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Sunday, July 14, 2024 | Back issues
Courthouse News Service Courthouse News Service

Hold on Here, Bankers Tell the IRS

WASHINGTON (CN) - Bankers associations in Texas and Florida sued the U.S. Treasury and IRS, challenging rules that require them to report specific information about any account help by a nonresident alien that earns more than $10 interest per year.

The Florida and Texas Bankers Associations sued the Department of Treasury and the Internal Revenue Service, in Federal Court.

They challenge a rule codified in April 2012, as 77 Fed. Reg. 23391 (April 19, 2012) and 26 C.F.R. §§ 1.6049-4(b)(5) and 1.6049-8.

"The Amendments require U.S. commercial banks, savings associations, and other depository institutions, as well as the U.S. branches of foreign banks, that hold accounts from non-resident alien individuals to file a report (Form 1042-S) with the IRS identifying the name, address, amount earned, and other personal information regarding any individual non-resident alien depositor whose account earns ten dollars or more of interest per year," the complaint states. "This information is being collected for the express purpose of sharing such information with seventy-two countries with which the United States has an income tax or other convention or bilateral agreement relating to the exchange of tax information. Interest paid to nonresident aliens on U.S. bank deposits is not subject to federal taxation in the United States. Prior to the Amendments, only interest paid to nonresident Canadians was subject to the interest reporting and inter-country sharing." (Citations omitted.)

The bankers claim the rule is costing them, and the country, money.

"The Defendants now seek to justify this vast expansion of the reporting, collection, and international sharing procedures on the basis that such reporting requirements are 'essential' to 'ensure that the IRS is in a position to exchange such information reciprocally with a treaty party when it is appropriate to do so. Defendants also seek to justify the Amendments on the claim that there is 'a growing global consensus regarding the importance of cooperative information exchange for tax purposes.' Within the potential scope of this arrangement are seventy-two countries with which the United States has an income tax or other convention or bilateral agreement relating to the exchange of tax information through which the United States agrees to provide and receive individual financial information. These countries include, for example, Egypt, Mexico, Pakistan, the Russian Federation, and Venezuela. Security concerns over the potential leakage and abuse of personal asset information from this sweeping international exchange with many countries that have unstable governments and porous law enforcement systems has led many non-resident aliens to withdraw or transfer money held in interest bearing bank accounts in the United States.

"This outflow of deposits and other investments has reduced and will in the future reduce the ability of U.S. depository institutions to make income-producing loans and to create jobs and spur economic growth in their local communities. Moreover, depository institutions in the United States are highly regulated and are already subject to extensive and often-used procedures for federal and state governmental authorities through which these governmental authorities may submit individual requests to obtain and utilize information relating to bank accounts maintained at branches in the United States. The IRS can also review bank documents informally under 26 U.S.C. § 7602(a)(1). Thus, the reporting requirements set forth in the Amendments are redundant, cumulative, and unnecessary. Furthermore, requiring banks in the United States to report such information for all non-resident aliens holding interest bearing accounts imposes a substantial economic hardship on such banks, which must develop and implement ongoing procedures for gathering and reporting such information.

"In adopting the Amendments, defendants have effectively reversed ten years of governmental policy during which a proposed expansion of the Canadian reporting and exchange model had been considered but rejected. Nowhere has there been any factual representation explaining why the prior analysis is no longer justified.

Despite the significant economic impact of the regulations on banks in the United States, defendants have taken the position that the sweeping Amendments do not constitute a 'significant regulatory action' and are not subject to the APA [Administrative Procedure Act]. Defendants have further taken the position that the Amendments are "not expected to have a significant economic impact on a substantial number of small entities" and, therefore, not subject to the RFA [Regulatory Flexibility Act]. In other words, in promulgating these Amendments, defendants have claimed exemption from all of the procedural safeguards put into place by the APA, the RFA, and related Executive Orders which were put into place to ensure that regulations are not overly burdensome or harmful to small businesses and other affected parties.

"Contrary to the defendants' contentions, both the APA and RFA are applicable to defendants' promulgation of the Amendments. Because defendants failed to comply with the APA and RFA in promulgating the Amendments, the Bankers Associations seek a declaratory judgment holding that the Amendments were promulgated in violation of the APA and the RFA and are therefore invalid and otherwise unenforceable. The Bankers Associations further respectfully request that the Court enter an Order staying the effective date of the Amendments."

The bankers are represented by James Butera with Jones Walker.

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