Facts About IRS’s Proposed Regulation Reporting of
Deposit Interest Paid to Nonresident Aliens

Three days before President Clinton left office, the IRS proposed a regulation to force American banks to report the interest paid to all nonresident aliens (REG-126100-00). This proposal drew heated opposition from both industry and the public policy community. More than 99 percent of the submissions during the public comment period were hostile, and 100 percent of the testimony at the public hearing was negative. More than 150 Senators and Congressmen weighed in against the proposed regulation. In the face of overwhelming opposition, the IRS was forced to withdraw the regulation. Unfortunately the IRS played a game of bait-and-switch and immediately submitted a similar measure (REG-133254-02). This regulation purported to affect a smaller number of countries, but allowed IRS to add to the list later on. The cosmetic changes did not fool anyone and the “new” regulation encountered the same degree of opposition. The interest-reporting regulation remained in limbo until 2011.

In January of 2011, the IRS withdrew the old regulation and submitted a new, even more onerous rule covering individuals from all countries. The proposed regulation is bad economic policy and should not be implemented. Some quick facts on the regulation:

In July and August of 2011, legislation was introduced to prohibit the IRS from finalizing the proposed regulation. Rep. Bill Posey (R-FL) introduced H.R. 2568, and Sen. Marco Rubio (R-FL) introduced S. 1506.

FACT: The IRS admits that the deposit interest information is not needed to enforce U.S. tax law and is being requested solely for the benefit of foreign governments.

FACT: The proposal puts the interests of foreign tax collectors above U.S. law and before the interests of the American economy.

FACT: The proposal would drive capital from U.S. banks causing irreparable harm to the economy. Foreign investors will move capital to institutions in competing jurisdictions.

FACT: The proposal would undermine tax reform since it will help foreign governments double-tax income that is earned in America.

FACT: European Union bureaucrats will try to mischaracterize the IRS regulation as a sign of support for the European Union’s Savings Tax Directive—a tax harmonization scheme that infringes on a nation’s right to determine its own tax policy.

FACT: The regulation violates the intent of Congress. Lawmakers have explicitly chosen not to tax the deposit interest paid to nonresident aliens in order to attract capital to the US economy. Regulations should help enforce law, not overturn law.

FACT: This proposal may be good news for high-tax governments, but it is contrary to American economic interest. The jobs of American workers and the competitiveness of U.S. companies should be our top priorities. This regulation works against both. It will put Americans out of work and it will force dollars out of U.S. financial institutions and into foreign financial institutions.

Coalition for Tax Competition Letter Seeks Withdrawal of Destructive IRS Interest-Reporting Regulation

February 21, 2012

The Center for Freedom and Prosperity Foundation, joined by 23 of the country’s most influential free market and taxpayer rights organizations, sent a letter to Treasury Secretary Timothy Geithner urging withdrawal of an Internal Revenue Service (IRS) regulation that would discourage capital from the U.S. economy and weaken the American financial system.

The IRS Running Amok: Forcing American Banks to Put Foreign Tax Law Above U.S. Tax Law

April 11, 2011

Even though it violates existing law, the IRS is seeking to impose a regulation that will discourage foreign investment in the U.S. economy and undermine the competitiveness of American banks. This CF&P Foundation video provides five reasons why this proposal is misguided, including the risk to innocent people living under corrupt and tyrannical governments.

Congressional Hearing on IRS Nonresident Alien Interest Reporting Proposal

November 16, 2011

The proposed IRS non-resident alien interest deposit reporting requirement received an unfriendly reception at an October 27 hearing held by a subcommittee of the House Financial Services Committee. We were on hand to represent CF&P, and noted that the hearing was both a testament to our success in disseminating the many arguments against the proposed regulation, as well as affirmation of the need to continue fighting vigorously against the IRS proposal.

Who Writes the Law: Congress or the IRS?

February 15, 2003

The Internal Revenue Service has proposed a regulation (133254-02) that would require U.S. financial institutions to report bank deposit interest paid to certain nonresident aliens. The IRS admits that the information is not needed to enforce U.S. tax law, and instead seeks to collect the information so it can be provided to the tax authorities of 15 specified nations. But since nonresident alien depositors easily can shift their funds to other jurisdictions if they wish to protect their privacy, the regulation has attracted considerable opposition. Critics fear the regulation would drive capital from the U.S. economy and undermine the competitiveness of American financial institutions.