According to new audit report from the Treasury Inspector General for Tax Administration (TIGTA), current IRS procedures are insufficient to ensure that all foreign seller real estate transactions subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) are in fact compliant with FIRPTA. In particular, TIGTA noted that its analysis of data on Form 1099-S, Proceeds from Real Estate Transactions, indicated that there may be significant noncompliance with the FIRPTA filing and payment requirements. TIGTA reviewed 6,631 Forms 1099-S that reported approximately $1.6 billion in real estate transactions to the IRS for 2009 through 2011 and met certain criteria. TIGTA found that approximately 53 percent of the real estate sales reported on this sampling may not have properly complied with the FIRPTA.

The Deficit Reduction Act of 1984, in conjunction with FIRPTA, requires a withholding tax on the sale of U.S. real property by foreign sellers. As specified in the law, the buyer (either domestic or foreign) of a U.S. real property interest from a foreign seller is responsible for determining if the FIRPTA applies, filing the required forms, withholding a portion of the sales proceeds, and remitting the withheld amount to the IRS. However, buyers are dependent on the foreign sellers disclosing that they are subject to the FIRPTA. If the foreign seller is not truthful about being subject to the FIRPTA, the buyer could still be held liable for the FIRPTA tax if it is not withheld.

TIGTA reported that the IRS cannot identify all foreign seller real estate transactions subject to the FIRPTA, but that changes in the law and associated regulations could improve the IRS’ ability to effectively administer the FIRPTA. In addition, TIGTA found certain internal control weaknesses the IRS’s processing of withholding payments submitted with Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Property Interests. In some cases the IRS issued erroneous refunds related to FIRPTA credits claimed by foreign sellers on their income tax returns. Furthermore, TIGTA reported that the IRS did not always take the necessary steps to ensure that buyers filed Forms 8288 and paid the FIRPTA withholding tax after Form 8288-B determinations.

TIGTA made several recommendations. These included revising Form 1099-S so it more easily identifies real estate transactions subject to FIRPTA and improving controls over the processing of FIRPTA transactions.

Provided by CCH

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