US Congressman Protests IRS Interest-Reporting Rules

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

29 October 2002

A fourth Congressman has written to the US Inland Revenue Service protesting about the agency's re-issue of regulations which would compel US banks to report the deposit interest they pay to non-resident alien (ie foreign) account holders.

Pete Sessions (Rep. - Texas) is "deeply concerned that the IRS is allowing personal ideology to interfere with the lawful conduct of its regulatory responsibilities."

Rep. Sessions, a member of both the House Rules Committee and the House Banking Committee, urges the immediate withdrawal of the proposed regulation, which many experts predict will chase hundreds of billions of dollars of deposits from US bank accounts.

Bank interest paid to non-resident aliens is exempt from US tax, but foreign governments want the IRS to pass along interest data so the money can be taxed abroad. Currently, the IRS gives that information only to Canada. Under the new proposed regulations, interest on bank deposits would be reported to the IRS for nonresident alien individuals who are residents of certain specified countries. The specified countries are Australia, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, and the United Kingdom.

In the last few weeks Reps. Phil Crane, Mark Foley and Todd Akin have also objected to the proposed IRS rule, which some see as a gesture towards the European Union's efforts to instal an information-sharing regime among member states, currently threatened by resistance from Switzerland and the US Administration.

The text of Rep. Pete Sessions' letter is as follows:

October 18, 2002

Alexandra K. Helou
Office of Associate Chief Counsel (International).
Internal Revenue Service
Room 5226
P. O. Box 7604, Ben Franklin Station
Washington, DC 20044

Dear Ms. Helou,

I am deeply concerned that the IRS is allowing personal ideology to interfere with the lawful conduct of its regulatory responsibilities. Specifically, the Service recently re-issued a slightly modified version of a Clinton-era regulation that will require U.S. banks to report the deposit interest they pay to nonresident alien account holders.

This proposal is an abuse of the regulatory process. The IRS is supposed to promulgate regulations to help enforce the laws approved by Congress and signed by the President. But this regulation overturns existing law and clearly flouts Congress' goal of attracting capital to the U.S. economy. Moreover, the IRS failed to perform a legally required cost/benefit analysis. Indeed, the Service actually had the nerve to claim that this rule is an interpretive regulation and thus exempt from important parts of the law governing regulatory review.

Equally important, I am worried that this regulation will create a roadblock for the President's tax reform agenda. Almost all tax reform plans are based on key principles, including the fact that income should not be taxed more than one time. Another key principle is territorial taxation, the common sense notion that governments do not try to tax income earned in other nations. Yet the IRS regulation is explicitly designed to help foreign governments impose a second layer of tax on U.S.-source income.

There is no way to fix this regulation. It is completely contrary to existing law and it would adversely impact America's economic interests. I urge its immediate withdrawal.

Sincerely,

Pete Sessions

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