FACT Coalition Applauds Proposed Regs on Reporting Interest Paid to Nonresident Aliens

Internal Revenue Service

We applaud this effort and hope that it is only one step in the ongoing improvement of the type and quality of information collected by the IRS that can be shared with other governments pursuant to tax treaties and tax information exchange agreements (TIEAs).

America should not be a haven for international tax evaders. We do not believe that the United States should be a tax haven for citizens of other countries who wish to evade their tax obligations to their home country. The United States should not engage in practices that make it easier for the laws of other countries to be broken or evaded.

The international community demands action. As the IRS noted in its preamble to the proposed rules, the international landscape has changed dramatically in the past few years. There is a growing global consensus that responsible governments must cooperate in exchanging tax information about their citizens in order to combat the rampant tax evasion that is facilitated by offshore tax havens. Recent agreements between governments have acknowledged the importance of cooperation and have removed obstacles such as bank secrecy rules as grounds for refusing requests for information.

The proposed rule will greatly improve our ability to respond to requests from other governments. We have a major stake in assisting other countries to stop tax cheating by their own citizens. Not only is it the moral and ethical thing to do, but we need the help of those other countries in protecting our own tax system. We cannot expect their cooperation if we are not willing to give ours. This regulation is especially important in light of the recently enacted Foreign Account Tax Compliance Act which requires foreign financial institutions to file information reports with respect to accounts owned by U.S. taxpayers. In order to encourage foreign governments to share information, we must be willing to collect and exchange information about their taxpayers. We cannot meet our obligations under tax exchange information agreements if we do not create a process that allows us to do that. These rules are an important step in that direction.

The proposed rules will help the IRS catch cheating by U.S. taxpayers. This type of third-party reporting is critical to our own tax system. A November 2007 report by the Government Accountability Office found that when income is subject to a high level of third-party reporting, such as wages, the income is reported correctly on the recipients' tax returns 98.8 percent of the time. When the amount of third-party reporting on income is low, such as rents, the income is reported correctly only 46 percent of the time. We believe that some U.S. taxpayers evade tax on this type of interest income by opening accounts with U.S. financial institutions using a foreign name or foreign entity. We believe this regulation will improve the IRS's ability to catch these tax evaders.

Claims of dire economic consequences are completely unfounded. There is no foundation to the argument that billions of dollars of deposits will leave the U.S. if these rules take effect. The regulation only applies to accounts owned by nonresident alien individuals. Much of the foreign capital in the U.S. is, first of all, invested by foreign legal entities (not individuals) that would not be covered by this regulation. Second, the regulations only apply to bank deposits -- not stock ownership, not private equity funds, not real estate -- not anything else. Of the $4 trillion of foreign deposits in U.S. banks, the federal reserve reports that three-fourths of those funds are in accounts held by foreign governments, official institutions, international and regional organizations, and foreign banks. Of the less than $1 trillion left, only the amount held in the name of individuals would be subject to reporting under the new rules. Even for accounts that are covered by these rules, only depositors who are tax evaders have incentive to move their funds.

Objections to these rules on humanitarian grounds are baseless. Opponents argue that providing information about deposits to foreign governments may endanger the lives of people who use U.S. depository institutions to escape problems in their home countries such as crime, persecution, and financial instability. The proposed rules only give the IRS the ability to collect information on these accounts. They do not require the IRS to turn the information over to foreign governments. Information is not exchanged under a TIEA automatically, but only as a response to a specific, carefully limited request which identifies the nature of the information and the specific evidence being sought. The request must be only for the purposes of tax enforcement. The U.S. government has the ability to refuse to provide the information provided by the foreign government in many circumstances. In addition, the U.S. generally does not have TIEAs with rogue governments.

The regulation would not overturn any Congressional intent regarding the taxation of this income. Opponents have pointed out that Congress has specifically decided not to tax interest paid to nonresident aliens and claim that the proposed rules would "overturn the outcome of the democratic process." This argument is completely without merit. The mere collection of information about this interest income does not in any way impose tax upon it or conflict with any law enacted by Congress.

The regulation is not overly burdensome on financial institutions. The regulation only applies to accounts owned by nonresident alien individuals, not any foreign entities. Banks, both large and small, are already required to collect this type of information on all their customers. They already must report this information to the IRS for their U.S. and Canadian customers. The new rule only expands the number of customers who are covered by the third-party reporting rules.

Conclusion. Those who oppose the proposed rules have a vested interest in facilitating tax cheating. The stakes in tax evasion are very high and the forces in favor of maintaining the status quo are well-financed and very politically connected. Corrupt American and international banks have a stake in maintaining tax cheating, since they make money from handling those accounts. Corrupt politicians may appreciate the financial contributions that backing the banks engenders. Wealthy Americans who use tax havens worry that if the U.S. cooperates with other countries, their tax evasion will be discovered. But it's the money of honest, tax-paying citizens of all countries that the tax cheats are stealing.

Request to Testily. The FACT Coalition requests the opportunity to appear at the hearing scheduled for April 27, 2011 and to have this letter serve as the outline of our comments. If you have any questions or require additional information, please contact Rebecca Wilkins, Senior Counsel, Federal Tax Policy, Citizens for Tax Justice at 202-299-1066 x32 or rwilkins@ctj.org. Thank you for this opportunity to contribute to the record.