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CUNA Regulatory Comment Call

April 19, 2001

EXECUTIVE SUMMARY

• The IRS currently requires the reporting of interest on deposits that are paid to nonresident alien individuals who are residents of Canada.
• The IRS has issued proposed rules that would extend the information reporting requirement for financial institution deposit interest paid to nonresident aliens to cover recipients who are residents of other foreign countries.
• The IRS believes this extension is appropriate for the following two reasons (but has not provided sufficient justification for the proposal):
• Requiring routine reporting of information to the agency of all financial institution deposit interest paid within the United States will help to ensure voluntary compliance by U.S. taxpayers by minimizing the possibility of tax avoidance, such as through false claims of foreign status.
• Several countries with tax treaties or other agreements that provide for the exchange of tax information with the U.S. have requested information concerning bank deposits of individual residents of their countries.
• These new provisions would apply to payments made after December 31 of the year in which the final regulations are published in the Federal Register.

Comments on the proposed IRS regulations are due by May 31, 2001 (this is an extended deadline). Please submit your comments to CUNA by May 23, 2001. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Senior Regulatory Counsel Catherine Orr at corr@cuna.com; or mail them to Mary or Catherine c/o CUNA's Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. If you would like to mail your comments directly to the IRS, the address is CC:M&SP:RU (REG-126100-00), Room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, D.C. 20044. To submit comments to the IRS electronically, select the “Tax Regs” option on the IRS Home Page (www.irs.gov), or by submitting comments directly to the IRS Internet site at http://www.irs.gov/tax-regs/regslist.html.

If you submit comments directly to the IRS, please also forward a copy of your comments to CUNA. There will be a public hearing on this proposal on June 21 at 10 a.m. in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, N.W., Washington, D.C. You may contact CUNA if you would like a copy of the proposed regulation or you may access it on the Internet at the following address: http://ftp.fedworld.gov/pub/irs-regs/12610000.pdf.

BRIEF DESCRIPTION OF THE PROPOSAL

Method of Furnishing IRS Form 1042-S to Recipients
Under current IRS rules, a financial institution is required to furnish directly or through a middleman (such as a trustee) an IRS Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding) -- instead of an IRS Form 1099-INT (Interest Income) -- for interest paid on deposits maintained at the financial institution’s office within the U.S. to nonresident alien individuals who are residents of Canada. The proposal would extend this requirement to all nonresident aliens and clarify that this requirement may be met by providing a copy of the form either in person or to the recipient’s last known address.

Joint Account Holders
Under the proposal, if any joint account holder is a U.S. non-exempt recipient , the payor (financial institution) or middleman would have to report the entire payment to that person. In the case where all joint account holders are foreign persons, then the payor or middleman would have to report the payment to the nonresident alien individual who is a resident of a country with which the U.S. has an income tax treaty or tax information exchange agreement (TIEA) . If more than one of the joint account holders is a foreign person and a resident of country with which the U.S. has an income tax treaty or a TIEA, then the payor or middleman would have to report the payment to the person who is the primary account holder. The payor or middleman, however, would have to furnish an IRS Form 1042-S to any account holder who requests it.

Canadian “Actual Knowledge” Test
According to current regulations, interest paid with respect to a deposit maintained at an office within the U.S. to Canadian residents must be reported. In such instances, the agency expects the payor or middleman to rely on actual knowledge of residence address in Canada or the permanent address found on IRS Form W-8 (Certificate of Foreign Status) to make the determination of whether the nonresident alien individual resides in Canada.

The proposal would eliminate this “actual knowledge” requirement. The proposed rule would clarify that such deposit interest amounts are generally not subject to backup withholding under Section 3406; however, the payor must report the payment on IRS Form 1099 as made to a non-exempt recipient if the payor or middleman does not have a valid IRS Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding) or IRS Form W-9 (Request for Taxpayer Identification Number and Certification).

1. Would account segregation for purposes of nonresident alien deposit interest reporting pose a significant burden to your credit union in terms of time or cost?
   
   Yes ______ No ______
   
   Can you quantify or describe this burden?
   
   

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2. In a related question, would the requirement to report deposit interest for all nonresident aliens result in information system or other significant operational difficulties or costs (such as obtaining or retrieving joint accountholder contact information)?
   
   Yes ______ No ______
   
   If so, please explain.
   
   

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3. If this proposal becomes a final regulation, do you expect your institution will have a significant increase in the number of nonresident alien members to whom it must furnish IRS Form 1042-S?
   
   Yes ______ No ______
   
   Please explain.
   
   

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4. Does your credit union foresee any difficulties in complying with the requirement to report interest payments made to certain joint account holders, regardless of whether the individual is a “primary” accountholder?
   
   Yes ______ No ______
   
   If yes, please explain.
   
   

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5. These new provisions would apply to payments made after December 31 of the year in which the final regulations are published in the Federal Register. Therefore, if the rule change is adopted this year, it will be effective December 31, 2001. Would that be sufficient time to comply?
   
   Yes ______ No ______
   
   Why or why not?
   
   

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6. Other comments?
   
   

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