Banks that fail to file depositors' interest income forms with the government would face higher fines under a Clinton administration proposal.

To oppose the plan, nine financial and real estate trade groups sent a letter on Tuesday to Treasury Secretary Robert Rubin arguing that "the proposed penalty increase ... is totally unwarranted."

"This is not closing any loophole," said Jim O'Connor, tax lobbyist for America's Community Bankers, one of the groups behind the letter. "The government is simply, as a means of raising revenue, going to whack you harder for any inadvertent errors you make."

According to a Dec. 18 report by the congressional Joint Committee on Taxation, the administration's budget plan calls for raising $147 million over seven years by hiking penalties for failure to file information forms with the Internal Revenue Service.

The proposal apparently covers all IRS forms - from the W-2 to the 1042 to the 1098 - but banks and thrifts are most concerned about the 1099-INT forms they must submit detailing depositors' interest income.

"Reporting this information is one of the biggest compliance burdens that financial institutions face," Mr. O'Connor said. "This kind of ups the ante on any mistakes that are made - and eventually some mistakes will be made, even if our guys are very conscientious."

The proposal would charge institutions that fail to file information forms 5% of the amount of money they were supposed to report.

Currently, percentage fines are levied only in cases of intentional disregard of IRS rules. Otherwise, the penalty limit is $100 per failure.

"It's really just a phenomenal proposal to have a percentage penalty apply," said Chip Collins, a senior manager with Price Waterhouse in Washington.

The mention of the increased penalties in the Dec. 18 tax committee report caught banks off guard, because a Dec. 7 Treasury Department explanation of the President's budget bill mentioned only an increase in penalties for failure to file 1099-MISC forms. The 1099-MISC covers payments for services to independent contractors, royalties, fishing-boat proceeds, and a host of other things not of particular interest to financial institutions.

The trade associations say they haven't been able to get Treasury to clear up the apparent discrepancy, and attempts by the American Banker on Wednesday to do the same were unsuccessful. In general, however, tax specialists say they trust the tax committee's interpretation.

"They're pretty authoritative," said Herb Spira, tax counsel for the Independent Bankers Association of America.

Other financial group signers of the letter to Mr. Rubin, in addition to the IBAA and America's Community Bankers, included the American Bankers Association, the Credit Union National Association, and the Securities Industry Association.

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