The IRS came out with their Regulations which tell banks that they must report interest earned by nonresidents. Up to now, this was not done. If a nonresident opened a bank account in the United States, the interest earned was not reported to the U.S. government.
The bank interest itself is not taxable in the United States. These new Regulations do not change that. These new Regulations merely force the bank to tell the U.S. government how much interest was earned, and the identity of the nonresident bank account holder.
The IRS is trying to force every foreign bank in the world to report the accounts of U.S. persons. It wants information from other countries shared with the IRS. In that way, the IRS believes it can reduce tax evasion by U.S. persons.
If the IRS wants banks in Mexico to share information with the United States, it is reasonable that Mexico would ask for information about Mexicans with U.S. bank accounts. Oh, wait.
Up to now, the U.S. government has not had any information to share. If the IRS wants to play the game of “Let’s share information on each other’s taxpayers!” then the IRS needs stuff to share. These Regulations make that happen.
This move by the IRS makes complete sense, within the government’s tiny logic box. The IRS Commissioner would be laughed out of the Diplomat Club as a hypocrite if information sharing was a one-way affair. The U.S. government has not been shy about strong-arming other countries into changing their laws to serve the purposes of the United States. This cannot go on forever. The U.S. has to make a pretense at being even-handed.
The Regulations will stand. Diplomats will junket amongst themselves happily and solemnly. Treaties and Agreements will be signed. Press releases will be released. Everyone will be happy. Within the logic box.
For those living outside the logic box, we know of the concept of “perverse incentives” and “unintended consequences.” We understand that humans are not static. New situations trigger new behavior.
The movement of capital out of U.S. banks to other countries is an obvious one. (What are the effects to the U.S. economy?) This has been resoundingly and repeatedly rejected by the IRS. We now get to watch and see whose prediction is right.
The IRS will acquire a lot of information about interest earned by nonresidents. Will this information be valuable? Will it be useful in acquiring the reciprocal information that the U.S. government hopes to get? Or will other governments find ways to resist the coquettish “come hither” blandishments of the U.S.? My guess is that the government will get rather less use out of the information than expected. This is a hypothesis that unfortunately cannot be tested rigorously because the data (if it is collected) will be inside the belly of the beast, and not available to impartial outsiders.
The IRS probably expects this to be an incentive that drives future voluntary income reporting by U.S. taxpayers with bank accounts abroad. Maybe. Again, the data to prove/disprove this hypothesis will lie deep inside the government, immune to truth serum. Equally plausible is that this will continue to accelerate expatriations (we get calls daily for this).
The U.S. government launched itself on an aggressive course of rooting out and punishing U.S. tax evaders. The hallmark of this quest was continued pressure to get information from other countries. Once launched, the course of action must continue to its logical conclusion despite the best efforts of many to point out its flaws.