Filing U.S. Tax Returns After Selling U.S. Property: A Must

The Foreign Investment in Real Property Tax Act, or FIRPTA, governs the disposition of U.S. real property interests by foreign persons. Essentially, FIRPTA permits the IRS to tax foreign persons on dispositions of U.S. real property interests.

You can find plenty of literature concerning both the different tax rates applicable when a foreign person or corporation disposes of a U.S. real property interest and the various disclosures that foreign sellers must make to the IRS. As such, this article will focus on the FIRPTA process and the obligation of non-U.S. persons to file U.S. tax returns after a sale of U.S. property.

Generally, subject to certain exceptions, when a non-U.S. person sells a U.S. property interest, the buyer is required to remit a percentage of the gross sales price to the IRS to capture any tax that the seller may owe to the U.S. on the sale of the property. This withholding amount is typically submitted to the IRS along with Form 8288; any amount that is in excess of the tax owed to the IRS can be recaptured by a foreign seller at a later date, when they file a tax return with the IRS (Form 1040NR or 1120-F).

The IRS has released data regarding FIRPTA obligations and revealed that very few individuals are filing the U.S. tax returns associated with the withholding. On a positive note, almost one-third of the filings initiated by foreign individuals have come from Canada, with Germany, the UK and Japan amongst other countries whose sellers of U.S. real estate have filed timely returns.

However, a growing number of individuals are choosing to forgo the filing of a tax return after they dispose of U.S. property. This decision is often made by foreigners who are not subject to withholding or have had a withholding amount reduced by filing Form 8288-B. These individuals fall into one of two categories: either they are intentionally not filing the return or they are not aware that they are required to file a return. In either scenario, the IRS is still entitled to its piece of the tax pie.

Although individuals may think that “missing” the filing deadline releases them from an obligation to file, Section 26 U.S.C. 6501(c)(3) – Limitations on assessment and collection indicates that the applicable statute of limitations on not filing remains open in perpetuity. As the code states: “In the case of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.”[1]This means that although foreign individuals believe that they are free and clear after the IRS does not receive their return, in reality, there is no statute of limitations associated with a failure to file.

Rather, taxpayers will be subject to any tax owed to the U.S. government in addition to hefty penalties that may result from failing to file. Add to this the ever-increasing amount of tax information being shared between the U.S. and foreign governments, and you quickly begin to realize that avoiding the IRS is a fool’s errand.

Both Altro LLP and our affiliated entity, Integrated Cross Border Tax Services, can assist you at every stage of selling U.S. property. Whether you have sold property and need to file a return or are beginning to put your home on the market, please consult one of our professionals, and we would be pleased to assist you in navigating FIRPTA and the complexities of the U.S. tax system.

[1] S. (6501(c)(3)