Three Really Bad Times to Discover FIRPTA

So there are three really bad times to discover FIRPTA.  I am going to take these in order from best to worst. 

Third

The third worst time to discover FIRPTA is at the closing table.  This usually happens because either the Realtor, the seller or the buyer did not know about FIRPTA.  It is typically discovered when the seller will not sign the citizen or tax resident declaration.  We call this the deal killer. 

Second

The second worst time to discover FIRPTA is 21 days after the closing.  Why 21 days after closing?  The withholding agent (Buyer) must send the check within 20 days of the closing date.  On the 21^st day, it is a 5% penalty on the withholding amount.  So half-million dollar sale 15% is $75,000.  The penalty is $3,750, and it is going to be $3,750 a month for every month after that.

Wow, that is the second-worst one.  What could possibly be worse than that?

Worst time

Not knowing about it and finding out about it a year and a half later when the IRS letter shows up in the buyer’s mailbox.  Remember, it is the buyer that is responsible for the withholding.  It is the buyer that is subject to the penalties and interest.  Yes, the IRS is going to go after your buyer.  On the same $500,000 sale as above, the penalties before any interest would be $71,250, and the IRS is going to be very un-sympathetic about any penalty abatement

The buyer is going to make three phone calls. 

First, to the Realtor that brokered the deal, screaming about their incompetence 

Second, The title company that failed to catch the mistake.

Third to an attorney to file suit against both the Realtor and the Title Company.