Banks’ Reporting Requirements Raise Privacy Concerns

Effective January 1, 2013, U.S. financial institutions will be required to annually report bank deposit interest earned by non-U.S. residents to the IRS. Currently, U.S. financial institutions are only required to report bank deposit interest earned by residents of Canada to the IRS. (It should be noted that such interest will continue to be exempt from U.S. withholding tax). What is most notable about the issuance of these regulations is the confirmation that the IRS may share this information with the account holders’ home countries, raising privacy concerns for some non-U.S. residents.

IRS Can Exchange Information with Other Jurisdictions

According to the IRS,

“[t]he reporting required by these regulations is essential to the U.S. Government’s efforts to combat offshore tax evasion for several reasons. First, it ensures that the IRS can, in appropriate circumstances, exchange information relating to tax enforcement with other jurisdictions. In order to ensure that U.S. taxpayers cannot evade U.S. tax by hiding income and assets offshore, the United States must be able to obtain information from other countries regarding income earned and assets held in those countries by U.S. taxpayers…

Second, in 2010, Congress supplemented the established network of information exchange agreements by enacting, as part of the Hiring Incentives to Restore Employment Act of 2010 (Pub. L. 111-147), provisions commonly known as the Foreign Account Tax Compliance Act (FATCA) that require overseas financial institutions to identify U.S. accounts and report information (including interest payments) about those accounts to the IRS. In many cases, however, the implementation of FATCA will require the cooperation of foreign governments in order to overcome legal impediments to reporting by their resident financial institutions. Like the United States, those foreign governments are keenly interested in addressing offshore tax evasion by their own residents and need tax information from other jurisdictions, including the United States, to support their efforts. These regulations will facilitate intergovernmental cooperation on FATCA implementation by better enabling the IRS, in appropriate circumstances, to reciprocate by exchanging information with foreign governments for tax administration purposes.

Finally, the reporting of information required by these regulations will also directly enhance U.S. tax compliance by making it more difficult for U.S. taxpayers with U.S. deposits to falsely claim to be nonresidents in order to avoid U.S. taxation on their deposit interest income.”

Rules Intended To Combat Tax Evasion

In response to the concerns raised by these new regulations and the fear of some depositors moving their money to jurisdictions such as Panama or the Cayman Islands, countries with stronger privacy laws, the Florida International Bankers Association recently reported that it has been educating its members on what these rules are really intended for – to combat tax evasion.

Consequences on Venezuelan Residents 

In addition, on September 11, 2012, Timothy Geithner, the Secretary of the Treasury Department, responded to a letter written by Florida Congresswoman Debbie Wasserman Schultz regarding the consequences these new regulations may have on Venezuelan residents holding accounts at U.S. financial institutions. According to the Treasury Department, the IRS will not share information collected pursuant to the bank deposit regulations with Venezuela because, in its view, Venezuela does not have “sufficient safeguards in place to ensure the proper use of the information and to protect its confidentiality.”

This response is not all that surprising, even though the IRS recently released (in Revenue Procedure 2012-24) a list of all the countries (which included Venezuela) that have in effect an income tax or other convention or bilateral agreement relating to the exchange of tax information pursuant to which the United States agrees to provide, as well as receive, information.

The preamble to the final regulations specifically indicates that, even when such an agreement exists, the IRS is not compelled to exchange information, including information collected pursuant to the regulations, if there is concern regarding the use of the information or other factors exist that would make exchange inappropriate.