Expat taxpayers are vanishing offshore with the sale proceeds of US real estate and leaving the Internal Revenue Service (IRS) with the blame of failing to collect taxes.
The IRS was severely criticised for not doing enough to make sure expats pay real estate taxes in a report from financial watchdog the Treasury Inspector General for Tax Administration (TIGTA).
Under US law, the Deficit Reduction Act of 1984 calls for a withholding tax of 10% of the disposal price of real estate but is the only tool the IRS has to make sure expats pay their tax dues in the United States.
Once they have left America with their money, there is little the IRS can do to recover any tax due, explains the report.
The TIGTA report reviewed whether the IRS could do more to safeguard tax revenues for the Treasury.
The findings revealed that the IRS was hamstrung in pursuing many tax debts but also was to blame for not collecting enough tax.
The problem seems to rest on real estate sellers self-reporting their disposals and handing over withholding tax, but because the process is almost unpoliced by IRS, many fail to follow the rules.
The study revealed that many property sellers or their tax agents requested a reduced withholding payment, which was more or less routinely granted by the IRS. The taxpayer then fled the country with their cash and could not be brought to book by the IRS.
“We found serious internal control errors with the IRS enforcing compliance of the appropriate tax laws that meant tax went unpaid,” said a TIGTA spokesman.
“These compliance mistakes led to the IRS paying refunds that should not have been handed over and not collecting withholding tax that was still owed.
“When these errors occur, many foreign taxpayers can evade paying their tax.”
Tax rules to change
As a result of the review, the IRS is tightening up compliance controls and redesigning forms to make identifying expat real estate disposals easier.
The report also recommends that tax rules should be changed to make collecting real estate tax from expats more effective.
Wealthy foreign real estate buyers have invested in US property in recent years as banks and mortgage companies have sold hundreds of thousands of foreclosed properties at discount rates.
Prices plummeted after the credit crisis and have only risen to pre-downturn values in the past 12 months.