The Foreign Account Tax Compliance Act (FATCA), was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, and mandates new reporting requirements, and amends existing IRC Sections. Recently, the IRS issued final regulations and guidance regarding the reporting interest paid to nonresident aliens by certain financial institutions, as well as revenue procedure specifying foreign countries with which the U.S. has a information exchange agreement. Nonresident aliens should be especially aware of these new rules, as many individuals will likely be affected by these rules.
TD 9584 (Guidance on Reporting Interest Paid to Nonresident Aliens), effective April 19, 2012, has the final regulations concerning the reporting requirements for commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest on deposits.
In general, beginning with interest payments made on, or after, January 1, 2013, covered financial institutions will be required to report deposit interest paid to certain nonresident alien individuals. The IRS may then exchange information relating to tax enforcement with the officials of foreign countries. Under the new Treas. Reg. §§ 1.6049-4(b)(5) and 1.6049-8(a), interest paid to nonresident aliens must be reported if the amount in aggregate is $10 or more.
The IRS views this ability to share such information as important to its goal of gathering information from other jurisdictions about US taxpayers who may be evading US tax by hiding assets offshore. Additionally, the IRS enacted the new reporting requirements to limit US taxpayers with US deposit accounts from falsely claiming to be nonresident aliens in order to avoid paying US taxes on interest they receive from deposits.