Good morning ALTA:
I hope you had a great week, I want to share the answer to a great question,
Q: Is there any scenario other than when the title agent acts as a funding agent when a title company/agent is on the hook for the purchaser and sellers' failure to comply with FIRPTA compliance requirements?
A: The Purchaser/transferee is the Withholding Agent; the Withholding Agent is obligated to withhold if the Seller/transferor is a foreign tax resident or does not provide a Certificate of Non-foreign Status.
Settlement Officer's Title Agents are obligated by the tax code to Inform Buyer if Seller's Certification of Non-foreign Status (CNS) is missing, or may be false, or is false.
Simply stated, if Seller won't sign the Certification of Non-foreign Status, or you know or suspect the CNS is false, you should inform the Buyer of the FIRPTA 15% withholding requirement. If the CNS is false, you must also inform the IRS.
If you have conflicting facts where some facts indicate foreign status, some indicate non foreign status, or the parties simply do not know how to determine if Seller is foreign, the Buyer & Seller should get this resolved before proceeding. However, if Buyer wishes to proceed once you have informed Buyer that Seller's CNS is either missing, or may be false, technically, you will have met your obligation when you have documented informing Buyer of the FIRPTA requirements and informed IRS if the certification of non-foreign status is false.
We see the uncertainty situation often. It is normally a situation where the Seller or Buyer simply do not understand the rules regarding U.S. tax residency. A third party such as our firm is brought in to sort out and verify the U.S. tax residency status of the Seller. We have many cases where everyone is convinced the transaction is subject to FIRPTA and we determine the Seller either qualifies for an exemption from FIRPTA or a reduction from the 15% withholding.
We do not recommend a Settlement Officer prepare FIRPTA documents or give advice on FIRPTA matters. As long as the Settlement Officer asks Seller/transferor to provide a Certificate of Non-foreign Status (CNS) and Settlement Officer informs Buyer/transferee if Seller/transferor fails to deliver a properly prepared CNS with signature, or if the CNS is false, you make proper notifications, you have complied with the federal FIRPTA regulations.
The Treasury regulations specifically state the following regarding settlement officers and agents for transferee and transferor:
(f) Definition of transferor's or transferee's agent -
In general. For purposes of this section, the terms "transferor's agent" and "transferee's agent" means any person who represents the transferor or transferee (respectively)-
In any negotiation with another person (or another person's agent) relating to the transaction; or in settling the transaction.
Exclusion of settlement officers and clerical personnel. For purposes of this section, a person shall not be treated as a transferor's agent or transferee's agent with respect to any transaction solely because such person performs one or more of the following activities.
(i) The receipt and disbursement of any portion of the consideration for the transaction;
(ii) The recording of any document in connection with the transaction;
(iii) Typing, copying, and other clerical tasks;
(iv) The obtaining of title insurance reports and reports concerning the condition of the real property that is the subject of the transaction; or
(v) The transmission or delivery of documents between the parties.
Regarding the federal tax code FIRPTA and settlement officer responsibilities, the obligations are straight forward. Your State, State Department of Insurance, and State Bar may have more to say regarding the real estate sale contract. Settlement officer is required to inform Buyer/transferee that Seller/transferor must either:
A: provide a Certificate of Non-foreign Status (CNS), or
B: Buyer must withhold 15%
Make certain the steps taken to inform Buyer / transferee are documented. If you have reason to believe the CNS may be false, inform the Buyer and inform the IRS.
If you have questions regarding the tax residency status of Seller, or you are unsure of how to proceed with a FIRPTA matter, call our office and we will be happy to answer your questions at no cost. If the matter turns into more than answering a general question regarding FIRPTA, that may involve an engagement that is normally picked up by the Seller, sometimes the Buyer, and normally never by the Title Company / Settlement Officer firm (unless we are cleaning up some previously closed transaction where the IRS may get involved).
Closing is never a good time to discover FIRPTA, but there are much worse times to discover FIRPTA.
If necessary, we can verify U.S. tax residency in a few hours, and if Seller is foreign, we can sort out the FIRPTA compliance that same day.
Don't forget to send us your questions, comments, subscribe to FIRPTA compliance community, send me a private message, an e-mail or pick up the phone and call us!! We will be glad to answer your questions, be a resource make FIRPTA easy for you!!
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Mary Enzi
Tax Solutions – FIRPTA Consulting
Barker TX
+1 (281) 578-1040
[email protected]
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