FIRPTA Tax Blog

We at DIRECTS spend each day working to help non-US persons obtain refunds of IRS mandated withholding taxes from US real estate sales. It is (often) not a simple process, not easy work, and there are frequently large refunds at stake. In our efforts, we are frequently required to call the IRS (and often the state of California as well) to check on the status on languishing refunds. Often the IRS will require us to resubmit certain paperwork (maybe resubmit the entire tax return) in order for them to process the refund, and this can the delay the refund for months. Or they might tell us the foreign seller’s ITIN recently expired, and this too will cause us a delay of months (maybe several months). So with this background we were not thrilled to see the IRS issue of several IRS Notices 5071C to our clients in 2024 (with respect to their 2023 IRS Form 1040-NR). These are “identify verification” notices, and they are not easily handled, and the IRS will not issue one penny in refund until the non-US person successfully verifies their identity to the IRS’s satisfaction. The IRS just added another (substantial) hurdle to foreign sellers attempting to obtain withholding tax refunds.

What is the IRS Notice 5071C?

So we at DIRECTS submit a tax return to the IRS (requesting a refund of (all or some…depending on the foreign seller’s net profit on the real estate sale) of a non-US seller’s withholding tax), and instead of sending our client the refund, the IRS sends a notice which states that the IRS needs our client/ taxpayer to “verify your identity and your tax return.” Uh ok, how do we do that? The Notice 5071C directs the taxpayer to “sign in or create a new online account at IRS.gov”. Wait, I’m a non-US person who’s owed a $250,000 refund from the IRS and I’m first required to sign in an create a new online account at IRS.gov? What if I don’t speak English? What if I’m not comfortable with computers and creating “online accounts”? What if I live in a country where I cannot connect to the IRS website because the internet is restricted by my home country (a real issue for many of our clients)? If I can’t do this, do I lose my $250,000 (yes, the foreign taxpayer must verify their identity to obtain any refund)? Further, the Notice 5071C directs us that the IRS requires the taxpayer to provide a government issued photo identification (which means our non-US taxpayer will have to be ready to scan into the computer government issued identification). Again, what if our non-US individual/client is not used to computers and has no idea how to “scan” anything into the computer? And basic scanning into the computer is hardly the end, the foreign seller of real estate will have several more hurdles to overcome to verify their identity and obtain the refund (assuming they can read the notice in English and properly access and use the IRS website). What else must non-US persons do to prove their identity:

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.