Open Forum

Conflict Between FIRPTA Compliance and Hold Harmless Agreements

The Conflict:

FIRPTA requires the buyer of U.S. property from a foreign seller to withhold taxes and complete IRS forms. Settlement agents (title companies, escrow officers, and closing attorneys) who handle the closing process are often asked to provide tax advice or prepare these forms despite not being responsible for FIRPTA compliance.

Tax Law Protection 26 CFR 1.1445-4(f)(3):

This regulation protects settlement agents from being considered agents of the buyer or seller when performing typical settlement activities, such as:

• Receiving and disbursing funds
• Recording documents
• Obtaining title insurance and property reports
• Transmitting documents

The Problem:

The conflict arises when a settlement agent goes beyond these duties, provides tax advice, or prepares FIRPTA forms. This potentially jeopardizes the protection afforded by the FIRPTA regulations.

Hold Harmless Agreements and the Conflict:

Title companies often use hold harmless agreements to protect themselves from FIRPTA liability. However, if the title company's settlement agent prepares FIRPTA documents or provides tax advice, it creates a conflict:

• Invalidation of the Agreement: The title company may invalidate the hold harmless agreement by acting as a tax advisor, thus exposing itself to liability.
• "Having it Both Ways": Title companies cannot claim protection from FIRPTA liability while simultaneously engaging in actions that create that liability. This undermines their credibility as a neutral settlement agent.
• Expanded Roles and Risks: By preparing FIRPTA forms or giving tax advice, the title company exceeds its role as a neutral settlement agent. This increases their responsibility and potential liability for costly errors in this complex area of tax law.

Potential Consequences:

If a settlement agent is deemed to be an "agent" of the buyer or seller under FIRPTA, they could face serious consequences, including:

• Failure to Withhold: The settlement agent could be held personally liable for any unpaid taxes, penalties, and interest arising from a failure to withhold the correct amount.
• Inaccurate Advice or Forms: Errors in providing FIRPTA advice or completing forms can harm both buyer and seller:
• Buyer Impact: Incorrect information could result in the buyer being held liable for the FIRPTA deposit, penalties, and interest, potentially leading to financial hardship and legal disputes.
• Seller Impact: Errors can delay or impede the seller's refund, potentially exposing the title company to legal action for damages.
• Lost Refund: Mishandling the FIRPTA deposit could result in the seller's refund being lost or delayed. This could lead to the seller suing the title company for the refund amount plus additional damages.

How to Mitigate the Risk:

• Clear Communication: Settlement agents should communicate their role and avoid giving tax advice or taking responsibility for FIRPTA compliance.
• Limited Assistance: Settlement agents may assist with gathering information but must refrain from providing tax advice or completing FIRPTA forms. Buyers and sellers are responsible for FIRPTA compliance in consultation with their tax advisors.
• Disclaimer: State that the settlement agent is not providing tax advice.
• Professional Responsibility: Settlement agents should act within the scope of their professional knowledge and expertise.
• Professional Liability Insurance: Maintain adequate insurance coverage.

In conclusion, title companies must carefully define their role in FIRPTA transactions and avoid taking on responsibilities that exceed their expertise to avoid potential liability.

Thanks Mary;

Settlement Agents get significant push back from Buyers and Sellers for not assisting in the completion of the FIRPTA forms.

It is difficult for the Settlement Agent psyche to JUST SAY NO.

We want to help our clients and make the closing process as easy as possible.

BUT. . . the risk exposure is just to great to cross over that  line.

Happy New Year (ALL)

Conflict Between FIRPTA Compliance and Hold Harmless Agreements

The Conflict:

FIRPTA requires the buyer of U.S. property from a foreign seller to withhold taxes and complete IRS forms. Settlement agents (title companies, escrow officers, and closing attorneys) who handle the closing process are often asked to provide tax advice or prepare these forms despite not being responsible for FIRPTA compliance.

Tax Law Protection 26 CFR 1.1445-4(f)(3):

This regulation protects settlement agents from being considered agents of the buyer or seller when performing typical settlement activities, such as:

• Receiving and disbursing funds
• Recording documents
• Obtaining title insurance and property reports
• Transmitting documents

The Problem:

The conflict arises when a settlement agent goes beyond these duties, provides tax advice, or prepares FIRPTA forms. This potentially jeopardizes the protection afforded by the FIRPTA regulations.

