Banks in Florida and Texas, locked in a long-running battle with U.S. tax authorities over the deposits of certain foreigners, are now asking the courts to intervene.

In a federal lawsuit filed last week, banks in the two states are seeking to halt a new tax regulation that requires them to file reports with the Internal Revenue Service when they pay interest to non-resident aliens. The court case follows an unsuccessful lobbying effort in Congress to stop the regulation.

The goal of the regulation is to aid efforts to crack down on tax evasion in countries that have tax treaties with the United States. The rule's supporters argue that it will encourage authorities in those nations to provide similar information to the United States.

But U.S. bankers, particularly in states that are reliant on deposits from residents of Latin American countries, say that the regulation will lead to an exodus of funds.

"For banks, a drain in deposits would significantly reduce funds available for lending and investment," Eric Sandberg, chief executive officer of the Texas Bankers Association, which along with the Florida Bankers Association filed the lawsuit, said in a news release.

Since January, U.S. banks have been required to collect the relevant information from depositors. The reporting requirements are scheduled to take effect early next year. Non-resident aliens, many of whom spend part of the year in the United States, do not owe U.S. taxes on their interest income, but they may be responsible for paying taxes on the income to their home countries.

The lawsuit states that the regulation's impact is already being felt, though it provides scant details. One unnamed bank reported a loss of 5% to 10% of its non-resident alien deposits, while others reported shifts of hundreds of millions of dollars from interest bearing accounts to noninterest bearing ones, according to the complaint.

In the lawsuit, the plaintiff banks argue that the Internal Revenue Service and the Treasury Department failed to comply with certain legal requirements when they were formulating the new rule. The banks maintain that a more thorough economic analysis should have been conducted.

A Treasury spokesperson said the department is reviewing the lawsuit. The IRS does not comment on pending legal cases, according to an agency spokesperson.

In the past, Treasury officials have argued that U.S. banks are overstating the impact of the tax regulation. Just because a country has a tax treaty with the United States does not mean that the American government will necessarily share the newly collected information with that nation, U.S. officials have said. They pledge to exercise discretion when other factors would make the exchange of information inappropriate.

But that assurance is not good enough for Alex Sanchez, president of the Florida Bankers Association.

He says that authorities in certain Latin American countries such as Mexico and Venezuela, which have tax treaties with the United States, can't be trusted to protect the confidentiality of any information they could receive. If the information gets sold to criminals, it put the depositors at risk of kidnapping, he argues.

"We're shutting the doors to people in these countries," Sanchez says. "And it's sad."

Sanchez says that he does not object to the IRS regulation being applied to European countries that have mature civil societies. But the situation in Latin America is different, he argues.

"I'm not talking about England, jolly old England," he says. "There's no kidnappings there."

The lawsuit, which was filed in U.S. District Court for the District of Columbia, follows a 251-165 vote last year in the House of Representatives to block the regulation. The Senate did not take up the measure.

The IRS attempted to impose a similar regulation 11 years ago, but it received blowback from Congress then, too. Ultimately the regulation was only applied to depositors from Canada. The new rule expands its application to dozens of other countries.

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