The Net Tightens Truth and Consequences


From "Background and Explanation of Provisions" of newly issued Proposed Treasury Regulations regarding requirementsto haveU.S. bank deposit interest paid to any nonresident alien individual reported annually to the IRS.

On January 17, 2001, the IRS and Treasury published a notice of proposed rulemaking (REG 126100-00) in the Federal Register (66 FR 3925, corrected by 66 FR 15820 and 66 FR 16019) under Section 6049 (the 2001 proposed regulations), which would provide that U.S. bank deposit interest paid to any nonresident alien individual must be reported annually to the IRS. Under regulations currently in effect, reporting of U.S. bank deposit interest is required only if the interest is paid to a U.S. person or a nonresident alien individual who is a resident of Canada.

The IRS and Treasury requested comments on the 2001 proposed regulations, and a public hearing regarding the 2001 proposed regulations was held on June 21, 2001. The IRS and Treasury received numerous comments on the proposed regulations, and several commentators spoke at the public hearing on the 2001 proposed regulations. After careful consideration of all the comments received, the IRS and Treasury have concluded that the 2001 proposed regulations should be withdrawn and a new notice of proposed rulemaking should be issued on this subject. Accordingly, this document withdraws the 2001 proposed regulations and provides new proposed regulations (the 2002 proposed regulations).

Most of the comments received on the 2001 proposed regulations were highly critical of the regulations. In particular, many commentators expressed the view that the administrative burden imposed by the 2001 proposed regulations would significantly outweigh any benefits obtained by the IRS from the additional information collected. Some commentators also stated that the 2001 proposed regulations could have a severe negative impact on U.S. banks, particularly U.S. banks with a deposit base that included a significant number of nonresident alien individuals, some of whom had expressed concerns that the information collected under the 2001 proposed regulations might be misused. Other commentators raised certain technical concerns regarding the 2001 proposed regulations, particularly with respect to the reporting requirements for bank deposit interest paid to joint account holders.

After consideration of the comments received, the IRS and Treasury have concluded that the 2001 proposed regulations were overly broad in requiring annual information reporting with respect to U.S. bank deposit interest paid to any nonresident alien. The IRS and Treasury have decided instead that reporting should be required only for nonresident alien individuals that are residents of certain designated countries. The IRS and Treasury believe that limiting reporting to residents of these countries will facilitate the goals of improving compliance with U.S. tax laws and permitting appropriate information exchange without imposing an undue administrative burden on U.S. banks. Accordingly, the 2002 proposed regulations would modify the current regulations (which require reporting of U.S. bank deposit interest only if paid to Canadian residents) by requiring in addition reporting of U.S. bank deposit interest paid to residents of Australia, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, and the United Kingdom. Payors may, however, at their option, choose 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 countries listed above.

If the IRS and Treasury determine that this list of countries should be modified in the future, regulations providing such a modification will be proposed and comments will be requested on those proposed regulations. In other respects, the 2002 proposed regulations generally follow the approach set forth in the 2001 proposed regulations. Thus, the 2002 proposed regulations provide that, if a nonresident alien who is a recipient of U.S. bank deposit interest is a resident of a country for which reporting of such interest is required, a copy of Form 1042-S, "Foreign Person's U.S. Source Income Subject to Withholding", must be furnished to the nonresident alien. Like the 2001 proposed regulations, the 2002 proposed regulations provide that the payor or middleman can satisfy this requirement by furnishing a copy of Form 1042-S either in person or to the last known address of the nonresident alien.

These regulations are proposed to apply to payments made after December 31 of the year in which they are published as final regulations in the Federal Register. Special rules apply to joint account holders.

In other words, these regulations are at present merely proposed, and are not yet in effect. However, expect to see some form of them becoming final, effective regulations in the future.


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