Can FIRPTA Withholding Be Deferred Legally Using Form 8288-B?

One of the most misunderstood areas of FIRPTA compliance involves whether withholding funds must always be immediately remitted to the IRS at closing.

In many real estate transactions involving foreign sellers, buyers and settlement agents assume the full FIRPTA withholding amount must automatically be sent to the IRS within 20 days after closing. While that is often true under standard FIRPTA procedures, there is also an important exception that may allow withholding funds to remain escrowed temporarily when a properly prepared and timely submitted withholding certificate application is filed with the IRS.

This process is handled through IRS Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests.

Under IRS procedures, a timely submitted withholding certificate application may permit the withholding agent to temporarily defer remitting the FIRPTA withholding funds while the IRS reviews the application and determines the appropriate withholding amount.

This distinction is extremely important because the standard FIRPTA withholding amount is often substantially higher than the seller’s actual U.S. tax liability.

For example, a foreign seller may be subject to a withholding amount equal to 15% of the gross sales price, even when the actual taxable gain is significantly lower — or in some cases when little or no tax may ultimately be due at all. Without a properly prepared withholding certificate strategy, substantial funds can remain tied up with the IRS for many months while the seller waits to file a U.S. tax return and request a refund.

A properly prepared Form 8288-B submission may allow the IRS to reduce or eliminate the withholding requirement before the funds are formally remitted.

However, timing is critical.

The withholding certificate application generally must be submitted on or before the date of transfer in order for the remittance deferral procedures to apply. Applications submitted after closing may lose the ability to suspend the withholding remittance requirement.

This is one reason experienced FIRPTA preparation becomes so important. In many transactions, the withholding certificate package is prepared substantially in advance and finalized immediately upon closing using the final settlement statement and recorded deed.

Settlement agents must also understand that escrow retention during the IRS review period is not the same thing as “waiving” FIRPTA withholding requirements. The withholding funds generally remain subject to FIRPTA rules and are typically held pending IRS determination.

Unfortunately, misunderstandings surrounding these procedures are common. Some settlement agents incorrectly believe all withholding funds must automatically be remitted immediately regardless of whether a timely withholding certificate application has been submitted. Others may be unfamiliar with the documentation and timing requirements necessary to properly support the escrow hold process.

Proper preparation, documentation, and timing coordination are critical to maintaining compliance while preserving the seller’s opportunity to seek a withholding reduction where appropriate.

FIRPTA compliance is not simply a matter of filing forms after closing. In many cases, the strategy and preparation occurring before and on the day of closing can significantly impact both compliance exposure and the seller’s access to funds.

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