, the Service Center has refused to grant the credit because it has no record of receiving the amount withheld from the buyer, as in fact the buyer had not paid over the amount withheld.
Whether the seller is entitled to the credit (and thus a refund) even though the amount withheld was never paid to the IRS.
Yes, the seller is entitled to the credit (and thus a refund in this case), provided that the seller has substantial evidence (e.g., closing documents) of the amount of the credit.
Treas. Reg. section 1.1445-1(f)(1) (last sentence) provides that “[a]ny tax withheld under section 1445(a) shall be credited against the amount of income tax as computed in [the seller’s] return.” See also IRC section 1462 (granting a credit for income tax withheld at the source). Treas. Reg. section 1.1445-1(f)(2) provides that generally a stamped copy of Form 8288-A (Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests) must be attached to the seller’s return to establish the amount withheld which is available as a credit. If the amount withheld under IRC section 1445(a) exceeds the seller’s maximum tax liability with respect to the disposition (as determined by the IRS), then the seller may seek an early refund of the excess pursuant to Treas. Reg. section 1.1445-3(g), or a normal refund upon the filing of a tax return.
Treas. Reg. section 1.1445-1(f)(3)(i) provides that if a stamped copy of Form 8288-A has not been provided to the seller by the IRS, the seller may establish the amount of tax withheld by the buyer by attaching to its tax return substantial evidence (e.g., closing documents) of such amount. Such a seller must attach to its return a statement which supplies all of the information required by Treas. Reg. section 1.1445-1(d), including the seller’s identifying number. The preamble to T.D. 8113 (Dec. 24, 1986), which finalized the IRC section 1445 withholding regulations, explains that Treas. Reg. section 1.1445-1(f)(3)(i) was promulgated specifically to deal with the situation in which the buyer failed to remit the withheld funds to the IRS. Accordingly, if the seller filed the requisite tax return and establishes the amount withheld through substantial evidence, the Service Center should grant a credit to the seller to the extent the amount withheld exceeds his maximum tax liability with respect to the disposition, as determined by the IRS.
It should be noted that IRC section 1461 and Treas. Reg. section 1.1445-1(e) impose liability on the buyer for the tax which it was required to withhold. In addition, IRC section 6651 imposes penalties on the buyer for failure to file Form 8288 when due, and for failure to pay the withholding when due.
* * * has spoken with the * * * attorney who previously provided you advice in this case, and all parties are now in agreement that credit for the withholding is permissible even though the amount withheld was never paid to the IRS. Thus, please disregard the advice previously provided by * * *.
Please let me know if you have any questions.