Hold Harmless Agreements and the Conflict:

Title companies often use hold harmless agreements to protect themselves from FIRPTA liability. However, if the title company's settlement agent prepares FIRPTA documents or provides tax advice, it creates a conflict:

• Invalidation of the Agreement: The title company may invalidate the hold harmless agreement by acting as a tax advisor, thus exposing itself to liability.
• "Having it Both Ways": Title companies cannot claim protection from FIRPTA liability while simultaneously engaging in actions that create that liability. This undermines their credibility as a neutral settlement agent.
• Expanded Roles and Risks: By preparing FIRPTA forms or giving tax advice, the title company exceeds its role as a neutral settlement agent. This increases their responsibility and potential liability for costly errors in this complex area of tax law.

Potential Consequences:

If a settlement agent is deemed to be an "agent" of the buyer or seller under FIRPTA, they could face serious consequences, including:

• Failure to Withhold: The settlement agent could be held personally liable for any unpaid taxes, penalties, and interest arising from a failure to withhold the correct amount.
• Inaccurate Advice or Forms: Errors in providing FIRPTA advice or completing forms can harm both buyer and seller:
• Buyer Impact: Incorrect information could result in the buyer being held liable for the FIRPTA deposit, penalties, and interest, potentially leading to financial hardship and legal disputes.
• Seller Impact: Errors can delay or impede the seller's refund, potentially exposing the title company to legal action for damages.
• Lost Refund: Mishandling the FIRPTA deposit could result in the seller's refund being lost or delayed. This could lead to the seller suing the title company for the refund amount plus additional damages.

How to Mitigate the Risk:

• Clear Communication: Settlement agents should communicate their role and avoid giving tax advice or taking responsibility for FIRPTA compliance.
• Limited Assistance: Settlement agents may assist with gathering information but must refrain from providing tax advice or completing FIRPTA forms. Buyers and sellers are responsible for FIRPTA compliance in consultation with their tax advisors.
• Disclaimer: State that the settlement agent is not providing tax advice.
• Professional Responsibility: Settlement agents should act within the scope of their professional knowledge and expertise.
• Professional Liability Insurance: Maintain adequate insurance coverage.

In conclusion, title companies must carefully define their role in FIRPTA transactions and avoid taking on responsibilities that exceed their expertise to avoid potential liability.

Thanks Mary;

Settlement Agents get significant push back from Buyers and Sellers for not assisting in the completion of the FIRPTA forms.

It is difficult for the Settlement Agent psyche to JUST SAY NO.

We want to help our clients and make the closing process as easy as possible.

BUT. . . the risk exposure is just to great to cross over that  line.

Happy New Year (ALL)

Conflict Between FIRPTA Compliance and Hold Harmless Agreements

The Conflict:

FIRPTA requires the buyer of U.S. property from a foreign seller to withhold taxes and complete IRS forms. Settlement agents (title companies, escrow officers, and closing attorneys) who handle the closing process are often asked to provide tax advice or prepare these forms despite not being responsible for FIRPTA compliance.

Tax Law Protection 26 CFR 1.1445-4(f)(3):

This regulation protects settlement agents from being considered agents of the buyer or seller when performing typical settlement activities, such as:

• Receiving and disbursing funds
• Recording documents
• Obtaining title insurance and property reports
• Transmitting documents

The Problem:

The conflict arises when a settlement agent goes beyond these duties, provides tax advice, or prepares FIRPTA forms. This potentially jeopardizes the protection afforded by the FIRPTA regulations.

Hold Harmless Agreements and the Conflict:

Title companies often use hold harmless agreements to protect themselves from FIRPTA liability. However, if the title company's settlement agent prepares FIRPTA documents or provides tax advice, it creates a conflict:

• Invalidation of the Agreement: The title company may invalidate the hold harmless agreement by acting as a tax advisor, thus exposing itself to liability.
• "Having it Both Ways": Title companies cannot claim protection from FIRPTA liability while simultaneously engaging in actions that create that liability. This undermines their credibility as a neutral settlement agent.
• Expanded Roles and Risks: By preparing FIRPTA forms or giving tax advice, the title company exceeds its role as a neutral settlement agent. This increases their responsibility and potential liability for costly errors in this complex area of tax law.

Potential Consequences:

If a settlement agent is deemed to be an "agent" of the buyer or seller under FIRPTA, they could face serious consequences, including:

• Failure to Withhold: The settlement agent could be held personally liable for any unpaid taxes, penalties, and interest arising from a failure to withhold the correct amount.
• Inaccurate Advice or Forms: Errors in providing FIRPTA advice or completing forms can harm both buyer and seller:
• Buyer Impact: Incorrect information could result in the buyer being held liable for the FIRPTA deposit, penalties, and interest, potentially leading to financial hardship and legal disputes.
• Seller Impact: Errors can delay or impede the seller's refund, potentially exposing the title company to legal action for damages.
• Lost Refund: Mishandling the FIRPTA deposit could result in the seller's refund being lost or delayed. This could lead to the seller suing the title company for the refund amount plus additional damages.

