Open Forum

Good morning:

I just want to post an Q&A from one of you ALTA members, I thought this may be interested for some of you, this one is a little longer than usual but contains what i think is important information for Title.

Title insurance does not insure against FIRPTA matters.

1. Agreed, this is correct, Title Insurance does not cover tax compliance.
2. FIRPTA can be thought of in a manner similar to payroll tax withholding compliance. FIRPTA is not the same as Payroll tax, but the concept is very similar, so if you understand the concept of tax being withheld from your paycheck is a prepaid tax deposit, then you already have an understanding of FIRPTA.

The payor (Employer or Buyer) is the Withholding Agent because they are the person paying the recipient the money. 

Tax law requires the Payor (an Employer or a Buyer) hold back money at source before it arrives in the possession of the recipient (Employee or Transferee / Seller) and turn the withheld funds over to the U.S. Treasury as a tax deposit to be credited to Payee / Transferee / Seller recipient.

3. The purpose of FIRPTA is to ensure the Foreign Seller settles their U.S. tax affairs by holding Seller's money at the U.S. Treasury until Seller files a U.S. tax return and net of any tax owed, Seller will get a refund of the withheld FIRPTA funds. If a Withholding Agent (Employer or a Buyer) fail in their obligation to withhold, then IRS will go after the Withholding Agent for the funds that should have been withheld plus penalties and interest.

However, we do require a "Certificate" on all purchase transactions.  

1. FIRPTA compliance applies to ALL property transactions. This means that the FIRPTA compliance is a fork in the road, either Buyer  goes down the exempt from FIRPTA path with a Certificate of Non Foreign Status from Seller, or Buyer goes down the FIRPTA withholding path.

Title Agent requiring either a Certificate of Non Foreign status in every sale or withholding and remitting FIRPTA is a sound practice.

If Seller provides Buyer a "Certificate of Non Foreign Status" (CNS) we are told Buyer may rely on the CNS.

Buyer is not required to withhold a FIRPTA funds deposit from Seller unless there is reason for Buyer to believe Seller's CNS is false.

Therefore, many title companies upon receipt of the Certificate provided to Buyer from Seller don't do anything else to determine if it is being signed honestly.  Therefore, we are told it is not our duty to determine if he has a permanent resident card or pass substantial presence etc. or even responsibility of the buyer. Is the IRS not taking that stand on these transactions and do you know what recourse they would seek, if any, against a buyer that received a false statement? 

1. Correct, Buyer may rely on Seller's "Certificate of Non Foreign Status" (CNS) on its face unless there is conflicting data that indicates Seller's tax residency status is foreign.

Buyer is under no obligation to audit or examine Seller's CNS meaning if Seller wants to engage in tax fraud, that is between Seller and IRS. 

Now, with that said, there is a legal concept known as "willful blindness" which the parties (Buyer, Seller, Realtors, Title) must not engage in. 

"Willful blindness" can be defined as a person seeking to avoid civil or criminal liability for a wrongful act by intentionally keeping themselves unaware of facts that would render them liable. 

In the context of FIRPTA, if Seller reveals a fact pattern indicating foreign tax residency status with statements such as: "Yes, I am foreign", "I have no U.S. tax ID", "I live in a foreign country", "I am using a POA to handle the closing for me", "I am doing a remote closing at a U.S. embassy in a foreign country", "I am exempt from paying tax to the U.S.", etc…  Then at closing, Seller produces a Certificate of Non Foreign Status which conflicts with previously revealed information, the conflict must be resolved. If Buyer simply rejects the implications of evidence indicating foreign status in favor of the "Certificate of Non Foreign Status" (CNS), Buyer, Title and Realtors could be engaging in "willful blindness" and could be held liable for willfully failing to comply with the FIRPTA tax regulations. 

If Buyer or Title have good reason to believe the Seller "Certificate of Non Foreign Status" (CNS) is false, Title Agent should inform Buyer that the CNS may be false and should not be relied upon[1] AND Title Agent must inform IRS that the CNS may be false[2]. Buyer should reject the CNS and withhold FIRPTA and remit the funds to IRS within 20 days of closing.

Also if the Buyer signs the Affidavit of Occupancy most buyers are unaware of the two year commitment but it also states I believe that if they move before the two years but have no reason to think that would have occurred when they signed then they wouldn't have to potentially pay the tax and penalties I believe so wasn't sure how that is looked at by IRS as well?  

1. Yes, the affidavit of intent to occupy the property as a primary residence is about the Buyer's intent at closing, it is not meant to be a guarantee of future events.[3]

Thanks for all your information on the blog. The one with "gifts" and transfers today was very good. Is it permissible for a foreign Seller spouse to transfer to the U.S. spouse to avoid FIRPTA? 

1. FIRPTA rules prohibit a foreign spouse from allocating their interest in a U.S. property to a U.S. tax resident spouse simply to avoid FIRPTA withholding rules[4].

[1] 26 CFR 1.1445-4(a)                     https://www.ecfr.gov/current/title-26/part-1/section-1.1445-4#p-1.1445-4(a)

226 CFR 1.1445-4(c)                     https://www.ecfr.gov/current/title-26/part-1/section-1.1445-4#p-1.1445-4(c)

3 26 CFR 1.1445-2(d)(1)                https://www.ecfr.gov/current/title-26/part-1/section-1.1445-2#p-1.1445-2(d)(1)

4 26 CFR 1.1445-1(b)(3)                https://www.ecfr.gov/current/title-26/part-1/section-1.1445-1#p-1.1445-1(b)(3)

Thank you Mary. Is there any scenario other than when the title agents 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?

