Thomas C. Roberge & Company

IRS PROBLEM BREWING

WITH REPORTING OF FOREIGN LANDLORD

RENTAL INCOME BY U.S. RENTAL AGENTS

November 6, 2007

Thomas C. Roberge & Company

St. Petersburg and Sarasota

Telephone: (727) 822-9393 or (727) 952-5848

Several of our foreign clients are experiencing a developing problem with the IRS which can easily be avoided if their rental agents would report their rental income using the proper IRS forms.

A foreigner’s rental income must be reported to the IRS on Form 1042-S, Foreign Person’s U.S. Source Income. This income is sometimes being incorrectly reported on Form 1099-MISC, Miscellaneous Income.

Form 1099-MISC is for reporting rental income for U.S. persons, not foreign persons. Some of our nonresident clients who have been receiving these forms from their rental agents are now starting to receive notices from the IRS asking them to file a regular U.S. income tax return, which should only be used by U.S. persons. This form requires the U.S. person to report their worldwide income, not just their U.S. rental property income.

The problem created by using this incorrect form is that it is causing unnecessary contact and scrutiny of the foreign landlord. What we are doing to mitigate this is to write the IRS explaining the individual is not a U.S. tax resident and that the incorrect form was used to report the foreign landlord’s income instead of Form 1042-S. Hopefully, the IRS will accept this explanation and not inquire further asking for proof that the landlord is a foreign person only subject to U.S. tax on his U.S. source rental income rather than his or her worldwide income. This additional monitoring by the IRS could be time consuming and expensive.

Earlier this year the IRS announced that they were going to start conducting Form 1042-S examinations on financial institutions, and rental agents with foreign clients. Their first targets were the financial institutions. Their secondary targets are rental agents who are collecting rents for foreign individuals. We were informally advised recently by government officials that they are now focusing on rental agents. These rental agents will also need on file U.S. tax ID numbers and current rental exemption withholding forms if they are examined by the IRS. Otherwise they will face a 30% tax, penalties and interest.

Please contact us if you are affected or have questions about these incorrect and potentially damaging reporting procedures. We have extensive experience in this area and can assist you.

Internal Revenue Service Circular 230 Disclosure – You are hereby advised that any tax advice contained in this newsletter is not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or to support the marketing of any tax transactions or matters addressed herein.