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W7s, FIRPTA, 8288s and 1042s
What do all these acronyms and forms have in common? All address foreign taxpayer issues.
W7 -- In order for any foreigner ( or Non Resident Alien) to do business in the United States, that individual must obtain an Individual Taxpayer Identification Number, or ITIN. The form W7 is prepared in order to obtain the ITIN for the foreigner. This process is long and arduous so if you are a foreign individual and plan on doing business in the U.S., the ITIN should be obtained as soon as possible.
Another item to consider is FIRPTA which stands for Foreign Investment in Real Property Tax Act. What does that mean to the foreign taxpayer? If a foreign investor owner property such as a house or apartment and decides to sell the property, then there is a 10% withholding on the SALES Price. So for a property being sold at $500,000, there would be a withholding of $50,000 sent to the IRS.
How is this withholding on sale of property processed? With form 8288-A. At the time of sell the withholding agent, usually the title company will withhold this amount and send it to the IRS. In order to recuperate these funds, the foreign investor (seller) would need to file a U.S. income tax return (with their ITIN) and present the expenses incurred such as purchase price and improvements in order to demonstrate there is not so much taxes owed and to request a refund. There are some options to reduce or even eliminate this withholding through certain tools and tax planning available.
Lastly, Form 1042-S is a year end tax document to given to a foreigner you received payment for services performed in the United States. The individual or company paying this individual must withhold 30% of the payment and send it to the IRS. The foreigner may then present a U.S. tax return, with an ITIN, to request a refund if applicable. The payer becomes a withholding agent in this scenario and penalties are very harsh for not complying and withholding on payments to foreigners.
We have briefly touched on some very important topics as they relate to foreigners and will prepare future videos addressing each one in more detail. These are very complex items that require very specific expertise which our firm possesses and is able to provide to you.
