How You Can Ensure Availability of Real Estate Withholding Credits
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Tax practitioners, do you want to ensure your clients receive their real estate withholding credit this tax season? Here is how you can help. To improve the number of tax returns with real estate withholding that are processed without errors, one of the best resources is the FTB 761 RE, Top Ten Real Estate Withholding Errors. This tool explains the most common errors that delay processing or payment allocation when the FTB Form 593, Real Estate Withholding Tax Statement is submitted by the escrow company. We commonly use this form to explain to escrow companies what they need to do to ensure their forms are processed correctly, but it can also be used by you to determine if your client’s form was submitted correctly at the close of escrow. Here are a few common errors that, if present, will likely mean the credit will not be available when the tax return is filed:
Wrong tax year form used - Withholding must be reported using the correct tax year Form 593. For example, if escrow is finalized on February 2, 2014, it must be reported on a 2014 Form 593. If it was reported on a 2013 Form 593, the credit will be assigned to the wrong tax year and will not be available when the tax return is processed. If this error is identified:
- Have your client contact their escrow company and request they correct the error.
- The escrow company will need to file an amended Form 593 for the incorrect year showing zero withholding and file an original Form 593 for the correct tax year.
Form 593 is incomplete - If there are fields left blank, we may not be able to match the credit to the taxpayer; therefore the credit will not be available when the tax return is filed. For example, if the seller’s name is entered and the tax identification number, address, etc. are left blank, then we will not be able to allocate the withholding. We recommend:
- Contact the Withholding Services and Compliance Section’s Public Service Line at 888.792.4900 to verify the credit has been applied.
- Provide our phone agent with the required information to assist you.
Form 593 contains inaccurate information - If there are fields with information entered incorrectly, we may not be able to match the credit to the taxpayer; therefore the credit will not be available when the tax return is filed. For example, if the taxpayers identification number was entered incorrectly (numbers transposed, social security number (SSN) entered when it should be a Federal Employer Identification Number (FEIN), etc.) then the credit will not be applied. Contact the Withholding Services and Compliance Section’s Public Service Line at 888.792.4900 to determine what action needs to be taken.
Trusts - Another common error we see which is not specifically described on 761RE is incorrect information when the seller is a trust. It is important to report the correct name and identification number when title is held in the name of a trust. We created FTB 7429, Do I Need to Withhold on This Trust?, to provide escrow companies with an overview of when withholding is appropriate on trusts. You should verify:
- If the seller is a grantor trust, verify Form 593 was completed using the grantor’s individual name and taxpayer identification number. The name of the grantor trust should not be entered on Form 593 since the grantor trust is disregarded for tax purposes and the individual seller must report the sale and claim the withholding on their individual tax return. If the Form 593 is filed in the name of the trust, contact the Withholding Services and Compliance Section’s Public Service Line at 888.792.4900.
- If the seller is a non-grantor trust, verify Form 593 was completed using the name of the trust and the trust’s FEIN. Trustee information should not be entered on the Form 593, because the withholding credit belongs to the trust. If the Form 593 is filed in the name of the trustee, contact the escrow company and request they file an amended Form 593 with the correct name.
Verifying the accuracy of the Form 593 and correcting prior to submitting the tax return is the best way you can ensure the credit will be available and the tax return will be processed when you file your client’s tax return. If you have concerns that the withholding credit may not be available, we encourage you to contact us at 888.792.4900 to verify the credit is available prior to submitting your client’s tax return.
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