FIRPTA Tax Blog

About a couple years ago we started seeing the IRS issue (in volume) IRS Notice CP5071 (“CP5071”) or IRS Notice 5071C to to non-US persons who sold US real estate who were seeking their withholding tax refunds. In 2025, around three out of every ten of our (DIRECTS) clients (30%!!!) are receiving the CP5071 (identify verification notice), and these notices are really delaying our clients’ refunds. Remember, non-US persons who sold US real estate are typically expecting IRS refunds of tens or hundreds of thousands of dollars (occasionally they’re entitled to refunds in the millions of dollars), so the prospect of delaying these refunds by months or even longer (delays of over a year are easily within the realm of possible outcomes) can be very troublesome for the non-US person(s) eagerly awaiting for their large refunds. Let’s examine again: what’s going on with these (very frequently issued) identity verification notices, and why are they so difficult for the non-US individual person to satisfy?

The IRS Will Not Even Look at the Tax Return Until the Identity Verification Requirement is Satisfied

Note if the IRS determines it requires the taxpayer to verify his or her identity, it will not even look at the tax return until the taxpayer first verifies the identity. So the identification verification element starts a delay which could last months. The tax return basically sits at the IRS, unreviewed, until the taxpayer’s verifies their identity. And it could be months before the non-us person/ taxpayer even realizes the IRS is waiting for their identity verification. Between the time it takes for the IRS to generate a letter to the taxpayer to the time the taxpayer actually receives the CP5071 letter (non-US persons receiving mail from the IRS is a whole other non-certain topic which can delay the refund process further) it could easily be a period of several months. Plus as we review again below, verifying one’s identity is often not a simple process, and only after finally satisfying the verification requirement will the IRS actually commence its review of the substantive return (and as we’ve mentioned in many other blog posts, the IRS withholding tax refund process itself is full of pitfalls and potential delays; this is process itself which could take months). Simply by being unlucky enough to receive an identity verification notice means the non-US person waiting for the large IRS refund probably added months to a refund process which was already likely to take several months).

In February 2025 the IRS terminated approximately 7,000 (mostly recently hired) employees (leaving the IRS with approximately 90,000 employees). But now in March 2025 news reports suggest the IRS will commence terminating an even larger number of employees. As recently reported by the Associated Press, “the IRS is drafting plans to cut its workforce by as much as half through a mix of layoffs, attrition and incentivized buyouts.” Cut its workforce by half? From 90,000 to 45,000 employees? Wow. This sounds drastic, and from my perspective, given the antiquated system the IRS currently uses to provide withholding tax refunds, this could dramatically slow the refund process down. Let’s see why below.

The Amount of the Average Real Estate Withholding Tax Refund Is So Much Greater than the Typical Generic Tax Refund

If you’re a reader of this blog, you’ll note in prior blog posts I’ve walked through in varying degrees of detail how the IRS processes withholding tax refunds for non-US sellers of US real estate. It’s a highly outdated process (in my opinion) requiring IRS employees to match a non-US person to a (often very large) withholding tax check and IRS forms submitted to the IRS (usually in the calendar year before the tax return as filed…although sometimes the withholding tax check was submitted to the IRS two or more years before the tax return is filed). I summarize the non-US person real estate withholding tax process again below. Keep in mind as I walk through this again- the IRS process (as it exists today) of providing real estate withholding tax refunds requires the availability and attentiveness of human beings. The notion of cutting the number of IRS employees in half seems to me like a big threat to the refund process (a process which is already slow and fragile). And in this area the size of the refunds is typically huge. We are not talking about a $1,500 tax refund for a typical US IRS Form 1040. Foreign sellers of US real estate are often entitled to tens or hundreds of thousands of dollars in IRS refunds (we sometimes see refunds in the millions). What will happen when the IRS has only half the number of employees to process refunds in the amount of hundreds of thousands of dollars owed to foreign sellers of US real estate?

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.

And what about the various components of the Certification of Nonforeign Status, what is the significance of the key components?