WASHINGTON – In a major setback for credit unions and banks, the Internal Revenue Service approved new rules that require depositories to report interest payments to nonresident aliens, starting in 2013.
The IRS forms 1042-S must be submitted for depositors/members without a Social Security number or Individual Taxpayer Identification Number who must file a W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding with the credit union or bank.
The new reporting requirement is part of an international effort to crack down on tax evasion, with the U.S. hoping its own reporting standards to help track large international deposits will encourage other countries to follow suit. The Treasury Department and the IRS say the U.S. should ask its banks and credit unions to report information just as it is requiring overseas institutions to provide information on U.S. account holders. Such reporting is already required of Canadian depositors in U.S. institutions.
The proposal was widely criticized by NAFCU and CUNA, which called on the IRS to withdraw it and tried to enlist Congress in its efforts. “We are concerned that a number of credit unions do not have the data processing capabilities to identity affected accounts and prepare the required Form 1042-S,” said Mary Dunn, chief regulatory lobbyist for CUNA. “While the rule is applicable for payments made beginning January 1, 2013, we remain concerned about the overall compliance burden this regulation will impose on credit unions and will be communicating that to Congress and other policymakers.”
“Credit unions are already required to do a lot for the IRS and reporting this is just an additional burden,” said Tessema Tefferi, regulatory counsel for NAFCU.
The American Bankers Association also opposes the rule and predicted a major outflow of deposits from banks in Texas, Florida and other states known for being safe harbors for foreign money. Under a law passed by Congress in 2010, the U.S. requires foreign banks to track and report payments to U.S. account holders, who are liable for U.S. taxes on their worldwide income. This regulation serves as a companion to that requirement.
“A jurisdiction’s willingness to share information with the IRS to combat offshore tax evasion by U.S. taxpayers depends, in large part, on the ability of the IRS to exchange information that will assist that jurisdiction in combating offshore tax evasion by its own residents,” the regulations say.
The regulations say the U.S. will share information only with countries with which it has an agreement to do so. According to an IRS list, those countries and jurisdictions include China, France, Germany, Israel, Japan, Mexico, Switzerland, the U.K. and Venezuela.
In the regulation’s release, the IRS wrote that it will exchange information only with countries that protect confidentiality and use the data solely for tax purposes.
