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A closer had a sale transaction involving a foreign seller subject to FIRPTA Withholding. The closer went to the Internal Revenue Service (IRS) website and found Form 8288; she completed the form and had the buyer sign it at closing. She sent in the withholding along with the form within the 20 days allowed by the IRS.
The closer failed to have the buyer also complete Form 8288–A in triplicate, not realizing this was a totally separate form. She also failed to have the buyer and seller sign any instructions authorizing the deduction and payment of the withholding. The only item she had signed was the 8288.
The buyer did not really understand what the form was for, so he was shocked when he received a penalty notice for $40,405.94 from the IRS. Incomplete or incorrect packages are subject to the same penalties and interest as if the payment was not made at all.
The IRS is not sympathetic either. In this case, they did reduce the penalty down to $1,405.94 since the penalty notice included the withholding in the amount of $39,000 which was timely paid. The closer had to file an escrow loss to cover the penalty and work with management, the buyer and the seller to file corrected forms with the IRS.
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MORAL OF THE STORY
The Escrow Instructions for FIRPTA Withholding are available in the escrow production system and provide step–by–step instructions for the buyer, the seller and the closer. Had the instructions been used in this transaction, the principals and the closer would have noticed a form was missing from the package. It also would have provided an explanation as to the responsibilities of everyone involved in remitting the withholding amount to the IRS.
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