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CUNA Comment Letter

Background

• The Credit Union National Association is the nation's largest trade organization for state and federal credit unions.

• CUNA represents over 91 % of the 10,600 state and federal credit unions in this country.

• More than one-third of credit unions are operated strictly by volunteers, with no paid employees.

• About 70% of credit unions have assets of less than $20 million.

CUNA's Opposition to the Proposal

• CUNA commends the IRS for holding a hearing on this proposal, and we are hopeful that the information provided today will help convince the IRS to withdraw the proposal.
• The explanation of the proposal published in the Federal Register on January 17, 2001 states it is appropriate for two reasons. Routine reporting of all bank deposit interest paid within the US will help ensure compliance by US taxpayers by minimizing the likelihood that any would claim foreign status falsely. Also, the IRS states that several countries that have tax treaties or agreements with the US have asked for information regarding deposits of individual residents of their countries.
• We question the sufficiency of these reasons, given the burden the proposal will impose on financial institutions and that the fact the interest is not taxable.
• As CUNA stated in its comment letter, we oppose the proposal because it will create compliance problems for credit unions and, in our view, the costs of compliance to institutions are significantly greater than the benefits to the government, as described by the IRS in the proposal.
• Further, while the proposal would require reporting for all nonresident aliens, it appears that it would only be shared with treaty partners.

Existing Regulatory Burden

• Credit unions are one of the most highly regulated entities in this country. Already, some 17 IRS regulations involving, in most instances, reporting and recordkeeping already apply to the operations of many credit unions.
• This is in addition to the myriad regulations from a number of other agencies, including Treasury's comprehensive Bank Secrecy Act rules, with which credit unions must already comply.
• A reasonable amount of regulatory compliance is expected and necessary, and is a cost of having a government charter.
• However, the mounting regulatory burden that credit unions as financial institutions shoulder diverts them from their primary mission, which is to provide financial services to consumers.
• As mentioned earlier, one-third of credit unions are operated by volunteers and the majority of credit unions are considered small institutions by anyone's measure. However, these institutions would be subjected to the same regulatory requirements that apply to the largest financial institutions in this country.
• We believe the extension of the requirement to report payments of deposit interest for all nonresident aliens would be burdensome because credit unions do not generally have data processing systems that have been programmed to identify nonresident alien individuals' accounts and prepare IRS Form 1042-S.
• The proposal would require institutions to set up new or upgrade information collection, monitoring and reporting systems. In addition, we believe there would be substantial training as a result of the requirements of the proposal and postage costs associated with furnishing the Form 1042-S to recipients.
• One of the most troublesome areas of the proposal is the treatment of joint accounts. Under the proposal, if all accountholders are nonresident aliens, there is the potential that the payment would be reported for all of them who are residents of a country with which the US has a treaty or agreement. Credit unions would have to keep track of which countries those are and be able to report more than one return for the same payment.
• At a minimum regarding joint accounts, if the IRS does not withdraw the proposal, we urge you to require reporting only for the primary account holder.

Conclusion

• In key ways, credit unions are different from other types of financial institutions that would be covered by the proposal. Because credit unions are financial cooperatives, the costs of compliance with any new rule, including this one, are borne by the members of the credit union who own it. The proposal will not only impact credit unions as covered entities, but also their consumer members.
• In our view, the proposal would provide only marginal benefits to the government while inflicting considerable costs on financial institutions, including credit unions.
• We urge the IRS to withdraw the proposal.
• In the alternative, we urge the IRS to make changes, such as the one we suggested regarding joint accountholders to minimize its impact on financial institutions and to then reissue the proposal for comments.
• We also urge the IRS to extend the effective date so that there would be sufficient time for institutions to comply.