On September 14, 2020, the IRS Large Business and International Division (LB&I) released several new campaigns. One of those campaign targets withholding and income tax filing obligations associated with the disposition of U.S. real property interests by nonresident aliens.
The disposition of a U.S. real property interest by a foreign person is taxable under the Foreign Investment in Real Property Tax Act or FIRPTA. FIRPTA imposes income taxes on foreign persons on the disposition of U.S. real property. Related withholding rules require the transferee (buyer) of that real property interest to withhold 15% of the amount realized on the sale. The withholding is required whether the property is held for personal or business use. In addition, the transferee must file withholding forms and remit the tax to IRS within a certain period.
The new compliance campaign introduced by the IRS is titled “FIRPTA Reporting Compliance for NRAs.” The campaign aims to address FIRPTA compliance through issue based examinations and external education and outreach.
The campaign was launched after a report earlier in the year by the Treasury Inspector General for Tax Administration (TIGTA) released on March 9, 2020. That report was titled “Millions of Dollars in Discrepancies in Tax Withholding Required by the Foreign Investment in Real Property Tax Act Are Not Being Identified or Addressed.” The report from TIGTA was critical of current IRS processes and identified almost 3,000 buyers with discrepancies of more than $688 million in tax year 2017 alone.
The issues that TIGTA identified were in part related to the processing of Forms 8288 and 8288-A which are withholding forms associated with sales of U.S. real property by foreign persons. TIGTA also noted that the IRS has not established processes to use Form 1099-S, which reports sales of real property, to identify buyers who fail to withhold.
In light of the report from TIGTA, it comes as no surprise to see FIRPTA related enforcement activity. If you have any questions, please do not hesitate to contact us.
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