Foreign Sellers and Federal Taxes for Buyers ?

[bks9581]

So a few months ago, I got a letter from the IRS saying I owed back taxes. We got a refund so I was really confused by this. Called the IRS and they saw nothing on my account and said to ignore the letter, it must be a mistake. About a month later, I get another letter from the IRS. I call back and they open an investigation because nothing is still showing on my account.

I get a letter today of the outcome of the investigation and it turns out that they are saying we owe on the purchase of our DVC property. It says the purchase was assessed a 10% amount of the gross sales price, which was paid, but form 8288 was filed and paid late. We apparently owe a penalty and interest on the amount owed. I looked up form 8288 and this is what it says:

"A withholding obligation under section 1445 is generally imposed on the buyer or other transferee (withholding agent) when a U.S. real property interest is acquired from a foreign person. The withholding obligation also applies to foreign and domestic corporations, qualified investment entities, and the fiduciary of certain trusts and estates. This withholding serves to collect U.S. tax that may be owed by the foreign person."

The previous owners were foreign, but my question is, why am I responsible for paying a penalty on something that they filed and paid late? I didn't even know this was required and had zero control over the sellers paying this tax.

Has anyone ever dealt with this before or are there any tax people out there that can explain this to me?

 

[Friendlyadvice2]

This is the FIRPTA tax or foreign investment in real property tax act. A foreign seller is responsible for paying applicable income tax on the sale of the property and typically 10% is withheld and paid to the IRS for the sale of the property. As such, the buyer, via your closing agent, is responsible for withholding the tax and paying it over. As the domestic party to this transaction, you are liable if the seller does not pay the tax. You provided your ssn at closing correct?

IMO, your closing agent should have withheld 10% of the sales price from the sellers proceeds at closing, prepared and filed the form and sent the money to the IRS as part of the closing fee....that's what they're paid for. You should have received a copy of the form. The closing should not have taken place until all proceeds were accounted for. There is no reason the filing of the form should have been delayed. It's also possible the seller was upside down at closing and needed to remit the amount to the closing agent to pay the lender and the withholding although they would eventually get it back. Either way, I'd be contacting the closing agent immediately....without more facts, I see this as their fault with you being on the hook for it.

I have nothing against foreign owners and most are great people with good intentions including many on the forums here, but I will not make an offer on a foreign owned resale contract for exactly the situation you are in now; it's just one more thing that can go wrong in an already less than optimum process.

 

[bks9581]

This is the FIRPTA tax or foreign investment in real property tax act. A foreign seller is responsible for paying applicable income tax on the sale of the property and typically 10% is withheld and paid to the IRS for the sale of the property. As such, the buyer, via your closing agent, is responsible for withholding the tax and paying it over. As the domestic party to this transaction, you are liable if the seller does not pay the tax. You provided your ssn at closing correct?

IMO, your closing agent should have withheld 10% of the sales price from the sellers proceeds at closing, prepared and filed the form and sent the money to the IRS as part of the closing fee....that's what they're paid for. You should have received a copy of the form. The closing should not have taken place until all proceeds were accounted for. There is no reason the filing of the form should have been delayed. It's also possible the seller was upside down at closing and needed to remit the amount to the closing agent to pay the lender and the withholding although they would eventually get it back. Either way, I'd be contacting the closing agent immediately....without more facts, I see this as their fault with you being on the hook for it.

I have nothing against foreign owners and most are great people with good intentions including many on the forums here, but I will not make an offer on a foreign owned resale contract for exactly the situation you are in now; it's just one more thing that can go wrong in an already less than optimum process.

Thank you very much for your reply. I will be calling the agent's office. It definitely makes me think twice about buying from a foreign seller again...

 

[mizarmour]

D

Thank you very much for your reply. I will be calling the agent's office. It definitely makes me think twice about buying from a foreign seller again...

Where you able to get this resolved? I'm purchasing from a foreign seller too (waiting to close any day now).

 

[bks9581]

D


Where you able to get this resolved? I'm purchasing from a foreign seller too (waiting to close any day now).

I spoke to the resale agent and they said that the title company sends all the documents in and that this was not the first time it had happened and is always the fault of the IRS. (Which I can believe after spending 5+ hours on the phone with them before figuring this out.) The title company just paid the balance and sent me documentation of having done so. Of course a few days later, I got another letter from the IRS and a new amount owed that is 2 cents higher than what the check was for that the title company sent in so not really sure what will happen now... It's been a headache to deal with.

 

[mizarmour]

Thanks for sharing your situation. So at least now I know if I hear from the IRS, I won't be freaked out. That's the great thing about these boards, people sharing their experiences and educating others.

 

[bks9581]

Thanks for sharing your situation. So at least now I know if I hear from the IRS, I won't be freaked out. That's the great thing about these boards, people sharing their experiences and educating others.

It should definitely take you less time to figure out than it took me. If I can help anyone avoid the 2+ hour wait time to speak to someone at the IRS then I will be happy. The strangest thing was that when I called the letters and amount owed didn't even show up in the database when they looked me up. So I'm not sure how many different databases they have at the IRS, but the system they have is pretty screwed up. Hopefully, your transaction will go smoothly and you will never hear from the IRS. Everything else with ours went well.