Attention All Home Buyers Part II: FIRPTA and the Statute of Limitations | SF Tax Counsel (2024)

By Kerrin N.T. Liu

This article is a followup to our previous article entitled “Attention All Home Buyers.” In our previous article, we introduced Foreign Investment in Real Property Tax Act of 1980 (hereinafter “FIRPTA”); what it is, who it applies to, exemptions, and the consequences of noncompliance. In this article we discuss the possible application of the statute of limitations in cases where unwitting U.S. buyers of a noncompliant FIRPTA transaction are subjected to a lien on their purchased property.

Options Moving Forward and the Statute of Limitations.

The most straightforward way of taking a tax lien off of a title is to pay the tax lien in full. However, this is not an equitable result for many buyers since the tax should have been paid by the foreign seller. Notices sent do not include any applicable future interest and penalties which accrues daily. This means that the unpaid balance likely significantly increases from that amount shown on the latest received Notice.

Generally, there is a 10 year statute of limitations on Internal Revenue Service (“IRS”) collections. See I.R.C. Section 6502. The 10 years are calculated from the date the tax was assessed. Subject to certain tolling events, once that 10 years is up, the IRS must stop its collections efforts against the taxpayer. What this potentially means is that unless the IRS moves to collect by 10 years from the assessment date, the tax lien becomes uncollectible by the IRS and they must take the tax lien off of your title.

However, this general 10 year statute of limitations is not set in stone. Potential tolling events include but are not limited to filing for bankruptcy, entering into an installment payment agreement, offer in compromise, and CDP hearing. A lesser known tolling event also occurs if the taxpayer is physically outside the United States for a continuous period of at least six months. See I.R.C Section 6503(c). Any of these exceptions may lengthen the statute of limitations in a particular case.

Barring such tolling events, it could be advantageous for unwitting taxpayers subject to a FIRPTA lien on their real property to take a “wait-and-see” approach in regards to the tax lien. If the 10 year statute comes and goes without the IRS taking action, unwitting buyers of a FIRPTA noncompliant transaction may be able to get the tax lien taken off without needing to enter into a payment agreement. However, this course is not without its hazards. For one, the IRS may take the position that a tolling event has occurred, lengthening the statute of limitations. Additionally, although the IRS is under no obligation to notify taxpayers of when their statute of limitations ends, they often act aggressively as the deadline approaches. Lastly, interest continues to accrue on the liability at a daily rate until payment is received by the IRS.

Given the often unforeseen consequences of failing to comply with FIRPTA withholding, it behooves buyers to be especially aware in cases where the seller indicates that they are a foreign person for purposes of the FIRPTA tax. Even if waiting out the statute of limitations is a possibility in a particular case, it is of course a better result to have the transaction be compliant from its inception. The code governing FIRPTA exemptions is complicated and it is generally advised that FIRPTA-affected deals should involve competent tax professionals who are experienced in FIRPTA.

Kerrin N.T. Liu is a partner and attorney at Diosdi Ching & Liu, LLP. The tax attorneys at Diosdi Ching & Liu, LLP understand the rules and regulations governing FIRPTA and have represented clients who have been affected by FIRPTA. Kerrin Liu also represents clients in federal tax controversy and collection matters. Kerrin N.T. Liu may be reached at (415) 318-3990 or by email: kliu@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney