If you are a foreign person who sells or transfers a U.S. real property interest, you may be subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) withholding tax. This tax requires the buyer or transferee to withhold 15% of the amount realized on the disposition and remit it to the IRS within 20 days of the closing date. The amount realized is the sum of the cash paid, the fair market value of other property transferred, and any liability assumed by the buyer.
The purpose of FIRPTA withholding is to ensure that the U.S. government can collect income tax on the gain realized by the foreign seller. However, the withholding tax may not reflect the actual tax liability of the seller, which depends on various factors such as the seller’s tax status, the holding period, the cost basis, and the amount of gain or loss. Therefore, the seller may be entitled to a refund or have to pay additional tax when filing a U.S. income tax return for the year of the sale.
How to File for FIRPTA Tax Withholding
To file for FIRPTA tax withholding, the buyer or transferee must complete and sign Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests. The buyer must attach a copy of the withholding certificate, if any, to Form 8288. The buyer must also furnish a copy of Form 8288-A to the seller and file the original with the IRS.
A withholding certificate is a document issued by the IRS that reduces or eliminates the amount of FIRPTA withholding tax. The seller can apply for a withholding certificate by filing Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, before or on the date of the sale. The seller must notify the buyer in writing that the application has been submitted to the IRS. The buyer must still withhold the tax until the IRS issues the withholding certificate or a notice of denial. If the IRS approves the application, the buyer must refund the excess withholding tax to the seller within 20 days of receiving the withholding certificate.
Can I Request Interest from the IRS?
If the seller overpays the FIRPTA withholding tax and is entitled to a refund, the IRS will pay interest on the overpayment amount. The interest rate varies and may change quarterly. The interest is calculated from the due date of the seller’s tax return to the date the refund is issued.
However, if the seller underpays the FIRPTA withholding tax and has to pay additional tax, the IRS will charge interest on the unpaid amount. The interest rate is the same as the overpayment rate and is compounded daily. The interest is calculated from the due date of the seller’s tax return to the date the payment is made.
The seller can request the IRS to reduce or waive the interest due to an unreasonable error or delay by the IRS. To do so, the seller must submit Form 843, Claim for Refund and Request for Abatement, or a signed letter explaining the reasons for the request. The seller must meet certain criteria to qualify for interest abatement, such as filing the claim within the statute of limitations, not contributing to the error or delay, and relating the error or delay to a ministerial or managerial act by the IRS.
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