Last month, the Internal Revenue Service announced two new audit campaigns aimed at foreign investors who own or hold shares in US assets.
The campaigns target foreign investors who sell their interests in US real estate and those who have rental income from their US properties.
The IRS generally expects to collect 15 percent of the amount a foreign seller makes from a transaction, although exceptions can be made if, among other things, the property is sold at a loss or if the price is less than $ 300,000. The taxes that the IRS collects from foreign investors who earn rental income vary depending on how the property is owned, but can be as high as 30 percent per year.
Audit campaigns began in 2017 as a way for the IRS to target issues that it believes pose a high risk of non-compliance. Campaign problems also present areas where the federal agency believes it has a good chance of recovering unpaid taxes.
When the IRS debuted strategy, it announced 13 campaigns, a number that has risen to nearly 60 since then. Operators in this area are more likely to lose their revenues to the IRS.
The IRS declined to comment on new campaigns or the expectations of funds recovered from foreign investors.
William Kambas, a tax partner with Withers Worldwide, said the agency’s new campaigns for real estate investors are a factor in the pandemic.
“The restrictions and restrictions that the government is now imposing financially have been refocused on collecting what is due,” Kambas said. “Now is the time for the IRS to decide to conduct more rigorous audits.”
The IRS’s aggressive strategy is likely to hit institutional private equity investors hardest in the mid-market, said Kenneth Dettman, executive director of tax firm Alvarez & Marsal.
Another group that may feel the crisis are mainly foreign investors who own second homes in markets where real estate values have risen sharply during a pandemic, such as South Florida.
In recent months, Dettman has said he has seen an influx of overseas clients looking to sell their homes in the US in such markets – and many do not realize that the IRS imposes a tax on sales, indicating a bigger problem.
“From the perspective of foreign people investing in the US, there is a general mood that they are foreign and not subject to the US tax network,” he said. “Their fear of coercive activity is not very high, so it is very quick to close.”
He said the new audit campaigns are likely to work hand in hand with the IRS, which is investigating the history of real estate sold by a foreign investor to see if they are collecting rents.
Most overseas landlords and their tenants in the United States trade cash transactions without any rental platform as an intermediary, Dettman said, so the IRS has no overview of rental income generated from U.S. assets abroad unless it conducts a major audit.
Vasiliki Yiannoulis-Riva, a real estate partner at Withers, agreed. “You have to make a lot of money,” she said. “They don’t really collect what they could collect.”
According to CBRE, investments in American commercial real estate contributed almost half global volume in 2019, despite more than half of foreign investors pulled away about pouring money into the USA
However, not everyone is interested. Michael Kosnitzky, a partner and co-leader of Pillsbury Winthrop’s private equity group Shaw Pittman, said he was confused by IRS campaigns.
“I’m just surprised there’s such a gross discrepancy,” he said. Kosnitzky’s clientele includes institutional investors and ultra-rich individuals, who he said come with a phalanx of lawyers and accountants hired to ensure compliance.
There are also doubts about the agency’s ability to perform. In recent years, the number of audits performed by the agency fallen. Of the audits carried out by the large companies division, only about half were closed without the Agency collecting any additional revenue, according to and message released earlier this year.
However, if the IRS can continue, Dettman believes that audits have the potential to change attitudes among mid-level real estate investors.
“The results of bad audits have reached social circles in clusters abroad,” he said. “[If there are] audits that come out with very rough results, I think it could cause a little more fear. “