I am a US resident and bought a house in July. Yesterday I received a letter from IRS which imposed $17,800 penalty and $2,437 interest. After spending the whole morning on the phone and spoke to 10+ IRS agents, I found out that it was because the seller of the house was not a US resident and the seller's lawyer (or combination of my lawyer and the seller's lawyer) didn't file the 8288 form in time as required by the law. I have talked to my lawyer and he is working with the seller's lawyer to see whether they can persuade IRS to cancel the charge. However I browsed the IRS website and discussed with an IRS agent, aparantly I was legally liable for this charge even though I was innocent in this whole process. So I hope the two lawyers can work out something with IRS. But my question to this group is, in case IRS still insist on some penalty/interest on me (either in full which is $20K+ or part of that as a deal), what option do I have?
Not the seller's lawyer. The buyer is responsible for withholding the tax due on the sale and remitting the amount to the IRS usually within 20 days of the sale. This is usually handled by the title or escrow company that is handling the closing. Either way, you as the buyer are responsible. You may have a claim against the individual or firm that represented you at the closing.
Interesting escrow company scam. By comparison, the same thing can happen domestically. In a recent residential real estate closing in California, which also requires the buyer to handle CA state tax withholding, the escrow company put a charge on the sellers' bill to provide the paperwork for the withholding. When challenged why the seller should pay for something that was the buyer's legal responsibility, the escrow agent said, "Oh, no one has ever asked that before...".
I am totally not an expert on this so I went to the IRS website. According to what I read, the W/H rate is 10%. If the tax was $17,800 as mentioned above, then the purchase price was $178,000. (This would equate to the "amount realized" mentioned on the IRS site). There is an exception to W/Hing if the purchase is for a primary residence and the purchase price is "not more than $300,000". So, is this your primary residence? According to the IRS site, a house will qualify as a primary residence under the following conditions: BEGIN QUOTE You or a member of your family must have definite plans to reside at the property for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer. When counting the number of days the property is used, do not count the days the property will be vacant. END QUOTE
There are many more exceptions at the following link:
Thanks for all the responses. My lawyer has hired a tax lawyer to deal with IRS on this matter. And it seems that he may be willing to take the final penalty. Frankly as a new comer to US, I was very surprised the way IRS (and some other aspects) treats the tax payer. Taking my case as an example. I guess the reason why IRS imposes the W/H duty on buyer is because it cannot easily enforce the seller to pay. However the point is, IRS is after the wrong person! To me, IRS simply "legalizes" its incapacility by forcing sb else to do the job for him, free of charge. (Can I bill IRS for providing the tax collection service to it?) From my perspective, I hired a licensed lawyer to do the legal work. But I am responsible for his mal-practice which ultimately is because of IRS' incapability. If, for whatever reason, my lawyer is out-of-business, I will be penalized for being totally innocient. This is just one example (if anybody is interested, I can give more examples). I don't know what you guys as long-term US residents think about this, but all these look non-sense to me.
I'm a biochemist, not a lawyer, but in most countries, ignorance of a law does not excuse one of the obligation to follow that law. Actually, that's (IMHO) one of the more useful aspects of a lawyer, i.e. pointing out to the client what needs to be done to satisfy the laws. Therefore, it seems to me that your seller and his lawyer) neatly evaded the law (and he is difficult to get at because of being a non-resident). Since apparently both of you, and/or both of your lawyers, are responsible for this 8288 form filing, legally you are left holding the bag. Again, not being a lawyer, I think your combined lawyers were hired to prevent this kind of thing from happening. They didn't perform their obligations. So maybe you should turn all this over to them to fight about. Maybe it is time to hire another lawyer ...
You seem to have had a baptism by fire here, and as you've found out, the IRS has all the cards. Presumably, you're in one of those states that thinks lawyers are the only individuals intelligent enough to transfer a house; in my state, that payment would have been handled in escrow by less highly-paid people and you'd not have had such trouble. For a foreigner, the IRS's behaviour must seem bizarre. The system is euphemistically described as one of "voluntary compliance", where the taxpayer is expected to do all the work. Naturally, since little of this burden falls upon the IRS, the tendency is to ever-increasing complexity and as you've found out, sometimes even other peoples' tax bills that you end up responsible for which no sane person would have anticipated in advance.
