IRS Attacked on Interest Reporting Rule

Pressure on the Internal Revenue Service is growing as more lawmakers and lobbyists voice support to withdraw a regulation that would force U.S. banks to declare to the IRS any bank interest paid to non-U.S. citizens.

Interest income paid by U.S. banks to nonresident aliens is not taxable in the United States. But a proposed regulation (REG-133254-02) would provide such information to the IRS. It is expected that the IRS would then supply this information to foreign taxing authorities who in turn would tax the income in their respective countries.

Andrew F. Quinlan, President of the think tank Center for Freedom and Prosperity, addressed the Senate Finance Committee last week, lobbying for withdrawal of the regulation and explaining that it is in our country's interest not to discourage foreign investment by reporting the income information to foreign authorities.

"U.S. banks and financial institutions benefit greatly from the bank deposits of nonresident aliens," Mr. Quinlan said. "These deposits, in turn, benefit every American by helping to create jobs, finance small business loans and improve the general welfare of all."

Several members of Congress have asked for withdrawal of the regulation, including nine members of the Senate Banking Committee who sent a letter to Treasury Secretary John Snow stating that, "The substantial benefits from attracting capital to the U.S. far exceeded either any revenue that would be derived from taxing that income in the U.S. or requiring it to be reported so that foreign governments could tax it."

The Senate Finance Committee conducted the first of two hearings on this issue on Tuesday, July 8. Another hearing is expected later this summer.

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