TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Office of Audit

Highlights

MILLIONS OF DOLLARS IN DISCREPANCIES IN TAX WITHHOLDING REQUIRED BY THE FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT ARE NOT BEING IDENTIFIED OR ADDRESSED

Final Report issued on March 9, 2020

Highlights of Reference Number:  2020-40-014 to the Commissioner of Internal Revenue.

IMPACT ON TAXPAYERS

The Foreign Investment in Real Property Tax Act (FIRPTA) of 1980 imposes an income tax on foreign persons selling U.S. real property interests.  Buyers are required to withhold a percentage of the anticipated taxes due on the amount realized from the sale.  The withholding requirement serves as an incentive for foreign sellers to file the appropriate U.S. tax return (i.e., Form 1040NR, U.S. Nonresident Alien Income Tax Return, or Form 1120-F, U.S. Income Tax Return of a Foreign Corporation) to report income from the sale and claim a credit for the withheld funds.  During Processing Year 2017, buyers reported more than $1.6 billion in FIRPTA withholding.

WHY TIGTA DID THE AUDIT

A foreign seller of U.S. property can claim a credit for the tax withheld by the buyer.  If the seller’s tax liability is less than the amount of tax withheld, the seller gets a refund of the difference.  Sellers filed 17,382 tax returns claiming more than $598.7 million in FIRPTA withholding credits during Processing Year 2017.  The overall objective of this review was to assess IRS efforts to verify the accuracy of withholding credits reported on Forms 1040NR and Forms 1120-F.

WHAT TIGTA FOUND

Reconciliation processes do not effectively identify and address FIRPTA reporting and payment noncompliance.  TIGTA identified 2,988 buyers with discrepancies of more than $688 million between the withholding reported on Forms 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, filed during Processing Year 2017 and the withholding assessed to the buyer’s tax account.  Extensive data inaccuracies in the FIRPTA database, incorrect and unclear guidelines, and employee errors contributed to these discrepancies.

In addition, some FIRPTA withholding assessments are incorrect because the IRS does not have sufficient procedures to ensure that Withholding Certificates are properly applied when determining the amount of withholding that should be assessed to buyers’ tax accounts.  TIGTA identified 3,184 Forms 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, for which the IRS did not assess more than $264 million in FIRPTA withholding tax.

The IRS also has not established processes to use Form 1099-S, Proceeds From Real Estate Transactions, to identify buyers that do not report and pay FIRPTA withholdings.  TIGTA’s analysis of Forms 1099-S for Tax Year 2017 identified approximately $22 million in FIRPTA withholding that was not reported and paid to the IRS.  Finally, employee errors resulted in 1,835 foreign individuals potentially receiving more than $60 million in additional FIRPTA withholding credits than they were entitled to receive.

WHAT TIGTA RECOMMENDED

TIGTA made 12 recommendations to the IRS to improve the processing of Forms 8288 and Forms 8288-A and the verification of withholding credits claimed by foreign sellers.  In addition, TIGTA recommended that the IRS initiate actions to address the accuracy of information in the FIRPTA database.

IRS management agreed with all of TIGTA’s recommendations and plans to take appropriate corrective actions, including implementing a strategy to improve the quality of data entered into the FIRPTA database, providing additional training to tax examiners, and improving internal guidance.

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

https://www.treasury.gov/tigta/auditreports/2020reports/202040014fr.pdf.

 

Phone Number   /  202-622-6500

E-mail Address  /  TIGTACommunications@tigta.treas.gov

Website             /  https://www.treasury.gov/tigta