US Groups Attack IRS Over NRA Reporting Rules

Tax-News.com, New York

14 November 2002

More US organisations continue to protest the IRS's proposed rules to force banks to report interest paid to non-resident aliens. The latest two letters to the IRS are from Grover Norquist, President of Americans for Tax Reform, and Pierce Stone, Chairman of the Independent Community Bankers of America.

Says Mr Norquist:

'It seems like only months ago that I weighed in on the subject of reporting the interest earned by nonresident aliens on their US-based deposits to the governments of their home countries because indeed it was only months ago. The regulation proposed at the time was abandoned, and rightly so. It would have dealt a direct blow to our nation's economy by introducing a potent disincentive for people in other countries to put their money in American banks. Why bother if the tax collectors back home can find out about it, and use the information to take their unfair share?

'But unfortunately, like Frankenstein's monster, this regulation has been stitched together again and reanimated. It was a uniquely lousy idea before, and narrowing its focus by concentrating this most recent effort on residents of "only" 15 countries makes it no less objectionable. Successfully imposing this regulation on these unlucky 15 will make it easier to regulate everyone else at a later (but not too distant) juncture.'

Pierce Stone says: 'The Internal Revenue Service proposal would require financial institutions to perform new reporting. The ICBA opposes this proposal as a cumbersome, unnecessary and costly burden that would negatively impact financial institutions, their customers, and their communities. The cost to community
bankers to comply with this proposed regulation would outweigh the anticipated benefits the IRS would obtain from the additional information reported.

Mr Stone's full letter:

November 11, 2002

Department of the Treasury
Internal Revenue Service
CC:DOM:ITA:RU (REG-133254-02)
Room 5226
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: 26 CFR parts 1 and 31: Guidance on Reporting Interest Paid to Nonresident Aliens.

Dear Sir or Madam:

The Independent Community Bankers of America (ICBA) is pleased to offer the following comments on the proposed rule change to require reporting of interest paid on deposits of all nonresident alien bank customers. The Internal Revenue Service proposal would require financial institutions to perform new reporting. The ICBA opposes this proposal as a cumbersome, unnecessary and costly burden that would negatively impact financial institutions, their customers, and their communities. The cost to community bankers to comply with this proposed regulation would outweigh the anticipated benefits the IRS would obtain from the additional information reported.

The IRS and Treasury initially proposed to have banks report to the IRS annually all bank deposit interest paid to any nonresident alien individual from any country. After overwhelming opposition to this proposal, Treasury withdrew this first proposed regulation but unfortunately re-proposed a similar regulation that is even more cumbersome. Reporting requirement are now proposed for Australia, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, and the United Kingdom. While the prior proposed regulation would have required banks to report on nonresident alien from all countries, under the current proposal, financial institutions would have to create and implement far more complex programming methods, forms, and procedures to identify and report on deposit interest for individuals from randomly specified countries. It is dramatically more complex and cumbersome to flag and report on accounts from an unsystematic list of countries.

Worse yet, the list of countries for which reporting would be required would be subject to change and expansion at the discretion of the Treasury and the IRS. In fact, the current proposed regulation is little different than the original withdrawn regulation since it includes the option for banks to report bank deposit interest paid to all nonresident aliens or to any nonresident alien who is a resident of a country other than the newly specified countries.

ICBA believes this proposed reporting requirement is onerous and unwarranted for several reasons. First, since nonresident alien interest payments on U.S. deposits are not subject to tax in the U.S., Code § 871(i), the Internal Revenue Service would not further any U.S. financial interest by requiring this new reporting. Therefore, there is no direct benefit evident from this proposed costly new compliance burden, nor is it necessary for the proper functioning of the IRS, since nonresident alien depositors are in fact exempt from U.S. tax on their interest income from U.S. banks. . Neither U.S. treaties nor international norms require mandated collection and dissemination of information not directly necessary to U.S. tax administration.

Second, new reporting requirements on legal foreign deposits would act to discourage nonresident aliens from depositing their assets in U.S. financial institutions. Foreign deposits under U.S. management are largely a function of the confidentially, privacy, and stability of the U.S. banking system. The additional government intrusion of this proposal is likely to encourage the withdrawal and removal of existing deposits to countries that give greater weight to depositors' privacy and confidentiality. Such withdrawals, particularly in small and mid sized banks and border states would reduce the availability of funds needed for lending and economic development in those communities. Additionally, a loss of foreign deposits by financial institutions with substantial foreign deposits could diminish the stability of the banks themselves. The proposed regulation would negatively impact banks successful in attracting substantial foreign deposits. These deposits in turn foster greater U.S. lending to domestic consumers and businesses and bolster our domestic economic growth and job creation.

Producing the new reports for individually selected countries as required by the proposal would entail substantial compliance costs for financial institutions, costs that would far outweigh any stated benefit. New information collection and reporting systems would need to be set up and would require significant capital investment in forms, hardware, software, personnel and employee training, and mailing costs. These compliance costs would be material for many of ICBA's small community bank members.

Banks already abide by strict documentation requirements to ensure that persons claiming exemptions from U.S. tax in fact qualify for their tax-exempt status. Treasury Reg. §§ 1.6049-5(b)(12), 1.1441-1(e). Currently, bank compliance with these regulations for nonresident aliens are open to audit and inspection by the Internal Revenue Service and bank regulators at any time. Therefore, oversight methods already exist to verify possible tax avoidance (such as through false claims of alien status), making this new proposal redundant and unnecessary.

In conclusion, the ICBA believes that the new costly reporting requirements proposed would not improve the financial interest of the U.S. nor cost-effectively enhance the ability of the IRS to perform its revenue collection function. Rather, new nonresident alien interest reporting requirements would add material compliance costs and would jeopardize beneficial foreign investment and deposits to the detriment of U.S. financial institutions and the customers and communities they serve. ICBA strongly objects to these proposed new regulations and urges that they be withdrawn.

Thank you for the opportunity to comment. If you have any questions, please contact Paul Merski, ICBA's Chief Economist and Director of Federal Tax Policy at 202-659-8111 or paul.merski@icba.org.

Sincerely,

A. Pierce Stone
Chairman

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