Adam Seligman (Melanie Bell)
A more conservative approach by the Internal Revenue Service in issuing tax identification numbers to foreign investors threatens to slow U.S. real estate deals, tax attorneys and financial service professionals say.
Fraudulent tax returns involving identification numbers issued to foreign applicants plus a sevenfold spike in identity theft led the IRS to implement a more stringent process for issuing employer identification numbers and individual tax identification numbers.
But the move could hurt foreign investors who need tax ID numbers to open bank accounts and incorporate businesses in the U.S.
“Until recently, if a client wanted to start a company to buy real estate or start a business, we could call the IRS, fill out the form and fax it over,” said Adam Seligman, real estate lawyer and a partner at Ward Damon Posner Pheterson & Bleau in West Palm Beach.
But since January, the new policy means clients must wait six to 10 weeks for approval. Instead of same-day decisions, applicants must submit original documentation or certified copies from issuing agencies and wait while the IRS confirms their authenticity.
The agency also wants to pinpoint the true beneficiary of each application. In a Nov. 27 notice, the IRS required applicants seeking employer identification numbers to list “the true responsible party” as opposed to simply naming trustees or agents acting on the applicant’s behalf.
Industry sources say the problem is the risk of losing out on legitimate transactions already in the works.
“Clients ready and willing to spend millions of dollars to buy property and hire employees are sitting there just waiting on the IRS. They understand the issue, but they’re concerned about missing out on the deals,” Seligman said. “It’s just one more example of how the IRS is making it more difficult to start a business and hire employees.”
An international medical supplier looking to open a South Florida office and distribution center might see the deal slip through his fingers due to the tighter controls. The Pakistani national has sound financials but couldn’t execute a commercial lease in February for a 1,000-square-foot Miami office.
“The landlord wouldn’t let him lease in a company name until he proved it was a legitimate business,” Seligman said. “More than what Sunbiz says, he wanted the EIN number from the IRS.”
The investor, who’s also in the market for 2,500 to 5,000 square feet of warehouse space, is now at a standstill with the deal on hold for about a month.
“We’ve seen this affecting the speed at which transactions can happen,” said Rick Souto, partner at Shutts & Bowen in Miami. “In some cases it’s causing delays, especially on the sales side.”
But the IRS policy change comes amid efforts to combat escalating identity theft fraud now ballooning in Miami. And nationwide during the first two months of 2013, the IRS blocked nearly 400,000 fraudulent tax returns by alleged identity thieves, a 142 percent increase from the same period a year earlier, the agency’s Identify Theft Advisory Council reported.
“Here is the issue: It’s a balancing act. You have to balance convenience and safety,” said tax attorney Martin Press, shareholder in Gunster’s Fort Lauderdale office. “Because of the fact that identity theft has gotten so out of hand and the identity theft people are always one step ahead of the IRS, the government is trying to take a very conservative approach.”