Good morning:

I just want to post an Q&A from one of you ALTA members, I thought this may be interested for some of you, this one is a little longer than usual but contains what i think is important information for Title.

Title insurance does not insure against FIRPTA matters.

1. Agreed, this is correct, Title Insurance does not cover tax compliance.
2. FIRPTA can be thought of in a manner similar to payroll tax withholding compliance. FIRPTA is not the same as Payroll tax, but the concept is very similar, so if you understand the concept of tax being withheld from your paycheck is a prepaid tax deposit, then you already have an understanding of FIRPTA.

The payor (Employer or Buyer) is the Withholding Agent because they are the person paying the recipient the money. 

Tax law requires the Payor (an Employer or a Buyer) hold back money at source before it arrives in the possession of the recipient (Employee or Transferee / Seller) and turn the withheld funds over to the U.S. Treasury as a tax deposit to be credited to Payee / Transferee / Seller recipient.

3. The purpose of FIRPTA is to ensure the Foreign Seller settles their U.S. tax affairs by holding Seller's money at the U.S. Treasury until Seller files a U.S. tax return and net of any tax owed, Seller will get a refund of the withheld FIRPTA funds. If a Withholding Agent (Employer or a Buyer) fail in their obligation to withhold, then IRS will go after the Withholding Agent for the funds that should have been withheld plus penalties and interest.

However, we do require a "Certificate" on all purchase transactions.  

1. FIRPTA compliance applies to ALL property transactions. This means that the FIRPTA compliance is a fork in the road, either Buyer  goes down the exempt from FIRPTA path with a Certificate of Non Foreign Status from Seller, or Buyer goes down the FIRPTA withholding path.

Title Agent requiring either a Certificate of Non Foreign status in every sale or withholding and remitting FIRPTA is a sound practice.

If Seller provides Buyer a "Certificate of Non Foreign Status" (CNS) we are told Buyer may rely on the CNS.

Buyer is not required to withhold a FIRPTA funds deposit from Seller unless there is reason for Buyer to believe Seller's CNS is false.

Therefore, many title companies upon receipt of the Certificate provided to Buyer from Seller don't do anything else to determine if it is being signed honestly.  Therefore, we are told it is not our duty to determine if he has a permanent resident card or pass substantial presence etc. or even responsibility of the buyer. Is the IRS not taking that stand on these transactions and do you know what recourse they would seek, if any, against a buyer that received a false statement? 

1. Correct, Buyer may rely on Seller's "Certificate of Non Foreign Status" (CNS) on its face unless there is conflicting data that indicates Seller's tax residency status is foreign.

Buyer is under no obligation to audit or examine Seller's CNS meaning if Seller wants to engage in tax fraud, that is between Seller and IRS. 

Now, with that said, there is a legal concept known as "willful blindness" which the parties (Buyer, Seller, Realtors, Title) must not engage in. 

"Willful blindness" can be defined as a person seeking to avoid civil or criminal liability for a wrongful act by intentionally keeping themselves unaware of facts that would render them liable. 

In the context of FIRPTA, if Seller reveals a fact pattern indicating foreign tax residency status with statements such as: "Yes, I am foreign", "I have no U.S. tax ID", "I live in a foreign country", "I am using a POA to handle the closing for me", "I am doing a remote closing at a U.S. embassy in a foreign country", "I am exempt from paying tax to the U.S.", etc…  Then at closing, Seller produces a Certificate of Non Foreign Status which conflicts with previously revealed information, the conflict must be resolved. If Buyer simply rejects the implications of evidence indicating foreign status in favor of the "Certificate of Non Foreign Status" (CNS), Buyer, Title and Realtors could be engaging in "willful blindness" and could be held liable for willfully failing to comply with the FIRPTA tax regulations. 

If Buyer or Title have good reason to believe the Seller "Certificate of Non Foreign Status" (CNS) is false, Title Agent should inform Buyer that the CNS may be false and should not be relied upon[1] AND Title Agent must inform IRS that the CNS may be false[2]. Buyer should reject the CNS and withhold FIRPTA and remit the funds to IRS within 20 days of closing.

Also if the Buyer signs the Affidavit of Occupancy most buyers are unaware of the two year commitment but it also states I believe that if they move before the two years but have no reason to think that would have occurred when they signed then they wouldn't have to potentially pay the tax and penalties I believe so wasn't sure how that is looked at by IRS as well?  

1. Yes, the affidavit of intent to occupy the property as a primary residence is about the Buyer's intent at closing, it is not meant to be a guarantee of future events.[3]

Thanks for all your information on the blog. The one with "gifts" and transfers today was very good. Is it permissible for a foreign Seller spouse to transfer to the U.S. spouse to avoid FIRPTA? 

1. FIRPTA rules prohibit a foreign spouse from allocating their interest in a U.S. property to a U.S. tax resident spouse simply to avoid FIRPTA withholding rules[4].

[1] 26 CFR 1.1445-4(a)                     https://www.ecfr.gov/current/title-26/part-1/section-1.1445-4#p-1.1445-4(a)

226 CFR 1.1445-4(c)                     https://www.ecfr.gov/current/title-26/part-1/section-1.1445-4#p-1.1445-4(c)

3 26 CFR 1.1445-2(d)(1)                https://www.ecfr.gov/current/title-26/part-1/section-1.1445-2#p-1.1445-2(d)(1)

4 26 CFR 1.1445-1(b)(3)                https://www.ecfr.gov/current/title-26/part-1/section-1.1445-1#p-1.1445-1(b)(3)