New Prop. Regs. on Bank-Deposit Interest Paid to NRAs

In 2002, the IRS proposed new regulations (REG-133254-02) under Sec. 6049, replacing previously proposed regulations (REG-126100-00) that, in general, would have required financial institutions to report annually to the IRS all U.S. bank-deposit interest paid to any nonresident alien (NRA). Under current Regs. Sec. 1.6049-8(a), U.S. banks are required to report only U.S. bank-deposit interest paid to a U.S. person or a NRA resident in Canada.

In its explanation of the 2002 proposed regulations, the IRS concluded that the prior proposed regulations were overly broad in requiring annual information reporting for U.S. bank-deposit interest paid to any NRA. The 2002 version of Prop. Regs. Sec. 1.6049-8(a) would require additional reporting of such interest paid to residents of Australia, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden and the U.K. Payors may, at their option, choose to report U.S. bank-deposit interest paid to all NRAs or to any NRA resident in a country other than those listed.

In most other respects, the 2002 proposed regulations generally follow the approach of the prior proposed regulations. Specifically, they require the payor of U.S. bank-deposit interest to provide a copy of Form 1042-S, Foreign Persons U.S. Source Income Subject to Withholding, to an interest recipient who is resident in a country for which reporting is required. In addition, like the 2001 proposed regulations, the 2002 regulations provide that, if a joint account holder is a U.S. nonexempt recipient, the payor or middleman must report the entire payment to that person. However, if all joint account holders are foreign persons, reporting is required to any one of the joint account holders resident in one of the listed countries.

Finally, the 2002 proposed regulations, like the 2001 proposed regulations, eliminate the Regs. Sec. 1.6049-8(a) actual knowledge of the individuals residence address rule, because it creates a result contrary to the presumption rules of Regs. Sec. 1.1441-1(b)(3)(iii), which generally provides that interest on a U.S. bank deposit that cannot reliably be associated with a valid Form W-8 or Form W-9, Request for Taxpayer Identification Number and Certification, must be presumed to be paid to an undocumented U.S. nonexempt recipient. The 2002 version of Prop. Regs. Sec. 1.6049-8(a) clarifies that a payor of interest on such a deposit must report the payment on Form 1099 as made to a U.S. nonexempt resident and subject it to backup withholding.

The 2002 proposed regulations would be effective for payments made after December 31 of the year final regulations are published. Many parties (including senators and representatives from both sides of the aisle) are pressing Treasury to withdraw the regulations, because (1) the U.S. has no tax interest in adopting this rule and (2) implementation of this rule would reduce investment in the U.S.

From Carol Doran Klein, J.D., Washington, DC