Compliance Bulletin

New IRS Nonresident Alien Account Reporting Requirement
April 20, 2012

The IRS released its final rule (“Rule”), first proposed in the Clinton Administration, then in 2002 by the Bush Administration, and then re-proposed last year, requiring banks and other payors (“payors”) [1] to report interest payments to nonresident aliens (“NRA’s”). 

The stated objectives of the Rule are to stop U.S. taxpayers’ offshore tax evasion and to make it more difficult for U.S. taxpayers to falsely claim to be nonresidents in order to avoid taxation on U.S. deposits. These objectives are to be achieved through the IRS’s ability to exchange information with its counterparts in foreign jurisdictions about income and assets held by residents of those jurisdictions in the U.S., usually under international information exchange agreements.

In 2010, Congress supported the establishment of these agreements by enacting, as part of the Hiring Incentives to Restore Employment Act of 2010 (Pub. L. 111-147), provisions known as the Foreign Account Tax Compliance Act (FATCA) that require overseas financial institutions to identify U.S. accounts and report information to the IRS. The IRS’s new Rule is part of the broader efforts arising under FACTA to facilitate information sharing.

Among the concerns raised about the Rule, including by CBA, was whether information required to be reported about NRA’s might be misused by foreign jurisdictions or failed to be held under rules of confidentiality. A potential consequence of these concerns is the withdrawal of deposits from U.S. institutions, especially from those that serve a high number of foreign customers. The IRS notes that information reported pursuant to the Rule is subject to the same confidentiality standards that are applicable to return information, and the IRS may only exchange collected information with foreign jurisdictions under agreements that similarly limit foreign governments’ use of such information [2]. In its preamble to the rule, the IRS also discusses several other safeguards that it follows to ensure no improper use of shared information by foreign jurisdictions.

Payors will be required only to report interest paid to NRA individuals who reside in a country with which the U.S. has entered into an information exchange agreement. The Treasury Department and the IRS released simultaneously with the Rule Revenue Procedure 2012-24 identifying such countries. The document currently lists approximately 78 jurisdictions with which the U.S. has some form of bilateral agreement, and only one country (Canada) with which the IRS currently exchanges deposit interest information on an automatic basis. When determining the country of residence of an NRA, a payor may rely on the permanent residence address provided on a valid Form W-8BEN (Beneficial Owners Certificate of Foreign Status for U.S. Tax Withholding) unless the payor knows or has reason to know the documentation is unreliable or incorrect [3].

Under the new Rule, interest aggregating $10 or more paid to covered NRA individuals is reported on Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding) for the calendar year in which the interest is paid [4]. See the instructions for Form 1042-S; however, you should be alert to any changes to the form. The duty applies to interest paid on or after January 1, 2013 [5]. The payor is also required to furnish to the recipient, either in person or by first class mail to the recipient’s last known address, a copy of the completed Form 1042-S and a statement to the effect that the information on the form is being furnished to the IRS [6]. The Rule eliminates a requirement in the proposed rule that payors also inform the individual that the information may be furnished to the individual’s country of residence.

Interest paid to NRAs is not subject to backup withholding as long as the payor may treat the payee as a foreign beneficial owner or foreign payee, which is substantiated by a Form W-8BEN or Form W-9 (Request for Taxpayer Identification Number and Certification) [7].

Payors will be required to report interest on deposits maintained at an office within the U.S. and paid to an NRA who is a resident of a country identified in the Revenue Procedure as of December 31 of the prior calendar year. For any year for which a report is required, a payor may elect to report interest payments to all NRA individuals, and this election is made by reporting all such interest [8]. The purpose of this allowance is (potentially) to ease the reporting burden of payors.

Click here to read the IRS’s complete release. As noted above, the requirements apply to interest paid on accounts as of January 1 2013.

Leland Chan

  1. The rule will affect commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest on deposits.
  2. See 26 U.S.C. § 6103.
  3. See 26 CFR § 1.6049-8
  4. 26 CFR § 1.6049-4(b)(5(i).
  5. 26 CFR § 1.6049-4(b)(5(ii)
  6. 26 CFR § 1.6049-6(e)(4).
  7. 26 CFR § 1.6049-8
  8. 26 CFR § 1.6049-8

Leland Chan

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

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