IRS Issues Final Regs on Reporting Interest Paid to Nonresident Aliens

On April 17, 2012, the U.S. Department of the Treasury and IRS issued final regulations and a revenue procedure implementing the final regulations regarding the reporting requirements for interest that relates to deposits maintained at U.S. offices of certain
financial institutions and is paid to certain nonresident alien individuals. These regulations will affect commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest on deposits.

On January 7, 2011, the Treasury Department and the IRS published a notice of proposed rulemaking (REG 146097-09) (the 2011 proposed regulations) in the Federal Register (76 FR 1105, corrected by 76 FR 2852, 76 FR 20595, and 76 FR 22064) under section 6049 of the Internal Revenue Code (Code). The 2011 proposed regulations withdrew proposed regulations that had been issued on August 2, 2002 (67 FR 50386) (the 2002 proposed regulations).

The regs explain that their main goal is to combat offshore tax evasion.  In order to ensure that U.S. taxpayers cannot evade U.S. tax by hiding income and assets offshore, the United States must be able to obtain information from other countries regarding income earned and assets held in those countries by U.S. taxpayers. Under present law, the measures available to assist the United States in obtaining this information include both treaty relationships and statutory provisions.   However, the effectiveness of these measures depends significantly on the U.S.'s ability to reciprocate.  In 2010, Congress supplemented the established network of information exchange agreements by enacting, as part of the Hiring Incentives to Restore Employment Act of 2010 (Public Law 111 -147), provisions commonly known as the Foreign Account Tax Compliance Act (FATCA) that require overseas financial institutions to identify U.S. accounts and report information (including interest payments) about those accounts to the IRS. In many cases, however, the implementation of FATCA will require the cooperation of foreign governments in order to overcome legal impediments to reporting by their resident financial institutions. Like the United States, those foreign governments are keenly interested in addressing offshore tax evasion by their own residents and need tax information from other jurisdictions, including the United States, to support their efforts. 

As an additional measure to further increase awareness among concerned nonresidents regarding the IRS’ use of information collected under these regulations, the Revenue Procedure also will include a second list identifying the countries with which the Treasury Department and the IRS have determined that it is appropriate to have an automatic exchange relationship with respect to the information collected under these regulations. This determination will be made only after further assessment of a country’s confidentiality laws and practices and the extent to which the country is willing and able to reciprocate.

The final regs reject the comments that the regs would impose a new administrative burden on U.S. financial institutions, especially to those that have a larger percentage of customers who are nonresident alien individuals.  The final regs respond to those comments. "All nonresident alien individual account holders who maintain accounts in the United States are already required to complete a Form W-8BEN, declaring their non- U.S. status and the country in which they reside. U.S. financial institutions can use their existing W-8 information to produce Form 1042-S disclosures for the relevant nonresident alien individual account holders. Nearly all U.S. banks and other financial institutions have automated systems to produce Form 1099-INT, “Interest Income”, for U.S. accountholders and Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding”, for Canadian accountholders. As a result, the information collection
requirements in these regulations build on reporting and information collection systems familiar to and currently used by U.S. financial institutions, including small business entities. The amount of time required to complete the Form 1042 and Form 1042-S is minimal, and the statement that is required to be collected is brief. Accordingly, the final regulations state that it should not be a significant burden to adapt those systems to report with respect to depositors who are resident in other countries with which the United States has an information exchange agreement. Therefore, a regulatory flexibility analysis is not required.

For Rev. Proc. 2012-24 (Implementation of Nonresident Alien Deposit Interest Regs),$FILE/2012-8148-1.pdf