What If the Buyer Fails to Withhold FIRPTA?

Under FIRPTA, the legal obligation to withhold and remit the tax belongs to the buyer (not the seller, not the closing agent. In DVC resale transactions, the title company handles withholding on the buyer's behalf, but that does not eliminate the buyer's underlying liability. Understanding how this works protects both sides of the transaction.

The Legal Framework: IRC Section 1445

Internal Revenue Code Section 1445 imposes the withholding obligation on the "transferee") the buyer. The law treats the buyer as the withholding agent responsible for collecting 15% of the sale price and remitting it to the IRS. If the buyer pays a foreign seller without withholding the required amount, the IRS can collect the tax directly from the buyer (regardless of what the seller does or does not do afterward.

The 20-Day Deadline

Form 8288 (the withholding remittance form) must be filed and the withheld funds remitted to the IRS within 20 days of the closing date. Missing this deadline subjects the closing agent) and potentially the buyer (to late filing penalties and interest on the withheld amount. This is why DVC closing agents treat FIRPTA compliance as a day-one priority, not an afterthought.

What the Closing Agent Does (and Does Not Cover)

In practice, the closing agent (title company) handles everything: collecting the withholding from the closing proceeds, filing Form 8288 within 20 days, remitting the funds to the IRS, and mailing Form 8288-A to the seller. The buyer is not involved in this process at all.

However, the closing agent acts as the buyer's agent for these purposes. If the closing agent makes an error) failing to withhold, withholding the wrong amount, or missing the 20-day deadline (the buyer's underlying liability under Section 1445 is not automatically extinguished. In practice, the IRS pursues the closing agent first (they carry professional liability insurance for exactly this), but the buyer can also be pursued if the closing agent cannot satisfy the liability.

How Much Can a Buyer Owe?

If withholding is missed entirely, the IRS can assess the buyer for:

• The full 15% withholding amount that was not remitted
• Interest calculated from the original 20-day deadline
• Penalties under Section 6656 for failure to deposit: typically 2-10% of the undeposited amount, increasing the longer payment is delayed

On a $30,000 DVC sale: missed withholding = $4,500 plus interest and penalties. The buyer is on the hook for this amount even if the seller has already spent the money.

The Seller Certification Problem

A buyer is exempt from withholding if the seller provides a written certification that they are a US person (Non-Foreign Affidavit). If the seller makes a false certification) claiming to be a US person when they are not (the IRS can still pursue the buyer for the unpaid withholding, unless the buyer acted in good faith with no reason to believe the certification was false.

In DVC transactions, closing agents typically conduct their own verification of seller status rather than relying solely on seller certification, because the consequences of relying on a false certification fall partly on the buyer.

Buyer Protection: What Reputable Closing Agents Do

A qualified DVC closing agent protects buyers by:

• Identifying foreign sellers early and flagging the FIRPTA withholding requirement
• Confirming seller status through documentation, not just self-certification
• Calculating the correct withholding amount (15% of gross sale price)
• Filing Form 8288 and remitting funds within the 20-day window
• Providing the seller with a copy of Form 8288-A
• Maintaining records in case the IRS raises questions later

This is why buyers should always use a licensed title company experienced with DVC and FIRPTA, not an informal escrow arrangement or direct payment to the seller.

What Sellers Must Disclose

As the seller, your primary obligation is accurate disclosure of your foreign status. If you are a non-US person, say so from the outset. Do not attempt to avoid withholding by falsely claiming US person status. The tax consequences) to both you and the buyer (are serious, and the closing agent will likely discover the misrepresentation during the title process anyway.

If you hold a Green Card, have obtained US citizenship, or are treated as a US resident for tax purposes in the year of sale, you may genuinely be a US person) confirm this with a tax professional before closing.

Does the Buyer Pay More Because of FIRPTA?

No. The withholding comes from the seller's proceeds, not from the buyer's purchase price. A buyer who agrees to pay $25,000 pays $25,000. Of that, $3,750 goes to the IRS (withheld from the seller's share) and $21,250 goes to the seller (before commission). The buyer's total outlay is unchanged.

Frequently Asked Questions

Who is legally responsible for FIRPTA withholding?
The buyer, under IRC Section 1445. The closing agent handles withholding as the buyer's agent, but the buyer's underlying statutory obligation remains. If the closing agent fails to withhold, the IRS can pursue the buyer directly.

What is the penalty for failing to withhold FIRPTA?
The full undeposited amount plus interest from the 20-day deadline, and penalties of 2-10% under Section 6656 that increase over time. On a $30,000 sale, missed withholding means potential buyer liability of $4,500+ in withheld tax plus penalties and interest.

Can a buyer rely on the seller's word that they are a US person?
Buyers can rely on a signed Non-Foreign Affidavit, but only if there is no knowledge or reason to believe it is false. False certifications do not completely eliminate buyer liability. The IRS evaluates whether the buyer exercised reasonable care.

Does FIRPTA withholding increase the buyer's purchase price?
No. The withholding is deducted from the seller's proceeds. The buyer pays the agreed purchase price; the split between the seller and the IRS is the seller's concern.

What should a buyer do if FIRPTA was not withheld?
Immediately contact a tax professional experienced in FIRPTA. There may be a window to voluntarily remit the withholding with reduced penalties before the IRS assesses the full liability.