IRS Audit Campaign Targets Nonresident Alien U.S. Real Estate Activities By Alan Winston Granwell and Andrea Darling de Cortes
HIGHLIGHTS The IRS Large Business & International Division (LB&I) announced on Oct. 5, 2020, the latest IRS audit campaign targeting nonresident aliens (NRA) who do not properly report rental income from U.S. real property. LB&I issued another audit campaign on Sept. 14, 2020, targeting the noncompliance of NRAs in connection with the withholding of tax and reporting obligations on the disposition of U.S. real property interests under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). The objective of these two IRS audit campaigns is to increase NRA compliance with the complex U.S. tax rules relating to U.S. real property transactions. _____________ In 2017, the IRS Large Business & International Division (LB&I) announced a new audit strategy known as "campaigns" that focused on issue-based rather than entity-based examinations, and focusing on those issues that present a significant risk of noncompliance. The IRS' objective is to improve return selection through identifying issues representing a risk of noncompliance and making the greatest use of its limited resources. Currently, there are nearly 60 IRS campaigns, several of which relate to high-net-worth individuals crossborder issues. The Oct. 5, 2020 campaign is a rerelease of a campaign initially announced in March 2020 that had been withdrawn shortly after posted on the IRS website.1 The October campaign focuses on NRAs receiving rental income from U.S. property and the requirement to comply with the Internal Revenue Code's reporting and filing requirements related thereto. The IRS September NRA U.S. real estate campaign targeted compliance with the withholding and reporting obligations of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).
WHY THESE TWO CAMPAIGNS? The purchase of U.S. real estate by foreign nationals is a major source of investment in the United States. Property sales to foreign buyers in 2019 totaled $78 billion. In recent years, the largest share of foreign residential buyers originated from China and Canada, followed by Mexico. 2 So, it is not unsurprising that the IRS might want to target tax compliance in this area.
FIRPTA IN A NUTSHELL Purpose. FIRPTA was enacted to ensure that foreign investors pay U.S. federal income tax on the sale or disposition of U.S. real property interests (USRPI), similar to the obligations imposed on U.S. persons. Prior to the enactment of FIRPTA, it was possible for a foreign investor to structure an investment in U.S. real estate and avoid paying U.S. federal income tax thereon. Copyright © 2021 Holland & Knight LLP All Rights Reserved
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