FIRPTA Tax Blog
By Michael W. Brooks, Esq.
michael@directsllp.com
Following up on our previous posts earlier this year, where we informed you the IRS employees in offices throughout the United States left those offices in late March, due to concerns about the virus (and stopped processing any foreign seller tax returns and paper tax returns for US taxpayers as well), we can tell you three and one-half months later that the IRS employees who process foreign seller issues and paper tax return refunds have still not returned to their offices to continue this work. While there have been numerous news reports about the IRS employees returning to their offices in June (and those reports were true in terms of answering phone calls and general operations), in terms of processing any paper tax returns (and issuing any refunds associated with such returns) and performing any function for foreign sellers of US real estate (we’ll go over those below), the IRS has not returned to work, and there appears to be no end in sight as to when they will actually return to their jobs (although just on July 7 we did receive an email from the IRS about the resumption of ITIN services). Detailed below is what we know, and at the end our thoughts on how realtors and escrow officers should address this big (and growing bigger) problem.
First, how do we know the IRS hasn’t worked in 3 and ½ months (you won’t read any news reports about this); how are we so sure? We at DIRECTS (Domestic and International Real Estate Closing Tax Services) prepare all the required tax paperwork for foreign sellers of US real estate. We help foreign sellers obtain ITIN’s (Individual Taxpayer ID Numbers), which they must have if they ever wish to obtain a refund of the 15% (of the gross sales price of the US real estate) withholding tax imposed on foreign sellers, and we help the foreign sellers obtain refunds of the 15% withholding tax- either in the year of sale (via the 8288-B/ withholding certificate process) or we help foreign sellers obtain their refunds (of the 15% IRS tax and the California (or other state) 3.3% withholding tax) in the year after sale via the tax return process. In doing this work for our hundreds of current clients, we typically receive mail from the IRS about some client matter just about every day. And yet, we (DIRECTS) have not received one piece for mail from the IRS since the end of March (not one piece of mail at any of our offices in Irvine, CA, Arcadia, CA or Palm Desert, CA). The IRS has clearly menWhat Specific Tasks Do We Know the IRS Has Ceased Performing?
Ok, let’s be specific about what tasks the IRS is (and is not) currently performing. If you call the IRS’ general phone line, they will answer the phone (that was not the case in April). If you call the IRS’ international line (as we do often at DIRECTS), an IRS representative will answer that call as well. They are also currently processing tax returns (and issuing refunds) if the taxpayer filed the tax return electronically.
But….
1. The IRS is Not Currently Issuing Refunds if the Individual Filed a Paper Tax Return (Impacting All Foreign Persons and Even (Presumably) Those US Persons Who Filed Paper Tax Returns).
Most Americans file their tax return electronically, and if they did that (or are about to do that) and are owed a refund, they should receive the refund in a matter of weeks (the normal refund period). But foreign persons cannot file their tax return electronically, they must file paper tax returns to retrieve their refund (which will usually be a large refund if they are seeking a refund after selling US real estate and are subject to the 15% withholding tax on sale). But if you go to IRS.gov/refunds, you will see the following statement on the IRS website:
“Processing Delays for Paper Tax Returns
We continue to process electronic and paper tax returns, issue refunds, and accept payments. We’re experiencing delays in processing paper tax returns due to limited staffing. If you already filed a paper return, we will process it in the order we received it. Do not file a second tax return or call the IRS.”
At DIRECTS, not one of our hundreds of foreign seller clients for whom we filed a tax return in 2020 has received an IRS refund from the end of March through July 12 (and counting) . Similarly, I will assume (although I cannot say with certainty), no US person has received an IRS refund in the last three and one-half months if they filed a paper tax return. The back-up for refunds must be out the door at the IRS right now since so many tax returns have been filed since March.
More on the on-going delays at the IRS in Part 2…