It is nonsense, but makes sense from the government's point of view. Remember, in general, if you make an error in their favour, you'll most likely not hear a word. If you make an error in your favour, you'll typically hear about it just before the statute of limitations expires to maximize the penalty and interest payments they'll tack on as well. Here, you've just made an error in someone else's favour, and as a courtesy they're not hitting you up for penalties and interest. See how compassionate they can be?
Welcome. Stay long enough and you'll get to be a pro at complaining about taxes. Don't believe that stuff you hear about baseball. Whining about taxes is our national passtime.
First, you need to understand that IRS just administers the laws that Congress writes. You do, however, have it right about why Congress imposed the FIRPTA withholding requirement.
Yes, you are forced to do it for them, and no, you can't bill them for it. Neither can employers bill them for withholding payroll taxes.
No, your lawyer is responsible, as you've already noted. He got paid to know this stuff, not you.
Life is sometimes unfair.
Now don't take on those "Ugly American" attitudes that people in Europe complain about. Were I to be plopped in a foreign country I'm sure I'd find a lot of strange goings on myself. We could start with royalty.
Whatever the merits (or demerits) of the withholding system are, it's not the fault of the IRS but rather Congress. Congress decided long ago that it didn't trust non-residents to pay their tax bills and instead imposed a withholding tax that the buyer is required to withhold out of the proceeds to be received by the seller and remit that amount to the US Treasury. BTW, as a measure of protection, if you, as buyer, had withheld those taxes, the seller would have had no recourse against you (other than to have not entered into a sales contract with you in the first place - once the contract is executed, you as buyer could have forced the seller to perform the contract, so the seller could not have backed out once it became clear that you were going to withhold). As to your legal costs - if the seller isn't willing to pick those up as well, then consider a malpractice claim against both attorneys, yours and the sellers, the FIRPTA filing requirements are so much an integral part of any real estate transaction that a lawyer who fails to make sure that his client complies with them has probably committed per-se legal malpractice (but, that's just my opinion, not a legal opinion or authority based on any case-law research). If you can't get satisfaction out of the seller or any of the attorneys, the additional costs go into your basis for the property you bought, and get recovered later when you sell (or, to the extent depreciation is allowed, partly through depreciation of a higher basis).
Well, if you are able to come up with a way for taxing authorities in various countries to enforce their tax laws without withholding at the source for nonresidents or noncitizens located offshore, my hat is off to you.
Law is a law, we should obbey. But at the same time, the law should be fair in the first instance. It should not be designed in such a way that an innocient person will get penalized (such as my case). If so, it's a bad law and only serve the interest of a special group. Personally I feel it's not because those wealthy/powerful politician cannot find a better solution, it's because they don't bother (or don't care?) Since there seems to be some interests, I'd like to give few more examples (among others!):
Title insurance. If I paid a lawyer to check the title history (which argueably is a public information) and he made a mistake, who should bear the responsibility? Force the buyer to pay hundreds, if not thousands, of dollars to buy this insurance is totally rip-off. To be fair, title risk is a common risk in all the countries where property transaction is allowed (i.e. it's not unique to US). There are better solutions readily available elsewhere. For example, in UK, all the buyers will be required to pay a small fee (~) which will go to Law Socity (kind of Bar Association equivelant) to fund a special insurance. In case of a title dispute, the lawyer who handled the case will be responsible. In case he fails to meet his liability, the Law Society will guarentee the liability.
There is a law which requires all the alien resident to report address change while in US. This is fine. But the problem is, nobody has informed me officially. The first time I heard this requirement was from my colleague when I told him I moved to a new place. So again, I might be punished for being innocent! If the immigration put a stamp or notice on my passport and I failed to comply, it would be my problem. But if nobody told me, that's a different story.
People are talking about social security crisis here. May I suggest a simple solution? First, treat divident etc the same way as wage from the SSN taxable basis. Second, instead of the current 6% till 90K ceiling, let's tax 5% for income up to 90% and 1% afterward. By doing this, most low income people will be better off, middle class will break even and rich people will pay more. I still well respect US as a country an its legal system. As somebody mentioned earlier, an American may find lots of strange things if he visits a foreign country. But as a person who has been living and working in some different countries (e.g. UK, Switzerland, Japan etc), I personally think there are few examples of "legalized rip-off" in this country I have seen in other developed countries.
