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:
1) They will have to participate in a video call with someone from the IRS, as the IRS will want to see the individual live while reviewing their identification, and the IRS will ask the foreign individual questions while reviewing the identification and viewing the individual over the computer monitor (again, computer knowledge will be required as they will have to speak with someone with the IRS while on the computer). Note, we (the tax professionals at DIRECTS) will not be able to verify the identity of our clients on their behalf, they will have be able to do this for themselves (although we certainly coach them through the process).
2) They will have to provide (scan into the computer) additional forms of identification which they will also be required to scan into the IRS site. Bank records, utility bills, plus government identification are examples of identification which may be required. And note, this identification must be in the same exact name as the name used on the tax return (this is hardly guaranteed for many of our clients, as clients often use different names in varying instances).
Common Requirements/ Challenges in Verifying Identity
A) Again, the foreign individual must be able to operate computers and be able to scan documents into the computer.
B) The foreign individual must be able to access IRS.gov so the individual can create an online IRS account. This may seem like a fairly benign condition, but accessing IRS.gov can be extremely challenging for some clients. There are some very prominent countries in the world which restrict access to the internet. A VPN (or a trip to the United States or other location where the internet is not restricted) may be the only way to circumvent these internet restrictions (to create the account for individuals from countries which restrict internet access).
C) The foreign individual will likely have to speak basic English. The IRS may have someone who can translate the foreign individual’s native language during the video call (in Spanish and possibly Mandarin), but this should not be counted upon. At a minimum, the foreign individual will need someone to help translate while on the video call with the IRS (but this is tricky too, because the IRS official wants to hear answers directly from the taxpayer, as it is his or her identity which they are trying to verify…the IRS agent may prohibit the translator from speaking during certain key questions). Verifying the identify of non-US seller who does not speak English can be very, very challenging.
So there are some significant challenges to foreign sellers of real estate seeking to obtain refunds of IRS withholding taxes who receive an IRS Notice 5071C. This notice has the potential to delay significantly or even deny some helpless foreign taxpayers their refund. This can be a real burden with (often) so much money at stake for the foreign individual who sold US real estate and who is seeking to obtain a refund of the withholding tax submitted to IRS.