With the exception of G-4 visa holders (and certain other visa holders), most nonresident taxpayers live outside the US. This makes it hard for the IRS to collect US taxes from them. Since the sale of US real estate is subject to tax in the US, the IRS wants to be sure that nonresidents pay any tax that they owe. By making closing agents withhold large amounts of tax on the sale of US property, the IRS ensures that the sellers will not disappear without paying the appropriate tax.

In 1980, Congress enacted the Foreign Investment in Real Property Tax Act (FIRPTA) to achieve this goal. It created an automatic income tax withholding for foreign persons when they sell US real property.

The IRS takes a conservative approach (withholding more than necessary). Then, the burden is on the seller to show that the tax owed is less than that. The seller can do this by giving the IRS documents and calculations showing the actual gain or loss. That’s what the Form 8288-B and the US tax return are for.