Well, how to effectively collect tax from non-resident is not my concern as an individual. It's the government's responsibility. They are paid by all tax payers to ensure the fairness. If we believe "an individual should be as powerful as the government", then it's bogous for the Congress to force me to collect the tax on behalf just because it cannot find a better way .... especially I may risk being penalized without any benefit.
Unfortunately the law doesn't see you as the innocent party. You had a legal obligation and you failed to perform it. Now, if your lawyer or real estate agent should have warned you about that and didn't, you have a right to get any penalty back from them. But as far as the IRS is concerned, you're the one they are looking at.
Generally the places that have title insurance allow people to use that instead of, not in addition to a lawyer. The cost ends up being about the same in both cases. The difference is whether you sue an insurance company for failing to pay under a policy or sue a lawyer for malpractice. Suing the insurance company is easier, if you have to.
They're not required to inform you "officially." If you had an immigration lawyer he should have told you. You may well have received voluminous documents that you may not have bothered to read because there was so much, that had exactly that information.
In the laws of every country of which I am aware, ignorance of the law is no excuse. That is to say that it is your responsibility to know the laws that affect what you do, and you are liable for failure to do so, even if you did not actually know what the law specifically said. Stu
Yes. I agree that from the legal perspective, I am on the spot. What I was talking about was that such law might be a "legalized rip-off of an innocient people" at least from the moral and common sense perspective. Certainly I, as an indivdual, is not as powerful as the government, otherwise I would not allow IRS to force me to do a free service for its incapability for only being fined. (BTW, the penalty rate is around 80% annually! We are always talking about credit card rate is rip-off, but that's usually only about 20-30%.)
How come the cost will be end-up the same? In addition to the lawyer fee, I only paid roughly 30 dollar in UK to insurace against laywer's fault, but I paid $2800 here. Also interesting enough, the title insurance I paid for here only protected the mortage bank, not me. If say I paid off all my mortgage, I have to buy another title insurance (no matter how much it will cost, expensive or cheap) because the previous one will expire! So from my perspective, I was forced to pay $2,800 to protect others (i.e. the bank) for the possible mistake others (the lawyer) might make. Also, the small print of the titlte insurance policy said "up to 60% of the premium will be paid to the lawyer for his/her service". So I wonder how much is the real cost for the insurance itself? (I don't have any statistics, but will be very interested to know how many residential title claims really happen and the cost to title insurer v.s. the total premium all the consumers have paid.)
As a law binding people and understand that there are many different laws in different countries, I usually read all the legal documents I received. Also, I will be very surprise that all my non-US friends/colleagues here will have all missed such information available to them officially. So I would say there is not such notice. Let's say you are driving at 50mph on a highway without any special speed limit sign. A police stops you for speeding because the speed limit on this portion is actually 40mph, even though everywhere else has 55mph. How does this sound to you?
I am not asking for a waive of law. All I am asking is a law that is fair and justic and an authority that is responsible. I want to be a good citizen thus I don't need others to tell me not to kill. This is because murdering is a common sense crime and it's a well recongized principle by all civilized human-beings. However I should not have the burden to follow and study every detailed law some people draw as part of their full-time jobs, esepcially if these regulations prohibit something which may not be regarded as a criminal conduct as a common sense. (e.g. report change of address
--- after all I am not a criminal and I think I am living in a free world). So is the purpose of the law is to maintain fairness and justice in the society (i.e. good people get protected, bad people get punished)? .. or it's a tool to increase govenment income by punishing innoncient citizens? Moderator: You have a strong case against your attorney and possibly the title company. An attorney would have to address this, but I believe attornies who cease to practice are suppose to purchase a "Tail Insurance" policy to cover suits arising later. Your attorney most likely has assets you can get to cover your loss.
The bulk of the cost is for the title search, to make sure the owner really is the owner and that there are no liens or other problems. Title companies serve that purpose. Instead of charging by time like lawyers do, they charge based on the value of the property, since their liability is based on that. But the numbers turn out roughly equivalent. The solicitors in the UK that I know who do conveyancing charge, as I recall, between £500 and £1000. Have you had a different experience?
If you're talking about a refinance, that's the way it works. If you're buying a property the title insurance should protect you. Sounds like your real estate agent did a horrible job.
I don't know what state you're in, but that's something I haven't seen in California - lawyers are simply not used in conveyancing transactions unless there's a problem.
Either the lawyer or the real estate agent or both. Tell them you expect them to pay the IRS, and if they don't cooperate, get yourself another lawyer. Stu
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