FIRPTA Tax Blog
By: Michael W. Brooks, Esq.
Earlier posts informed you that IRS employees in offices throughout the United States left their offices in April 2020, and only came back to work in July. We can now give you an update on where the IRS is at processing tax returns, 8288-B withholding certificate applications and ITIN applications. In general, the news is that the IRS came back to work in July 2020 (with a four-month backlog of work waiting for them), but many of those returning IRS employees are now working from home. In general, they have gone through the backlog pretty well (probably as well as can be expected in many instances), but problems still remain. Below we give you an overview of where we’re are at at DIRECTS in terms of the IRS processing the work of our 2019/ 2020 clients. First, an update on the current state of affairs at the IRS, from our view…
The Biggest Problems Now at the IRS is that They Are Not Cashing All the Withholding Tax Checks
What hangs over the entire state of the IRS, both looking back into the 2020, and presently, is that IRS employees spent months out of the IRS offices (and not working) in 2020. That caused significant delays in 2020, and many of those delays of course have carried over into 2021. Recall at DIRECTS our business is helping foreign investors of US real estate (who are subject to the large withholding tax of 15% of the gross sales price of US real estate). We now have hundreds of clients who sold real estate in 2020 who are eager to obtain these (usually large) withholding tax refunds. For example, take a foreign investor who purchased US real estate in 2017 for $1,000,000 and who sold it in October 2020 for $1,200,000. At closing, the escrow company sent $180,000 ($1.2M x 15%) into the IRS, because the seller is a non-US person. But this person might actually only owe $30,000 to the IRS ($200,000 appreciation x 15% individual capital gains rates), and so they are owed a significant refund from the IRS of $150,000 ($180,000 – $30), and here in January 2021 they are eager to receive their refund of $150,000. And we’re happy to help them get it. But we have a major problem with the IRS refunds right now- the IRS generally has not cashed any withholding tax check sent into it after August 2020 (if escrow sent in a withholding tax after August 2020, it almost certainly has not been cashed yet by the IRS yet). So we cannot obtain refunds right now for foreign investors who sold after August 2020, because at the moment the IRS does not even realize it has the withholding tax. Ugh. So there will be major IRS refund delays in 2021, it is already baked in.
Here’s a summary of how the IRS ended after a challenging 2020 into the present…
How is the IRS Doing Processing 8288-B/ Withholding Certificate Applications?
8288-B/ withholding certificate application processing was a mess in 2020, and remains a mess presently. 8288-B/ withholding certificate applications can be a terrific tool to help foreign sellers of US real estate obtain their large refunds (of the 15% IRS withholding tax) in the matter of a few months (usually four months after the date of real estate close) instead of a year to a year and a one-half after the close. These applications are reviewed by a very specialized IRS Unit in Ogden, Utah, which also took about four months off last year to adjust to operating while in a pandemic. When these employees returned to work in July, 2020, they resumed their work not from the IRS office, but from their homes (in Utah). The end result is that the IRS backlog processing 8288-B/ withholding certificate applications remains very long. At DIRECTS, we have not received an approved withholding certificate yet for any sale which closed after April 2020. So for any withholding certificate applied from May 2020 to present, we are still waiting for our approval letter (withholding certificate) from the IRS. So it appears the line to obtain withholding certificate approvals from the IRS is nine months long, or longer. These usually take only about four months, so this is a big delay the IRS is working through.
More on where the IRS is at processing issues related to non-US sellers of US real estate in Part 2 of this blog, coming up…