IRS Audit Campaigns for NRA

November 4, 2020by Frontier Group
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IRS Audit Campaign Targets Nonresident Alien U.S. Real Estate Activities

Two IRS audit campaigns have recently been introduced with prospect to increase NRA compliance with the extensive and complex U.S. tax rules in relation to U.S. real property transactions. 

On October 5th, 2020, the IRS LB&I (Large Business and International Division) announced the introduction of their latest audit campaign which targets NRA’s (non-resident aliens) who do not correctly report rental income from their U.S. properties.

Another audit campaign was issued on September 14th 2020 by the LB&I which targeted the non-compliance of NRAs in relation with the withholding of tax and reporting obligations (on the disposition of U.S. real property interests under the FIRPTA 1980)

 

Key reasons for the introduction of the two audit campaigns:

  • Purchase of U.S. real estate by foreign nationals in a major source of investment in the United States.
  • In 2019, there was a total of $78 billion of property sales to foreign buyers.
  • Figures show that in recent years, the largest share of foreign residential buyers originated from China, Canada, and Mexico.

 

FIRPTA 1980 – Foreign Investment in Real Property Tax Act of 1980

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA 1980) was introduced to ensure that investors pay U.S. federal tax on the sale or disposition of U.S. real property interests (also known as USRPI)

U.S. Real Property Interest (USRPI)

A USRPI is an individual, other than a creditor, who holds an in interest in real property located in the U.S. 

U.S. Taxation of Rental Income

Non resident aliens are subject to a 30% U.S. withholding tax on the gross amount of rent received. This is applied on top of the FIRPTA taxation regime that applies to the disposition of the USRPI.

 

Conclusion

The main purpose of the newly introduced audit campaigns for U.S. real estate that targets non-resident aliens is to focus on NRA non-compliance.

The initiatives behind the two campaigns are to improve and encourage NRA compliance through guidance and examinations implemented by the IRS.

Due to the complexity of the subject, it is advisable that NRA investors seek appropriate and professional advice before the purchase of any U.S. real estate property.

We have highly experienced professionals on our team who would be happy to help. Please call for further information.

Frontier Group