Rules for Reporting Interest on Deposits Paid to Foreign Taxpayers Are Finalized

The IRS issued final regulations under Sec. 6049 outlining the rules requiring U.S. financial institutions to report interest payments to certain nonresident alien individuals of $10 or more per year paid after Dec. 31, 2012 (T.D. 9584). 

The IRS explained that the new rules are part of the process of improving the detection of tax evasion worldwide. Having this information available to give to other countries will help the United States gain their cooperation in implementing the Foreign Account Tax Compliance Act (FATCA). The IRS also says the information will improve U.S. tax compliance by making it more difficult for U.S. taxpayers with U.S. deposits to falsely claim they are nonresidents.

The new rules apply to commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest on deposits. They require the payer to file Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, for the calendar year in which interest is paid to nonresident alien account holders (Regs. Sec. 1.6049-4(b)(5)). The payer must also send a copy of the form to the account holder together with a statement explaining that it is furnishing the information to the IRS (Regs. Sec. 1.6049-6(e)(4)).

A payment of interest to a nonresident alien individual that is subject to this reporting requirement is not subject to backup withholding under Sec. 3406 if the payer may treat the payee as a foreign beneficial owner or foreign payee under the rules of Regs. Sec. 1.6049-5(b)(12) (Regs. Sec. 31.3406(g)-1(d)).

Under Regs. Sec. 1.6049-8(a), these reporting requirements are limited to interest paid to nonresident alien individuals residing in countries with which the United States has an agreement to exchange information in effect as of Dec. 31 of the year before the interest is paid. The list of countries with such an agreement is provided each year in a revenue procedure; for the 2013 year, that list is contained in Rev. Proc. 2012-24.

Financial institutions can rely on Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to determine where a taxpayer lives unless there is evidence that it is unreliable or incorrect. To simplify the process for financial institutions, Regs. Sec. 1.6049-8(a) also permits reporting of all interest paid to nonresident alien individuals, so that financial institutions do not have to determine if a nonresident alien’s home country has an information exchange agreement with the United States.