Thursday, April 26, 2012

IRS Issues Regulations Requiring the Reporting of Bank Interest Paid to Nonresident Aliens

On April 17, the Treasury Department issued final regulations that require banks to report U.S. bank deposit interest paid to nonresident alien individuals who reside in designated countries having Exchange of Information Agreements[1] with the United States. Concurrently with the regulations, the IRS released Revenue Procedure 2012-24 which designates approximately 80 countries as having such agreements with the United States.
 
The preamble to the regulations states that the new regulations are “essential to the U.S. Government’s efforts to combat offshore tax evasion” because the IRS’ ability to obtain information from foreign jurisdictions is dependent on its ability to reciprocate. The IRS will provide information only upon a specific request. Upon receiving a request, the IRS will evaluate the requesting country’s current practices with respect to information confidentiality and will require the requesting country to explain the intended permitted use of the information under the relevant Exchange of Information Agreement and to justify the relevance of that information to the intended permitted use. The IRS will not provide information on deposit interest to a country if it determines that the country is not complying with its obligations to (1) protect the confidentiality of that information or (2) use the information solely for collecting and enforcing taxes.

Currently, the U.S. has an agreement with one country, Canada, under which it will provide information on an automatic basis. However, a number of countries including France, Germany, Italy, Spain and the United Kingdom have announced that they are in discussions to enter into automatic exchange agreements with the United States.

The regulations apply to payments of interest made on or after January 1, 2013. Payors must report the interest on Form 1042-S.

The Treasury Decision announcing the regulations is at: https://www.federalregister.gov/articles/2012/04/19/2012-9520/guidance-on-reporting-interest-paid-to-nonresident-aliens.

Revenue Procedure 2012-24 is at http://www.irs.gov/pub/irs-drop/rp-12-24.pdf.

1 The Exchange of Information Agreement may be either a standalone, bilateral agreement or contained within an income tax treaty.

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