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The American Banker

December 3, 2002

Second Thoughts on Second Foreign Deposit Plan by IRS

By Laura K. Thompson

It seems bankers will never be satisfied with rules on their reporting of foreign deposit interest.

Bank trade groups in recent weeks have bombarded the Internal Revenue Service with letters denouncing a proposal that U.S. banks report to the IRS interest on deposits coming from 13 Western European countries, Australia, and New Zealand. (U.S. banks already report the interest on deposits of Canadian residents, and the modifications in this proposal would apply to those deposits as well.)

Just three months ago industry groups cheered this same IRS proposal, which replaced one that would have required banks to report interest on accounts from residents of all foreign countries. The agency scaled back the January 2001 proposal, in part because of banker complaints that it was far too burdensome. Now the groups say the reporting requirements for nonresident alien deposits would still be onerous, especially for community banks. The IRS says the reporting burden for a bank would be about 15 minutes a year on average and that about 2,000 institutions would be affected, but the industry is painting a much different picture.

"There is no system where you can push a button and it comes up with a list of these accountholders," said Mark Baran, senior tax counsel for the American Bankers Association. "So they need to do it manually, and the process is extremely time-consuming and costly."

Mr. Baran also pointed out in his opposition letter that it would be difficult to keep tabs on foreign joint accountholders. He said that before banks could do so, there would have to be a system to track the nationality of the secondary accountholders.

Bankers will be able to air their opinions in person at a hearing on the proposal in Washington Thursday. The IRS plans to review the comment letters and testimony before deciding on a course of action.

The Council of State Bank Supervisors said that the IRS should not act on the proposal without first conducting a cost-benefit analysis. "There is a direct cost to the banks themselves to implement any kind of system, and there has not been real analysis to see if the benefit outweighs the cost," said John "Buz" Gorman, general counsel for the Washington-based group.

The reporting requirements were designed to catch U.S. citizens pretending to be foreign nationals to avoid paying taxes on their deposits, though the IRS has not said how much is slipping through the cracks this way.

The agency determined that the proposal is not "significant regulatory action" and therefore a formal regulatory assessment is not required. But the proposal has been submitted to the chief counsel for advocacy of the Small Business Administration for comment on its impact on small business, which includes some community banks.

Bankers also argue that residents of these countries, who value their financial privacy, would pull their money out of the United State and put it into a bank in a country that does not have such reporting requirements.

"Our country has always encouraged capital to be invested in it, and I think this proposal discourages it. So I don't think it's a good policy," said Alex Sanchez, chief executive officer of the Florida Bankers Association.

Bankers had similar objections to the original proposal. They contended that Latin American residents, fearful of what their government would do if it found out they had stashed away cashed, would pull their deposits out of U.S. banks. This, the bankers said, could have had a devastating effect on banks in Florida, Texas, California, and other states with large nonresident alien populations.

But the IRS said the 15 countries in the revised version were selected because banks in most of them report interest earned by U.S. citizens, and the United States has agreements on the sharing of tax information with all 15.

Mr. Sanchez said that while these treaties may be in place, the burden in all of them is really on the United States, since its citizens have very little money abroad compared with the number of foreigners investing in the United States.

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