How to Mitigate the Risk:

• Clear Communication: Settlement agents should communicate their role and avoid giving tax advice or taking responsibility for FIRPTA compliance.
• Limited Assistance: Settlement agents may assist with gathering information but must refrain from providing tax advice or completing FIRPTA forms. Buyers and sellers are responsible for FIRPTA compliance in consultation with their tax advisors.
• Disclaimer: State that the settlement agent is not providing tax advice.
• Professional Responsibility: Settlement agents should act within the scope of their professional knowledge and expertise.
• Professional Liability Insurance: Maintain adequate insurance coverage.

In conclusion, title companies must carefully define their role in FIRPTA transactions and avoid taking on responsibilities that exceed their expertise to avoid potential liability.

I close a large number of FIRPTA filles and at the very initial stage of the file, I refer them to the FIRPTA Firm that we recommend.  I let them know that I do now want to give guidance on which I am not the expert.  They always have more Tax related questions, which I train my office not to answer.

Happy New Year all and "this is the life we choose"  :-)

Thanks Mary;

Settlement Agents get significant push back from Buyers and Sellers for not assisting in the completion of the FIRPTA forms.

It is difficult for the Settlement Agent psyche to JUST SAY NO.

We want to help our clients and make the closing process as easy as possible.

BUT. . . the risk exposure is just to great to cross over that  line.

Happy New Year (ALL)

Conflict Between FIRPTA Compliance and Hold Harmless Agreements

The Conflict:

FIRPTA requires the buyer of U.S. property from a foreign seller to withhold taxes and complete IRS forms. Settlement agents (title companies, escrow officers, and closing attorneys) who handle the closing process are often asked to provide tax advice or prepare these forms despite not being responsible for FIRPTA compliance.

Tax Law Protection 26 CFR 1.1445-4(f)(3):

This regulation protects settlement agents from being considered agents of the buyer or seller when performing typical settlement activities, such as:

• Receiving and disbursing funds
• Recording documents
• Obtaining title insurance and property reports
• Transmitting documents

The Problem:

The conflict arises when a settlement agent goes beyond these duties, provides tax advice, or prepares FIRPTA forms. This potentially jeopardizes the protection afforded by the FIRPTA regulations.

Hold Harmless Agreements and the Conflict:

Title companies often use hold harmless agreements to protect themselves from FIRPTA liability. However, if the title company's settlement agent prepares FIRPTA documents or provides tax advice, it creates a conflict:

• Invalidation of the Agreement: The title company may invalidate the hold harmless agreement by acting as a tax advisor, thus exposing itself to liability.
• "Having it Both Ways": Title companies cannot claim protection from FIRPTA liability while simultaneously engaging in actions that create that liability. This undermines their credibility as a neutral settlement agent.
• Expanded Roles and Risks: By preparing FIRPTA forms or giving tax advice, the title company exceeds its role as a neutral settlement agent. This increases their responsibility and potential liability for costly errors in this complex area of tax law.

Potential Consequences:

If a settlement agent is deemed to be an "agent" of the buyer or seller under FIRPTA, they could face serious consequences, including:

• Failure to Withhold: The settlement agent could be held personally liable for any unpaid taxes, penalties, and interest arising from a failure to withhold the correct amount.
• Inaccurate Advice or Forms: Errors in providing FIRPTA advice or completing forms can harm both buyer and seller:
• Buyer Impact: Incorrect information could result in the buyer being held liable for the FIRPTA deposit, penalties, and interest, potentially leading to financial hardship and legal disputes.
• Seller Impact: Errors can delay or impede the seller's refund, potentially exposing the title company to legal action for damages.
• Lost Refund: Mishandling the FIRPTA deposit could result in the seller's refund being lost or delayed. This could lead to the seller suing the title company for the refund amount plus additional damages.

How to Mitigate the Risk:

• Clear Communication: Settlement agents should communicate their role and avoid giving tax advice or taking responsibility for FIRPTA compliance.
• Limited Assistance: Settlement agents may assist with gathering information but must refrain from providing tax advice or completing FIRPTA forms. Buyers and sellers are responsible for FIRPTA compliance in consultation with their tax advisors.
• Disclaimer: State that the settlement agent is not providing tax advice.
• Professional Responsibility: Settlement agents should act within the scope of their professional knowledge and expertise.
• Professional Liability Insurance: Maintain adequate insurance coverage.

In conclusion, title companies must carefully define their role in FIRPTA transactions and avoid taking on responsibilities that exceed their expertise to avoid potential liability.