FIRPTA Tax Blog
The Tax Recovery Process(es) for Foreign Sellers of US Real Estate Will Take Much, Much Longer in 2019 (Part 2)
By Michael W. Brooks, Esq.
The Quick Refund Method Will Take Longer in 2019
Foreign sellers of US real estate can obtain their withholding tax back from their real estate sales in one of two ways. The first way, and the best way, is for the seller to hire a very (very) competent attorney or accountant, and have that professional prepare what is called an 8288-B (withholding certificate) application. What happens here is the foreign seller asks the escrow company (escrow companies are used on the West Coast) to hold the withholding tax in their escrow account at close (i.e., not send it into the IRS). The escrow is allowed to do this only if the seller has properly made a withholding certificate application prior to the closing. In a normal year, the IRS might, if the application is prepared properly (a big “if”), approve the release of the withholding tax in four months or so. This year, my guess is it will take something like four to seven months due to the back-up caused by the shutdown. For example, if our Canadian who sold the Palm Springs house for $530,000 (and bought it for $550,000- a net loss) and had their $79,500 in withholding tax confiscated by escrow (as they have to under FIRPTA), sold the house in March, 2019, and a very careful 8288-B application is prepared, the IRS could grant a release of the $79,500 in four to seven months (in a non -shutdown year it would probably be like four months or less). Still, the 8288-B application will allow the seller to receive a full refund ($79,500) without the withholding tax ever going into the IRS (upon approval from the IRS the withholding tax is simply sent by the escrow company (which is holding the $79,500) directly to the seller)- that’s the way to do it. Even though the 8288-B process may take longer than usual in 2019, it’s still best way. Don’t let the withholding tax go into the IRS where bad stuff can happen, as described (unfortunately) below….
The Regular (Tax Return) Refund Method May Take a Long, Long Time in 2019
Of course most foreign sellers of US real estate simply had the 15% sent right into the IRS by the escrow company at closing before they even really knew what happened. So lets say our Canadian seller sold the Palm Springs house now in March 2018 (but otherwise the example above remains the same), but (as is the typical case), the escrow company sent the $79,500 into the IRS at closing. Now we’re here in early 2019, and our Canadian individual is very eager to receive a refund of the $79,000. He can send in his return now, yes. But will that accomplish everything he needs? First, remember again, the IRS is sitting on thousands of letters, forms and applications that were sent into the IRS during the shutdown in early 2019. Does the IRS have to go through all the letters and forms that were sitting around during the shutdown before getting to the new submissions and the 2019 tax returns? If the IRS has to go through all the mail sent into it in the five week shutdown before reviewing the new tax filing (and we don’t know if that’s the case), it will take months and months for them to catch up. And then there is the issue of the (mandatory) ITIN (Individual Taxpayer ID Number) applications. If the Canadian didn’t apply and receive an ITIN at the time of sale, now he must first apply for the ITIN at the time of the tax return. And what’s been happening at the ITIN department at the IRS? Hundreds or thousands of ITIN applications have piled up (and they are complex), and who knows how long it’s going to take the IRS’ ITIN Unit to go through their backlog (they received ITIN applications all during the shutdown). This delay could hamper the IRS’ refund department’s ability to match the withholding tax to this specific Canadian individual (so the IRS agrees it has the Canadian individual’s $79,500 to begin with). The tax return will need the ITIN to be assigned to the Canadian before the IRS will ever even consider whether he is owed a refund of $79,500 (or any amount). An ITIN finally obtained a year and a half after the sale is a little dangerous for the Canadian who is eager to receive his large refund tax return. And that’s the kind of mismatch in timing that could lead to the IRS having major difficulties in returning our Canadian’s withholding tax in a normal timeframe, or maybe even ever! Throw in the huge backlog caused by the shutdown to the complexity of withholding tax refund process in normal times, and now maybe we have a real mess.
Who knows when foreign sellers of 2018 and 2019 will receive their withholding tax refunds. My bet is some will take a long time.