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In a controversial move, the IRS has finalized regulations that require U.S. banks and other financial institutions to report interest on deposits paid to a nonresident alien (NRA).

Banks Must Report Interest Paid to Nonresident Aliens

  • 5/2/2012

Banks Must Report Interest Paid to Nonresident Aliens

In a controversial move, the IRS has finalized regulations that require U.S. banks and other financial institutions to report interest on deposits paid to a nonresident alien (NRA). The requirement applies to payments to residents of any country having a tax information exchange agreement (TIEA) under which the United States will provide and receive information. The IRS also issued a companion revenue procedure that identifies countries that have a TIEA with the U.S.

Comment: Although the IRS has long contemplated this reporting, it took more decisive action after the Foreign Account Tax Compliance Act (FATCA) was enacted in 2010.

Reporting

The reporting requirements will apply to interest payments made on or after January 1, 2013. Reporting will apply to commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies. For administrative purposes, a financial institution may elect to report interest paid to all nonresident aliens, rather than having to determine whether the NRA lives in a country with an agreement with the U.S.

Comment: Although the regulations require reporting, the Tax Code exempts the interest itself from income, and is designed to encourage foreign citizens to deposit funds in the U.S.

Confidentiality and use

Reporting is only required for NRAs living in countries with a TIEA. Rev. Proc. 2012-24 provides two lists — a list of 78 countries that have TIEAs with the U.S., and a list of countries with which automatic exchanges are appropriate.

Comment: The IRS currently exchanges information automatically with Canada.

The IRS attempted to reassure financial institutions that it will not provide information to countries lacking appropriate safeguards for confidentiality and use. Although the IRS will require information on residents in treaty countries, it will not exchange the information automatically. Even if a TIEA is in effect, the IRS would not exchange information with a country that is not protecting the confidentiality of the information, or is not using the information solely for tax enforcement.

Regulatory objectives

The IRS indicated that the new reporting requirements are "essential" to the agency’s efforts to combat offshore tax evasion. International cooperation depends significantly on the IRS’s ability to reciprocate, the agency said.

The IRS is working in connection with FATCA on an alternative reporting system, under which foreign financial institutions will report information to their own governments, rather than directly to the IRS. The foreign government will then provide the information to the IRS.

The new rules will also make it more difficult for U.S. taxpayers with U.S. deposits to avoid U.S. taxes by falsely claiming to be nonresidents, the IRS explained.

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