No.120
Friday June 22, 2001
Page G-6
ISSN 1523-567X

Tax, Budget & Accounting
Information Reporting IRS Urged to Re-Evaluate Reporting Demands On Banks in Proposal on Nonresident Aliens

Witnesses at a June 20 hearing petitioned the Internal Revenue Service to withdraw or at least re-evaluate the reporting demands placed on U.S. banks in proposed rules (REG-126100-00) governing payments of interest to nonresidents.

The witnesses cited the potential threat to individual safety and severe implementation costs, and warned there could be an exodus of deposits if the rules become permanent.

Treasury Department spokeswoman Tara Bradshaw told BNA after the hearing, "We appreciate all the comments we have received and all the concerns we have heard expressed today, we will take these comments seriously and will consider them as we consider our next steps."

At the time the proposed rules were issued, IRS said they are intended to ensure voluntary compliance by U.S. taxpayers by minimizing the possibility of avoidance of the U.S. information reporting system (11 DTR G-8, L-10, 1/17/01).

In addition, the proposed rules would enable the United States to meet the demands of its treaty partners by providing requested information about bank deposits of individual residents of their countries, IRS said. The impetus behind the information exchange is the importance the United States attaches to exchanging tax information as a way of encouraging voluntary compliance and further transparency, the rules said.

The proposed rules estimated an annual reporting burden of 500 hours for 2,000 respondents, and an average annual burden per respondent of 15 minutes, which witnesses said underestimated the time that would be invested per individual and cumulatively. The witnesses suggested further study and offered several reasons for their concerns.

Congressional Intent

Both Andrew Quinlan of the Center for Freedom and Prosperity, Alexandria, Va., and Daniel Mitchell of the Heritage Foundation, Washington, D.C., said the rules went against congressional intent to exclude interest paid to nonresidents from taxation.

"Since 1921, the U.S. has not taxed nonresident alien individuals and foreign corporations on their interest income from bank deposits," Quinlan said. Many lawmakers felt that taxing such bank deposit interest could result in massive capital flight away from U.S. banks to foreign competitors, he added.

Mitchell said the proposed rules are an abuse of the rulemaking process. "Regulations are supposed to implement the laws approved by the legislative branch," he said, adding that Congress has chosen not to tax the income and not to require that income be reported to foreign governments.

"The final regulations now in force currently require this kind of reporting only for interest that the banks pay to Canadian residents," an IRS spokesman told BNA. "The proposed regulation would extend it to all nonresident aliens. The regulation would not change the basic taxation rule that interest earned by foreigners on their U.S. bank deposits is not taxable in the U.S."

Credit Unions Oppose Rules

Mary Mitchell Dunn of the Credit Union National Association, Washington, D.C., said the credit union industry strongly opposed the proposal because of the compliance burden. She said the cost associated with compliance would significantly outweigh the benefits the government would obtain.

Dunn added that credit unions already are struggling to meet the regulatory demands imposed by IRS, and, because of their structure, would be unable to meet the extensive nature of the requirements in the proposed rules.

"Because credit unions are financial cooperatives, the costs of compliance with any regulation are borne by the members of the credit union who own it," she said. "The proposal will not only impact credit unions as covered entities, but also their consumer members."

Banks Air Safety Concerns

Carlos Migoya, South Florida Area president for First Union Bank, explained that many nonresidents make deposits in the United States in an attempt to avoid extortion and kidnapping in their own countries.

The perception of many nonresidents is that current U.S. privacy rules would safeguard their assets in the event of political or social upheaval, he explained.

Michael Fields of Bank of America added that obtaining the required information would be extremely difficult. For many of the same reasons cited by Migoya, almost half of nonresidents do not provide the addresses in their countries of domicile, he said. Fields said banks could potentially take up to nine months to gather the information.

J. Thomas Cardwell of the Federal Bankers Association said his group commissioned a study to determine the burden that the reporting requirements would have on the banking industry.

The transcript from the hearing will be in BNA TaxCore.

By Myrna Zelaya-Quesada

Copyright © 2001 by The Bureau of National Affairs, Inc., Washington D.C.

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