The IRS finalized controversial regulations that now require U.S. banks and other financial institutions to report interest on deposits paid to a non-resident alien (NRA). The new requirement applies to payments made to residents of any country with a tax information exchange agreement (TIEA) with the U.S. To avoid confusion the IRS has included with the procedure a list of the participating TIEA countries.
The original regulations were issued in Protected content the Clinton administration and applied to all foreign persons. The Bush administration substantially “edited” the regulations in Protected content , however the Protected content regulations essentially reinstated the original regulations. While the IRS had considered this reporting for some time, it was the FACTA enactment that triggered action.
Reporting requirements will apply to all interest payments made on or after January 1, Protected content . Commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies will be expected to comply. Institutions may choose to report all nonresident alien interest regardless of country of residence in order to simplify administrative processes.
Although there are concerns of confidentiality, the IRS currently only exchanges information on an automatic basis with Canada. While financial institutions remain wary, the IRS is attempting to reassure them that no information will be provided to countries who do not have sufficient safeguards in place. The IRS will require information on residents in treaty countries, none of the information will be exchanged automatically. According to the IRS, no exchange of information will occur with a country not protecting the confidentiality of the information or with one who is not using the information only for tax enforcement.
The tax code exempts the interest from income and it is not ordinarily taxable. The IRS has indicated that the reporting requirements are necessary in the fight to combat offshore tax evasions.
Contact James C. Sexton, Jr., LL.M if you have further questions about this article.