Daily Tax Update - April 17, 2012: Final Regs Requiring Reporting of Bank Deposit Interest Paid to Non-Resident Aliens Issued

FINAL REGULATIONS REQUIRING REPORTING OF BANK DEPOSIT INTEREST PAID TO NONRESIDENT ALIENS ISSUED:  Today, the IRS and Treasury issued final regulations (TD 9584) requiring the reporting of bank deposit interest paid to certain nonresident alien individuals.   These regulations apply to payments of interest made on or after January 1, 2013.

  • The finalization of the bank deposit interest reporting regulations follows more than a decade of debate over the potential for improper use of the collected information when provided to foreign governments, Treasury’s authority to issue the regulations, and other related issues.  Proposed regulations (REG-126100-00) that would have required the reporting of bank deposit interest paid to any nonresident alien individual were originally issued in 2001, then withdrawn and re-proposed (REG-133254-02) in 2002 to require reporting only with respect to residents of certain countries.  In 2011, Treasury and the IRS withdrew the 2002 proposed regulations and replaced them with new proposed regulations requiring reporting of bank deposit interest paid to any nonresident alien individual (REG-146097-09). 
  • The final regulations issued today adopt the 2011 proposed regulations with certain modifications.
    • The final regulations require reporting only in the case of interest paid to a nonresident alien individual resident in a country with which the United States has an information exchange agreement.  A list of these 78 countries is contained in Revenue Procedure 2012-24, also released today.  A payor may elect, however, to report interest payments made to all nonresident alien individuals.
    • The final regulations eliminate the requirement in the 2011 proposed regulations for financial institutions to include in the information statement provided to nonresident alien individuals a statement informing the individual that the information may be furnished to the government of the country where the recipient resides.
    • The final regulations clarify that a payor or middleman may rely on the permanent residence address provided on a valid W-8BEN for purposes of determining the country of residence of a nonresident alien, unless the payor or middleman knows or has reason to know that such documentation of the country of residence is unreliable or incorrect.
  • The preamble to the final regulations explains that Treasury and the IRS believe that the reporting required by the regulations "is essential to the US Government’s efforts to combat offshore tax evasion" by allowing the IRS to exchange information with other jurisdictions and facilitate intergovernmental cooperation on implementation of the Foreign Account Tax Compliance Act (FATCA) provisions of the Hiring Incentives to Restore Employment Act.
  • The preamble to the final regulations responds to criticism of the reporting requirement. 
    • With respect to the concern that the information collected and exchanged might be misused by foreign countries, the preamble notes that the information reported will only be exchanged with foreign governments with which the United States has an information exchange agreement, that fulfill certain other requirements, and agree to keep the information provided secret.  The preamble further explains that the United States will not exchange information if it believes a country is not complying with its obligations to protect confidentiality and use the information solely for tax enforcement and collection.  The preamble also notes that the United States will only exchange information automatically with the countries contained on the second list in Revenue Procedure 2012-24.   Currently, there is only one country, Canada, on that list, but additional countries are likely to be added as they seek automatic information exchange relationships with the United States.
    • In response to the argument that Treasury and the IRS lack authority to require the reporting, the preamble observes that section 6049(b)(2)(B) and (5) provide that reportable interest does not include bank account interest paid to nonresident alien individuals, "except to the extent otherwise provided in regulations."
  • The regulations can be viewed here and here.
  • For additional information, contact Philip R. West - pwest@steptoe.com or Amanda Varma - avarma@steptoe.com

SENATE FAILS TO PASS "BUFFETT RULE" BILL:  Last night, the Senate failed to garner the 60 votes needed to proceed on the “Buffett Rule.”   The bill, S. 2230, the Paying a Fair Share Act of 2012, would have imposed a 30 percent tax rate on those with an adjusted gross income in excess of $1 million annually. The final vote was 51 to 45.

WAYS & MEANS HOLDS HEARING ON TAX REFORM AND TAX-FAVORED RETIREMENT ACCOUNTS:  Today, the House Ways and Means Committee held a hearing on possible reforms to certain tax-favored retirement savings plans that might be considered as part of comprehensive tax reform.  

  • The witnesses were:
    • Dr. Jack VanDerhei, Research Director, Employee Benefit Research Institute
    • Ms. Judy A. Miller, Chief of Actuarial Issues and Director of Retirement Policy, American Society of Pension Professionals and Actuaries
    • Mr. William Sweetnam, Principal, Groom Law Group
    • Mr. David John, Senior Research Fellow in Retirement Security and Financial Institutions, The Heritage Foundation
    • Mr. Randy H. Hardock, Partner, Davis & Harman LLP, testifying on behalf of the American Benefits Council
  • Dr. VanDerhei testified, "Given that the financial fate of future generations of retirees appears to be so strongly tied to whether they are eligible to participate in employer-sponsored retirement plans, the logic of modifying (either completely or marginally) the incentive structure of employees and/or employers for defined contribution plans at this time needs to be thoroughly examined."
  • Ms. Miller stated, "The current system is working very well for millions of working Americans. Expanding availability of workplace savings is the key to improving retirement security.  There is no need for dramatic changes, but measures should definitely be considered to make it easier for employers, particularly small businesses, to offer a workplace savings plan to their employees."
  • Mr. Sweetnam testified, "Any effort to advance tax reform will likely include a review of the retirement savings incentives.  If one goal of tax reform is to simplify the current system, I would recommend that the Committee examine the work [relating to savings and retirement vehicles] of the Office of Tax Policy during the Bush administration."
  • Mr. John said, "American households have a compelling need to increase their personal saving, especially for long-term needs such as retirement.  This testimony summarizes several strategies for making saving more automatic – hence easier, more convenient, and more likely to occur.  In particular, by adapting to the IRA universe practices and arrangements that have proven successful in promoting 401(k) participation, the Automatic IRA holds considerable promise for improving the retirement security of millions of workers."
  • Mr. Hardock testified, "Tax reform efforts in the retirement area should focus on simplification and reducing the administrative burden on plan sponsors.  For example, the number of required notices should be reduced and streamlined and rules should be updated to better accommodate electronic delivery.  Those changes could substantially reduce the costs of plan administration.  But simplification should not necessarily need to involve consolidation of existing retirement plan options.  Different types of employment-based retirement plans provide employers with the flexibility to design plans that meet the unique needs of their particular workforce in the business's specific competitive environment."
  • Testimony can be accessed here.
  • For additional information, contact Philip R. West - pwest@steptoe.com or  Amanda Varma - avarma@steptoe.com

MISCELLANEOUS GUIDANCE RELEASED:

Revenue Ruling 2012-13 provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate. These rates are determined as prescribed by § 1274. The rates are published monthly for purposes of sections 42, 382, 412, 1288, 1274, 7520, 7872, and various other sections of the Internal Revenue Code.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

STEPTOE & JOHNSON LLP - TAX PRACTICE
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country.  The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court.  The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving.  Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them. Read more information on Steptoe's tax practice.