IRS to Require Bank Data on Non-U.S. Customers

WASHINGTON — The banking industry on Wednesday expressed disappointment at a new tax rule that starting next year will require banks to report interest payments made to non-U.S. citizens.

The long-anticipated tax reporting rule has caused a great deal of consternation at banks in states such as Florida and Texas that depend on deposits from residents of Latin American countries. Some bankers in those states fear an exodus of funds to banks in nations that promise not to share the information with the depositors' home countries.

As expected, the final rule states that the Internal Revenue Service, which operates as a bureau of the Treasury Department, may only provide information to countries with which the U.S. has information-sharing agreements.

But critics say depositors seeking to avoid the rule will move their money to banks in countries that will not divulge their information.

Out of 78 countries that have information-sharing agreements with the United States, only Canada will get the information automatically. The rule states that for other nations, the IRS, which is part of the Treasury Department, will exercise discretion based on specific circumstances.

"Even when such an agreement exists, the IRS is not compelled to exchange information, including information collected pursuant to these regulations, if there is concern regarding the use of the information or other factors exist that would make exchange inappropriate," the rule states.

That safeguard was not good enough for the American Bankers Association, which has been lobbying against the rule.

"Treasury's final rule will harm our nation's community banks and falls far short of what's needed to protect the economies of border states," ABA President Frank Keating said in a written statement. "It is bad public policy that could potentially cause the exodus of billions of dollars worth of stable, long-term deposits from U.S. institutions — money that border state banks depend on to remain viable and make loans."

Mexico and Venezuela are among the 78 countries that have information-sharing agreements with the United States. Since the IRS first proposed the rule in January 2011, U.S. bankers have expressed doubt as to whether countries such as Mexico and Venezuela can be trusted to protect the confidentiality of the information they could receive.

"This will risk the loss of these foreign deposits," Gerry Schwebel, executive vice president of IBC Bank in Laredo, Texas, testified to Congress last October. "Realistically, many of these depositors would fear for their personal safety. Kidnapping is not just a theoretical concern for these depositors. Having their deposit information potentially leaked is a real threat to them."

A Treasury spokesperson said Wednesday that while the United States has an income tax treaty with Venezuela, the South American nation does not satisfy requirements for information exchange under the treaty. "Accordingly, the United States does not, and has no plans to, exchange information with Venezuela," the spokesperson said in a statement.

In a letter to the Miami Herald last month, Emily McMahon, Treasury's acting assistant secretary for tax policy, wrote that "the claim that the proposed regulations will cause nonresidents to pull their money out of U.S. banks isn't supported by past experience, which has shown that nonresidents have many reasons for depositing money in U.S. banks, including the strength and stability of our financial institutions and the quality of our regulatory supervision."

But Jaret Seiberg, an analyst with Guggenheim Partners, stated in a research note that the IRS rule raises the risk that depositors in border-states will withdraw their funds.

"At its worst, this could threaten the viability of some of these banks as they deal with liquidity runs," Seiberg wrote. "It also means banks that rely on foreign deposits — especially from Central America and Latin America — may be forced to sell to stronger banks."

"The IRS tried to mitigate some of the risk that foreigners will pull their deposits by pledging only to share tax information with foreign governments that have strict confidentiality policies," he added. "We question how effective this will be as foreigners who fear being targeted for crimes because of their U.S. deposits will not want to risk having the information fall into the wrong hands."

Meanwhile, lawmakers from border-states have proposed legislation to get the rule overturned.

Rep. Bill Posey, a Florida Republican who is sponsoring one bill, said in an interview Wednesday that Treasury refused to do a cost-benefit analysis of the rule.

"So I think they're going at this blindly, and I think it's going to hurt the economy, which is already in the doldrums," Posey said. "I'm worried about it destroying jobs. Banks provide the mother's milk for creators of jobs."

"I hope leadership will see fit to move the bill forward, and see that we can overturn the rule," Posey added.

Sen. Marco Rubio, another Florida Republican who has introduced companion Senate legislation to block the new rule, also issued a statement blasting the Obama Administration.

"As if our tax code weren't already broken enough, the Obama Administration has added another regulation that will have disastrous consequences for Florida," Rubio said in a press release. "By requiring banks to report interest earned by foreign investors, the administration has unilaterally handed down a job-destroying mandate that would encourage billions of dollars to flee Florida's economy."

But the IRS argues that the reporting requirement is essential to its effort to combat offshore tax evasion, in part because other countries will only share information about foreign accounts held by American citizens if the United States is willing to reciprocate.

Global Financial Integrity, a group that advocates for crackdowns on tax evasion, money laundering, and other illicit financial flows, called the new rule "a significant step in the right direction," but said that residents from many countries will still be able to hide their money anonymously in U.S. banks.

"The new rules are a very welcome improvement," Heather Lowe, the group's director of government affairs, said in a press release, "but we'd like to see the rule expanded to require information on accounts held by all non-resident aliens."

The new rule will affect interest payments made starting on Jan. 1, 2013.