FIRPTA Tax Blog
We have many foreign individuals (or foreign entities) who sold their US real estate in a prior year (say 2020 or 2019), and simply can’t obtain their refund. Hugely frustrating of course. And this refund is very often a large amount (15% of the gross sales price of a US real estate transaction is going to be a lot of bucks for almost anyone). Let’s say, for example, a non-US person sold US real estate in August 2019 for $1,400,000. So $210,000 went into the IRS in August 2019, and depending on the amount of profit the foreign seller made on the sale, the foreign individual is probably entitled to a large refund, and here we are in August 2022 and the individual hasn’t received a penny. Three years since the sale and the withholding tax of $210,000 being submitted into the IRS, and still no refund. That’s a long time. We call refunds which have not been obtained years after the original date of sale “SOS refunds”. Happens so frequently, but what caused it, and what to do now about the SOS refund?
Did the Foreign Seller File a US Tax Return to Claim the Refund?
The obvious first question in reviewing the SOS refund scenario is, has the foreign seller even filed a US tax return yet? Although it’s a really long timeframe, there is a limit on when the tax return must be filed in order for the person to be eligible to receive the refund. Generally, in order to be eligible for the tax refund, a tax return must be filed not later than three years from the date of the original deadline for the tax return. In the case of a non-US person selling US real estate, the tax return is due on June 15 of the year after the real estate transaction. So, in the case of our August 2019 sale, the original deadline was June 15, 2020, and the latest the non-US person can file a tax return and still be eligible for a tax refund is June 15, 2023. Even now in this hypothetical sale, the individual still has the better part of year to file the tax return to be eligible to obtain a refund (but after that, the refund will be time-barred). Final note here, be careful that if a tax return has been filed that the IRS actually acknowledges their receipt of such tax return. So often we call the IRS to check on the status of a refund and (according to the IRS agent) the IRS has simply never received the tax return. Yikes, better mail it right back in there to ensure no question that the tax return filed was timely.
Does the Foreign Seller Have an ITIN, and if so, is it Active?
Another common problem we see in helping clients receive refunds (especially in SOS refund cases) is the issue of the ITIN (Individual Taxpayer ID Number). These ITIN’s are so critical. Does the non-US person have a US social security number or (more likely) an ITIN? Did they get it at the time of the real estate sale (hopefully) or did they obtain it later? Is the ITIN currently active, because the IRS deactivates ITIN’s after three years of non-use (determining that will require a phone call to the IRS…not easy these days)? Finally, does the IRS associate this ITIN with the withholding tax from the 2019 real estate sale? So many SOS cases we help with come down to some problem with the ITIN. If you filed a tax return for a tax return (and the IRS has the tax return), and it’s been a year or so and you still don’t have the refund, trust me and check on the status of the ITIN (so often, this is the key issue in the SOS refund case).
Has the IRS Connected the Withholding Tax with the Foreign Person and Their Specific Sale of US Real Estate?
The last common issue we see in SOS withholding tax refund cases is a little more complicated. Assuming we know the IRS has the tax return and the foreign person has an ITIN and it is active (and connected by the IRS to the person), the final main issue to review in SOS cases is does the IRS associate this person with the withholding tax amount it is in possession of ($210,000 from the 2019 sale of US real estate in our example)? The matching by the IRS of the refund to the taxpayer (even one who filed a timely tax return and who has an active ITIN) is probably the trickiest area in this puzzle. Factors which play into the matching of the withholding tax refund to the person include how carefully and precisely the original withholding tax paperwork was prepared (and submitted to the IRS at the closing of the sale…the IRS Forms 8288 and 8288-A) and whether the foreign person ever received any withholding tax confirmation letters from the IRS (in a perfect scenario, the taxpayer will receive a letter from the IRS a few months after the close confirming the IRS is in possession of the foreign person’s withholding tax from the sale). The whole delay in the refund (which causes the necessity of a SOS refund effort) could be that the original IRS forms 8288 and 8288-A were not prepared carefully and that and has made it very difficult for the IRS to register that it has the individual’s withholding tax, and hence made it very difficult for the person to receive any refund.
As you can see, there are many common reasons why a foreign person who sold real estate years ago still has not obtained a refund. We highlight three main issues above, but there are other reasons too. At DIRECTS, old and cold withholding taxes are rescued via SOS refunds all the time. Really, it’s just a question of re-tracing every step, identifying where the flaw which caused this long delayed occurred, and then fixing it.