I am being asked to fill out IRS forms 8288, 8288-A, and 8821. The Title Company would then withhold 10% and file a 1099-S for the seller.
Since I'm filling out the 8288, in the eyes of the IRS, I'm actually the one withholding, and my understanding is that I'm responsible at that point for the sellers taxes.
If the IRS determines that money is due back to the seller, they will send it to me. Likewise I imagine if there are issues, I need to deal with them as the Contract has verbiage excusing the Title Company.
Under a deal like this, am I potentially financially exposed to a sum greater than the 10 percent withholding?
Am I exposed to any other dealings the seller may or may not have with the IRS?
If I do proceed are there any actions I should take to protect myself?The Title Company puts three clauses in the contract, basically excusing them. "The Escrow Holder shall not be responsible or liable for the accuracy of sufficiency of these forms or their content" "If after payment is made, any correspondence, tax forms or refund of any monies are received into escrow from the IRS, the Escrow Holder shall, and is hereby authorized to remit such amounts, forms, and any correspondence to the BUYER named herein without any further instruction. Thereafter, the Escrow Holder is relieved of and shall have no further responsibility in this regard". "By signing below, Buyer and Seller, jointly and severally, hereby agree to hold the Escrow Holder harmless from any and all responsibility, liablity and risk of loss whatsoever (including but not limited to taxes, interest, penalties, court costs and attorney fees) that may arise by reason of or as a result of the Escrow Holder's compliance with these instructions".
You are the withholding agent under FIRPTA in this case because you're the buyer. Generally speaking, your only exposure vis-a-vis the seller should be under FIRPTA; unless you've received a levy from the IRS requiring you to withhold more money from the proceeds, your liability will, generally speaking, be for the FIRPTA withholding.
The clauses exculpating the title company do not seem to be outlandish. The first, regarding the content of the forms, is perfectly reasonable because the company isn't completing them and, generally speaking, is not obligated to do due diligence on those forms to confirm the contents. This clause simply makes that clear.
The second clause simply confirms that the title company is nothing more than a passive agent, an intermediary between you and the IRS, whose only obligation is to pass money, forms, and any correspondence automatically to you.
However - possibly big however - the title company is only absolved of liability in this capacity if - big if - it properly performs that role as intermediary. If the company fails to pass on something and you suffer damages as a result, the company could be on the hook for those damages because it failed to properly pass something on to you.
The third clause is similar, although broader. It basically says that so long as the title company follows the instructions you and the seller are giving to it as escrow agent, that the title company is absolved of any liability. Again, however, implicit in that clause is the possibility that the company may be liable for damages you suffer if it doesn't properly follow those instructions.
Since the title company is going to be doing the actual withholding and remitting of the FIRPTA amounts, the only thing I might want to try and get into this is the requirement that the title company promptly remit the withheld funds to the IRS and provide confirmation to you that the funds have been remitted to, and received by, the IRS. Essentially, you want to try and make sure that it's clear they're on the hook for doing the withholding until and unless they provide adequate proof that they've done so.
I would strongly recommend you discuss this in detail with a real estate attorney (your own, not the sellers) to make sure that you're adequately protected.
My answer does not constitute legal advice and may not be relied upon by anyone for any purpose and does not constitute an attorney/client relationship or an offer to form such a relationship. This disclaimer is intended to be fully compliant with the requirements of Treasury Department Circular 230 and the terms thereof are fully incorporated by reference.
Years licensed, work experience, educationLegal community recognition
Peer endorsements, associations, awardsLegal thought leadership
Publications, speaking engagementsDiscipline