The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) requires any sale or disposition of U.S. real property interests that involves a foreign seller to submit 10 or 15 percent of the sale price to the IRS for withholding. While the tax debt is the seller's, it's the buyer's responsibility to send the withholding amount to the IRS.

Timing matters. If the IRS doesn't receive the tax due by the deadline, the agency will begin assessing interest and penalties until the tax debt is satisfied.

The IRS can pursue a foreign person for a tax debt just as the agency can any U.S. citizen, resident, or corporation. Foreign individuals and corporations that have unpaid taxes may be limited in their ability to enter the U.S. or do business in the country. The IRS may put a lien on other U.S. property the foreign person owns or has an interest in.

While the tax debt is the seller's, if the buyer fails to withhold the required amount and submit it to the IRS, and the seller fails to meet their tax obligation, the buyer may become liable for the tax debt. This includes any penalties or interest.

The Collection Statute Expiration Date

Under the Collection Statute Expiration Date (CSED), the IRS does have a 10-year clock on collecting taxes. The agency also has the power to suspend or extend that 10-year deadline. In cases when a taxpayer has left the country, the IRS can choose to suspend the deadline, meaning a taxpayer cannot simply avoid stepping into the U.S. for a decade and then have their tax debt wiped clean.

Exceptions and Withholding Certificates

Certain sales that fall under FIRPTA qualify for exceptions from taxes. In other cases, a seller may file for a withholding certificate to reduce or eliminate the tax they owe.

To qualify for an exception, the taxpayer must still file a tax return with the IRS. Without filing, the IRS has no proof that the taxpayer qualified for an exception.

Similarly, a foreign person must apply for a withholding certificate. Until the IRS approves the withholding certificate, the seller remains responsible for the tax owed.

If you have questions about FIRPTA, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.