FIRPTA Tax Blog
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 It’s a highly outdated process (in my opinion) requiring IRS employees to match a non-person to a (often very large) withholding tax check and IRS forms submitted to the IRS (usually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?
How Easy is it to Speak with Someone at the IRS About the Status of Your Refund?
Are you having problems obtaining your refund? You (or your representative like me, Michael Brooks at DIRECTS) will need to call in and speak with an IRS representative to check on the refund. But how easy is it to speak to an IRS representative on the phone? You might have to wait on hold a long time; you might have to wait two or three hours to speak with an IRS representative…you might even have to wait days until you can even get through to reach an IRS representative, and this will be significantly exacerbated if the IRS reduces its staff dramatically. And once you finally do get through, will the IRS person on the phone be able to help you with your issue? Not everyone who answers the phone for the IRS will understand a foreign seller withholding tax issue. So after waiting hours to get through, you might have to hang up and call back in (and maybe wait hours again) to speak with another IRS agent (who understands the area better). Assuming the IRS agent has a full grasp of the issue, what can they actually do to help? They should be able to provide you an update of sorts (such as, we’re still processing that tax return, or the return is under review, or we don’t have all the information/ documentation we need to process your return). If they need further information or documentation, can you provide them the missing documentation while on the phone with the representative looking at your case? Maybe, but you’ll have to fax it in to the representative (no emails…the best you’ll do is faxing to the IRS representative while he or she is reviewing your case…provided you still have a fax machine or e-fax of course). Depending on the issue, the representative might not accept a fax and might require you to mail the missing information (not good). If they terminate half the IRS employees, how long will it take them to process the mail? The bottom line is, calls into the IRS can take a long time (especially to speak with an agent who really understands the area/ the issue), and the IRS representative can really only provide you status updates or supplement your refund effort with additional needed information which you fax in, or maybe you’ll have to mail it in. You are not going to be able to speak with the people who are actually processing your returns/ refunds on the phone. This system (of speaking with an IRS representative about the status of your tax return, but not the tax return processor themselves) is already indirect and slow. But terminating approximately half the IRS employees may make it nearly impossible to even speak with an IRS representative. Perhaps in the future one can only speak with an IRS representative after waiting five hours on hold (a crazy amount of time), or via a call back system where they call you back days later. The IRS representative call-in system (which can take a long time now and is only of limited effectiveness), takes manpower…it takes employees. What happens if so many of these employees are let go?
Why is the Current Process For Refunding Real Estate Withholding Taxes so Cumbersome?
We start from the premise that the IRS currently utilizes a withholding tax refund process which probably stems (and still relies on some technology) from the 1960’s, and hasn’t really dramatically changed much since then. What makes this process so challenging? It’s really a combination of factors. First of all, most foreign sellers of US real estate often do not have a US social security number or individual taxpayer ID number (an “ITIN’) as of the date of close (they can apply for an ITIN at the close, but really not before). So frequently the 15% x the gross sales price withholding tax goes into the IRS without a US taxpayer ID number assigned to the foreign seller (who’s account is being credited with the withholding tax). As you might guess, that’s already the start of a recipe for problems. Without a US tax number assigned to the foreign person when the tax is submitted to the IRS, the IRS can have trouble keeping track of the foreign seller’s withholding tax. Next comes an even more fundamental issue- the IRS must acknowledge it is in possession of the withholding tax from the sale. It astounds me, even without this dramatic proposed reduction in force, how difficult a time the IRS can have simply acknowledging they are in possession of the 15% withholding tax (that they received the check from the escrow company or other closing agent). I have been on the phone countless times with IRS representatives, reading to them the coded numbers typed on the back of a cashed (by the IRS) withholding tax check, and still they can have trouble “finding” the check withing the depths of the IRS. It’s really unbelievable. Finally, once the IRS locates the withholding tax, it must “connect” the tax to the foreign person, and again we can have troubles here (they can identify they are in possession of the tax, but not that it should be credited to the foreign seller’s account…this can happen whether or not the foreign seller has a US tax number at the time of sale). Additional headaches such as required identity verifications of the foreign individual (these are getting more common and can really slow down foreign seller refunds); additional reviews (audits) of the tax return itself; and problems for the foreign taxpayer to receive the refund check by mail (mail security issues have really become a problem of late; IRS refunds checks are lost or stolen/foreign frequently in these times), and foreign seller withholding refunds can really be a nightmare sometimes to obtain. So currently real estate withholding tax refunds can easily take a year, or longer (they can also take just a few weeks if all goes well). This is the current process with 90,000 IRS employees. As presently constituted, this process takes manpower. And I just cannot understand how a refund process which is already so complicated and outdated it can already easily take a year to receive the refund, won’t become even more complicated and take more time (maybe a lot more time) if the IRS reduces its workforce by anything close to half its current employees.