In Letter to Treasury, House Leaders Say IRS Regulation on Non-Resident Alien Deposits Would Harm Financial Institutions

An IRS regulation requiring US financial institutions to collect and report information on interest paid to non-resident aliens is burdensome and may be a significant regulatory action under the Administrative Procedure Act, said Rep. Charles Boustenay (R-LA), Chair of the House tax oversight subcommittee. In a letter to Treasury Secretary Tim Geithner, Chairman Boustenay noted that, while the regulation requires the information so that it can be shared more easily with foreign governments, the reporting requirements apply whether or not the information has been requested by a foreign government.

Treasury has taken the position that the regulation’s adoption was not a significant regulatory action under the APA. The Chairman requests all correspondence and documents relating to the formation of the opinion that the regulation is not a significant regulatory action within the meaning of the APA.

Separately, a bi-partisan letter to the President by the Florida House delegation maintained that the regulation will have a negative impact on the balance sheet of US financial institutions and the solvency of those that have a high percentage of non-resident alien deposits. They also said that the regulation is an abuse of IRS regulatory authority and contrary to the intent of Congress.

The regulation requires the reporting of bank deposit interest paid to foreign account holders so that this information can be made available to the countries of origin of the non-resident alien account holders. The Florida delegation noted that many non-resident alien depositors are from countries with unstable governments where personal security is a major concern. The letter also notes that the Commerce Department estimates that US banks and securities firms have reported $3.6 trillion in passive investments by non-resident aliens.

Legislation introduced by Rep. Bill Posey (R-FL), HR 2568, would prohibit the Secretary of the Treasury from requiring a payor of interest to file an information return on interest that is not effectively connected with a trade or business within the United States and that is paid to a nonresident alien on a deposit maintained at an office within the United States. There is a Senate companion bill, S 1506, submitted by Senator Marco Rubio (R-FL).

In a recent statement before a panel of the House Financial Services Committee, Senator Rubio said that this bi-partisan legislation, which is co-sponsored by various members of the Senate Finance and Banking Committees  would stop the IRS from moving ahead with expanded reporting mandates for non-resident alien deposit interest.

REG-146097-09 is an unnecessary mandate that would overturn decades of well-established tax policy, emphasized the Senator. Given that the IRS’s latest proposal would apply the new reporting requirements to foreign deposits from every country, not just sixteen as proposed by in  a 2002 regulation, noted the Senator, it is difficult to see how REG-146097-09 does not warrant a cost-benefit analysis to better understand the far-reaching costs that it would impose on the economy.