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  • Daniel Gray CPA

FIRPTA sale - analysis weighing applying for 8288-B or waiting to claim refund on tax return.

Before Covid-19, often this question boiled down to the time of year of closing and amount of money withheld. If both the amount of money and the length of time wait until return filing were large, made sense to file 8288-B to stop the withholding up front.


Now in Covid-19, IRS is delayed in issuing refunds, processing returns and issuing 8288-B decision letter 3310. If seller needn't put out any withholding money, then 8288-B is seller's best choice. In reality, while buyer needn't remit withholding to IRS near closing when 8288-B is in play, buyer's title co or lawyer often insists the money go into escrow (and often charge a hefty fee to babysit that money). Which way will result in seller receiving back their unrequired withholding tax amount - waiting for IRS Covid-delayed response to 8288-B or filing a tax return in early part of post-closing year with a refund claim and assuming IRS tax return processing departments are less backed-up than its FIRPTA department? Let's further spice up this question by assuming the closing will occur in Nov or Dec, i.e., close to year-end (let's use Nov/Dec 2020 as our example) and this somewhat close to Jan 2021 tax return filing.


My general rule of thumb is to prevent withholding up front as first choice. Why? Because I've seen too many cases of people chasing down FIRPTA withholding refunds from IRS for years. Those cases require untangling, much time, energy and fees.


However, if one decides to go the other route, I’m not against it, so long as the 8288/8288-A are properly prepared and seller follows up with IRS after filing returns to make sure all items were properly processed at IRS end so that the refund is smoothly issued to you. The items seller needs to keep an eye on are discussed at: https://www.ustaxservices.ca/post/2019/10/09/unplug-the-irs-firpta-refund-backup as it explains how IRS keeps track of your FIRPTA withholding payment before it assigns you ITINs. Also, IRS, possibly unlike escrow, doesn’t charge you to hold your money and once a certain length of time passes, IRS even pays you interest on your money it’s held.

Hand in hand with the 8288-B or 1040NR/1120-F decision are the ITIN application choices. One can apply for ITINs after closing using (i) 8288-b (disadvantage – delay 8288 filing, wait for IRS reply, if withholding in escrow with buyer-side waiting until letter arrival for funds release), (ii) with 8288/8288-A copies (advantage – you should have ITINs for your 2020 return filing in 2021, disadvantage of possibly remitting withholding not owed) or (iii) with your 2020 tax return filing in 2021 (advantage – not needing 8288/8288-A copies for the ITIN per se, disadvantage that if withholding was not owed must procure it back from IRS and {unlike 8288-b, out of your personal control} buyer 8288 filing and IRS administration need be perfect to achieve that refund release).

In either case, for the seller's 2020 return filing in 2021 (where one didn't have ITINs at closing and/or didn't receive a stamped 8288-A from IRS) you’ll need:

· 8288/8288-A copies

· Copy of buyer’s FIRPTA check or EFPTS payment, the latter described here: https://www.ustaxservices.ca/post/2017/06/28/how-to-actually-pay-the-irs-firpta-withholding-tax-when-filing-form-8288

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