January 13th 2014 – Federal District Court Upholds IRS Regulations Requiring Interest of $10 or More to Be Reported by US Banks for Accounts held by Nonresident Aliens.

A petition for summary judgement against the new IRS reporting rules brought by the Florida and Texas Bankers Association has failed in US district court. The court instead elected to uphold the new IRS regulations that require U.S. banks to report interest in excess of $10 on accounts held by nonresident aliens.

The court upheld this information-reporting requirement based on the IRS’ determination that this would “improve U.S. tax compliance, deter foreign and domestic tax evasion [and] impose a minimal burden on banks and not cause any rational actor- other than a tax evader- to withdraw his funds from U.S. accounts.”

The new law is a key strategic element in the IRS’ plan to address the so-called “tax gap” – that is, the $450 billion gap between what taxpayers owe the government and what they actually pay. Recent regulatory initiatives like FATCA have stepped up the pressure on foreign banks and governments to provide reporting on US taxpayers who earn interest from investments abroad.  As a result, the United States has entered into treaties with at least 70 foreign governments to provide for the exchange of tax information upon request.

One of the key elements in getting foreign banks to comply however has been the idea of reciprocity, or namely that the IRS in turn will help identify foreign nationals who are not reporting taxable income derived from investments in the the US banking system. Essentially if the United States does not report tax information for foreign account holders, then other countries have little incentive to provide us with similar information.

According to Assistant Attorney General Kathryn Keneally, “[“this”] represents an important step in our commitment to work with our treaty partners to eliminate cross-border tax evasion.”

This new reporting is required for all nonresident aliens who are resident of countries that have tax information exchange agreements with the United States.If you are a foreign national deriving income from formerly undeclared or under declared investments in US banks, 2013 is the first year in which your US banking institutions may report your taxable income to your country of residence. It is very important that you insure your compliance.