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Reproduced with permission from Daily Tax Report, No. 151, pp. G-3 - G-4 (Aug. 6, 2002).

Copyright 2002 by The Bureau of National Affairs,Inc. (800-372-1033).
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No. 151
Tuesday August 6, 2002 Page G-3 
ISSN 1523-567X
Tax, Budget & Accounting

 Information Reporting
Criticism Continues for Narrowed Proposal
On Nonresident Alien Interest Reporting

 An Internal Revenue Service proposed rule (REG-133254-00) that would require banks to report income paid to certain nonresident aliens has attracted heated opposition from a free-competition advocacy group and at least one member of Congress.

The proposal, issued July 30 to replace one issued in January 2001, narrowed the previous proposal by requiring banks to report interest income paid only to resident aliens from 15 specified countries (147 DTR G-9, L-20, 7/31/02). The previous proposal would have applied to any nonresident alien.

IRS narrowed the proposed rules in response to strong criticism from banks, credit unions, federal lawmakers, and foreign investment groups. The replacement proposal, however, has also attracted reproval.

The Center for Freedom and Prosperity (CFP) issued a news release Aug. 5 to announce that its affiliate, the Coalition for Tax Competition, will oppose the proposed regulation. The advocacy group said the changes in the proposed rule are "virtually meaningless," claiming IRS would amend the rule within a few years and extend it to every other country.

CFP also said the new rule would "force U.S. financial institutions to help foreign governments tax income earned in America," something the group said even IRS "admits ... is not needed to enforce U.S. tax law."

In response to the CFP statement, Treasury spokeswoman Tara Bradshaw said simply that the regulation was issued in proposed form, providing affected parties an opportunity to comment before the regulation is finalized.


Hearing Considered by Thomas

Meanwhile, House Ways and Means Chairman William Thomas (R-Calif.) was considering a hearing to determine whether the rule reflects congressional intent.

In a July 22 letter to President Bush, Thomas raised concerns about the original rule proposal that would have required banks to report interest income paid to any nonresident alien (147 DTR G-12, 7/31/02). He also said he was worried the replacement proposal would cause a capital drain from the United States as investors move their money elsewhere.


CFP Calls Rule 'Clinton Lite.'

CFP President Andrew Quinlan said in the CFP news release the new proposal is based on the same "misguided" policies that the Clinton administration attempted to push through.

"Unfortunately, the IRS apparently puts the interests of foreign tax collectors above the interests of the American people, but we are confident that the Bush Administration will withdraw this 'Clinton-Lite' regulation at the first possible moment since it clearly undermines the President's economic growth agenda," Quinlan said.

Daniel Mitchell, a senior fellow at the Heritage Foundation, said in the newsletter that the proposal is a gross abuse of the regulatory process, adding that it was only expected "since the agency is still headed by a Clinton-appointed commissioner."

Veronique de Rugy of the Cato Institute urged Treasury Secretary Paul O'Neill to rein in the bureaucracy at Treasury, saying "While Paul O'Neill is racking up frequent flyer miles, a Clinton-appointed IRS commissioner is issuing regulations that would require automatic sharing of confidential financial information with foreign governments--even though this is contrary to the treasury secretary's public statements."

Text of the CFP news release is in BNA TaxCore.

By Constance Parten

Copyright © 2002 by The Bureau of National Affairs, Inc., Washington D.C.


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