The IRS has an enquiring mind. Let’s just leave it at that. They like to know everything, because the IRS believes that all of us (the humble taxpayers) lie, cheat and steal.
At the moment, the IRS has a significant knowledge gap for foreigners. A nonresident of the United States can put money in a U.S. bank and earn interest on that deposit. The IRS will never, ever know about that interest, because the bank is not required to report bank interest earned by foreigners to the IRS.
A U.S. taxpayer, by contrast, will receive a Form 1099-INT at the end of the year, reporting the interest earned. This would then give the IRS a handy way of confirming that the numbers match: what the taxpayer said he earned on his tax returns must match what the bank said it paid to the taxpayer.
Why don’t we require banks to issue a Form 1099-INT to foreigners? There’s a simple reason: bank interest earned by a nonresident is completely free of U.S. tax.
There’s a simple reason for that, too: as a matter of international competitiveness, it makes U.S. banks more able to attract international deposits. If the U.S. taxed bank interest, foreign money would flee to friendlier countries.
And why do we want foreign money on deposit at U.S. banks? Simple, too: that’s the money that U.S. banks can lend to their customers. Those customers are likely to be U.S. businesses. That means U.S. businesses can grow and create new jobs. It’s no accident that the U.S. became an industrial colossus in the 19th Century: there was a vast inflow of foreign capital (to say nothing of immigration of skilled labor) that propelled U.S. economic growth.
Aha. Now our friend, Secretary of the Treasury John Snow, wants to shovel water uphill and do something that will scare away foreign capital. New Proposed Treasury Regulations on the table say that U.S. banks must soon tell the IRS how much interest a nonresident bank depositor earned on his U.S. bank deposit.
The U.S. Chamber of Commerce has weighed in against the proposed regulations. Here is a copy of the letter sent to Treasury Secretary Snow:
The Honorable John W. Snow
Secretary of the Treasury
Department of the Treasury
1500 Pennsylvania Avenue
Washington, D.C. 20220
Dear Secretary Snow:
On behalf of the U.S. Chamber of Commerce, the world’s largest business federation, representing more than three million businesses and professional organizations of every size, sector and region, I am writing to urge you to withdraw the proposed regulation (133254-02) that requires American banks to report the interest they pay on the deposits of nonresident aliens.
The proposed regulation, which would not improve the safety or soundness of the U.S. banking system, places an undue burden on banks. The IRS estimates financial institutions would each spend approximately 500 man-hours annually on compliance and other stakeholders have argued the hours would be considerably higher. This waste of resources would reduce the profitability of U.S. banks.
Furthermore, failure to withdraw the regulations would lead to a reallocation of deposits out of the U.S. banking system thus reducing profits and decreasing credit flows to bank borrowers. The reduced credit flows will fall disproportionately on small businesses, which rely on banks for funding.
In conclusion, we believe that there is little or no benefit to be gained by these proposed regulations and the resulting negative consequences of reduced profitability and credit availability. Therefore, we urge you to withdraw this proposed regulation.
R. Bruce Josten
Chamber of Commerce of the United States of America