US Bankers Again Protest At Planned IRS Interest Reporting Rules

by Mike Godfrey, Tax-News.com, New York

06 January 2003

Although the window for public submissions to the IRS on its proposal to compel US banks to report interest payments on deposits made by non-resident aliens closed a month ago, the American Bankers Association (ABA) issued a very strong letter denouncing the IRS's proposed regulation at the end of December, prompted by news that staffers in the Treasury Department has been telling Congressional offices that there is no opposition from the financial services industry to the revised regulation.

The ABA had previously written to the IRS twice, commenting on the proposed regulation. More than 20 months ago, on February 27, 2001, the ABA stated that the "ABA disagrees with placing these new reporting burdens on the banking industry, and we strongly recommend that the Service withdraw the Proposed Regulations."

The new ABA letter, to Deputy Secretary Kenneth Dam, makes several strong points against the rule. Special note should be taken of the following excerpt:

"Finally, we are concerned about language in the proposal that allows the Treasury Department and the IRS, at their discretion, to expand the list of countries for which reporting would be required. Given the likely impact reporting would have on banking institutions and international trade and tax policy, coordination with Congress and the federal banking agencies is essential."

This is important because it demonstrates that the industry is increasingly aware that this regulation is merely a predicate to the original regulation that had banks across the country so concerned. In its previous letter to the IRS, the ABA pointed out that its members already have experience of implementing a reporting requirement for Candian citizens, and this allows them to be sure that the bureaucracy attached to the requirement (applying initially to 15 additional countries) would be very costly, particularly in relation to joint accounts, where the allocation of interest payments between two or more account holders with differential rights and accompanying identification problems would be problematic.

The ABA also previously said: 'We are concerned about the potential impact the proposed regulations will have on global competitiveness within the financial services market. While the ABA recognizes and supports the reasonable compliance objectives of the Service, competition in the international market for financial services may be adversely affected m a result of these new reporting requirements. Several of our members are concerned that the unilateral imposition of these information requirements on U.S. banks will drive low cost bank deposit funding to foreign banks with no corresponding increase in voluntary compliance in the depositor's country of residence.'

The ABA concluded its new letter by urging "the Treasury Department to withdraw the proposed tax rules requiring deposit interest reporting to nonresident aliens."

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