FIRPTA Tax Blog
Coronavirus safety concerns at IRS refund processing offices has forced the IRS to limit the amount of employees at the offices it dedicates to processing taxpayer refunds. The IRS is taking several steps due to the fears and concerns of its employees regarding the coronavirus outbreak, including eliminating in-person visits at taxpayer assistance centers and cutting the staff numbers at return processing centers by 50%. This cut in “on site” personnel was a response to requests by the IRS employees, who have become concerned about working in such close proximity to other employees (apparently a typical IRS processing center has employee cubicles jammed next to each other). Further updates have suggested the IRS is trying to adjust to allow its employees to work from home as much as possible.
In addition, speaking on the phone with IRS representatives is not currently possible as the IRS has temporarily suspended phone communications. This includes IRS representatives at the ITIN center in Austin, Texas, and IRS representatives (some of whom we at DIRECTS have gotten to know fairly well) at the IRS FIRPTA Unit in Ogden, Utah. Both facilities appear to be continuing to operate, although likely with less speed and efficiency because of the on-site employee limitations.
What Will These Changes Mean in Terms of Waiting Times for the Sizable Non-US Seller of US Real Estate Tax Refunds?
From my perspective, there is no other way to interpret this news than to guess the normal withholding tax refund time is now going to be delayed, and probably significantly delayed. Typically foreign seller withholding tax refunds take somewhere between 16 to 20 weeks upon submission, depending on the amount of documentation a foreign seller has received from the IRS regarding the tax sent into the IRS (which can be included with the tax returns). If 16 to 20 weeks is the normal wait time, what will it be now? No way to know, but my guess is much longer, maybe twice as long as normal (or maybe even longer).
Why Will Foreign Seller of US Real Estate Withholding Tax Refunds Probably Take Much Longer Under These Circumstances?
ITIN Processing Will Likely Take Much Longer
Every foreign seller must obtain an ITIN (“Individual Taxpayer ID Number”) or a US Social Security Number, or they will never receive a refund of their 15% (of the gross sales price of the real estate) IRS foreign seller withholding tax. But processing ITIN applications requires an examination by IRS representatives of a significant amount of private and specialized material; the sort of material which may be very difficult to impossible for an IRS employee to review from their home. For example, one of the items a foreign seller must submit to the IRS to obtain an ITIN is a “certified copy” of the foreign seller’s passport. Is the IRS really going to permit its employees to take a copy of an applicant’s passport to their homes to process the ITIN application? It’s such a private and important document, I question whether the IRS will allow certified copies of foreign persons’ passports out of the IRS office (out of that controlled environment). And if IRS employees cannot take certified copies of passports home, then we’re back to keeping track of how many employees are actually going into the IRS office in Austin, Texas (this is the office where ITIN’s are processed). If at some point the IRS (or the City of Austin, Texas) prohibits all IRS employees from showing up at the IRS offices (which must be considered a real possibility at this point), can the IRS even process ITIN applications? If the answer is no, then ITIN applications will sit for months, and so will refund requests.
Withholding Tax Refund Processing Will Also Likely Take Much Longer
Assuming the foreign individual has successfully obtained an ITIN, there still exists the hurdle of the IRS processing the tax refunds themselves. Procuring foreign seller withholding tax refunds from the IRS can be an excruciating process, even under good conditions. The IRS uses an arcane system of matching the (hopefully) properly prepared withholding tax forms (the IRS forms 8288 and 8288-A) to locator numbers it has stamped on these forms once they were sent into the IRS with the withholding tax checks. The IRS then mails back these withholding tax forms it has stamped with a locator number to the foreign seller…hopefully. The locator number shows the IRS employee how to find the with 15% (of the gross sales price) withholding tax check sent into the IRS. The IRS needs to be 100% sure it has the foreign seller’s withholding tax before it will issue any refund. Can the IRS employee check this locator number (to verify it has the foreign seller’s check) remotely from home? I really don’t know (I’m skeptical). To make matters even more challenging, many foreign sellers of course never actually receive the copy of the withholding tax form sent back to them by the IRS (stamped with the locator number). In this very common case, the foreign seller must prove to the IRS it has the withholding tax by using “extrinsic evidence” that the IRS has the tax, making the refund process much less efficient. Can the IRS employees really review a tax return full of various items of extrinsic evidence that the IRS has the withholding tax (and then find the foreign seller’s check somewhere in the bowels of the IRS) by taking the file home? I doubt it very much.
This Coronavirus situation is awful. In terms of foreign sellers from 2019 receiving their large withholding tax refunds in 2020, I suspect the refund time is very much tied to how many IRS employees at the key offices can continue to work at those IRS offices. If only 50% can continue to go into their offices, or if they are all forced to work from home soon (very possible you would have to think), my guess is foreign sellers could wait many, many months, or even over a year, for their refunds.