IRS Targets FIRPTA Enforcement

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Since 2017, the IRS Large Business & International Division (LB&I) has followed an issue-based audit strategy that creates “campaigns” focusing on issues that present a significant risk of non-compliance as opposed to entity-based concerns. In September 2020, plans were announced for a campaign to intensify the targeting of nonresident aliens subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).

Foreign nationals investing in U.S. real estate provide a major source of investment in the economy. In 2019, property sales to foreign buyers totaled $78 billion—creating significant opportunities for the IRS to increase tax revenue. (China, Canada, and Mexico were the top three countries of residence for foreign investors in real estate.)

Please note that the real property interest outlined in FIRPTA also applies to an interest in a U.S. real property holding corporation (USRPHC) where the fair market value of its USRPIs equals or exceeds 50% of its total assets. Single-member domestic LLCs are subject to FIRPTA in the same manner as if the foreign sole member was the seller, but domestic multi-member LLCs with foreign owners are taxed as corporations or partnerships and are not subject to FIRPTA as stand-alone “persons” in the eyes of the IRS.

Ignorance Is No Excuse

Most FIRPTA violations are due to honest mistakes, as opposed to willful tax evasion. For example, a seller rushing to complete a transaction may sign everything the title company sends without fully reading and understanding the documents. Sellers may also not understand how to proceed if they don’t have a Social Security number or mistakenly believe the withholding collected by the buyer fulfills their obligation and that filing a subsequent annual tax return is unnecessary.

Unfortunately, not understanding the law isn’t considered an acceptable excuse by the IRS. A nonresident alien found in violation of FIRPTA requirements will be subject to payment of the tax with interest, as well as monetary penalties or fines.

We’re Here to Help

To avoid finding yourself in hot water with the IRS, you should discuss your FIRPTA obligations with a business law attorney who focuses on issues involving foreign persons investing in the United States. At MEG International Counsel, PC, our dually licensed international business planning attorneys take the time to understand your goals and recommend tax planning strategies personalized to fit your unique needs. Contact us to learn more.

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