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At closing, the sellers wanted to apply for a withholding certificate, which would likely reduce the amount of withholding. The escrow officer of another title company had the buyer and seller sign holdback instructions to hold the full 10% and the forms 8288 and 8288–A at closing until the withholding certificate was received. The seller's accountant prepared the Internal Revenue Service (IRS) forms and delivered them to the closing office, with instructions on which forms to send and which forms to hold.
At closing however, instead of holding the 10% along with the Forms 8288 and 8288–A, the escrow officer sent the Forms 8288, 8288–A, 8288–B and Form W–7 to the IRS. The forms were not complete. They were missing the date of transfer, so the IRS had no choice but to count the days back to the date the sellers acquired the property in July 2006.
The IRS penalized the sellers for failure to accurately file, failure to pay, interest for eight years and the initial withholding in the amount of $71,731.98. The sellers called their accountant, who in turned called the escrow officer to undue the mess she had created.
The escrow officer attempted to call the IRS on several occasions only to be told no information could be shared regarding the withholding, since one of the forms she neglected to have completed is Form 8821. The form would allow her to work on the taxpayer's behalf to correct the errors and abate the penalties.
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MORAL OF THE STORY
If the principals instruct the settlement agent to hold back the funds and forms in a FIRPTA Withholding matter, the settlement agent must understand they will be holding the money and the forms for more than 10 months. That is the approximate time it is taking the IRS to process a Form 8288–B, which is the application for a waiver or reduction of the withholding due at closing.
The Company–approved holdback instructions authorize the settlement agent to fill–in the withholding amount, if any, based on the amount shown on the face of the Withholding Certificate. The date of transfer does not change, that should be completed on the Forms 8288 and 8288–A when the forms are submitted by the buyer at closing.
As mentioned in previous nightmares, the settlement agent should already have a signed Form 8821 from the seller and buyer in a FIRPTA Withholding matter in anticipation of a potential nightmare, since misposting happens often with regard to FIRPTA Withholding.
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