Abstract
A proposed regulation issued as one of the final acts of the Clinton Administration would have required U.S. banks to routinely file with the IRS reports identifying nonresident alien individuals receiving payments of interest and the amount of such interest. U.S. bank deposit interest paid to nonresident aliens is exempt from U.S. tax, and previously only payments to Canadians were required to be reported to the IRS. Intense opposition to this regulation was expressed by bankers and other organizations, such as the Center for Freedom and Prosperity, as well as by Governor Jeb Bush of Florida (where bank deposits are held by many residents of Latin America). This opposition led the Bush Administration to withdraw the proposed regulation but to replace it with a similar proposed regulation applicable only to residents of 16 countries(12 member countries of the European Union, as well as Canada, Australia, New Zealand, and Norway).While the new proposed regulation has also attracted fierce opposition, the Bush Administration has continued to defend it (but has not yet finalized it).
This article will explore some aspects of the controversy that continues to surround this proposed regulation. First, the article will discuss the chief justification for the regulation, i.e., to enhance and broaden efforts to exchange tax information with treaty partners. This part will explain that greater information sharing is needed as a means to counter the use of off shore bank accounts to facilitate tax evasion. In the next part, the article will assess the concern of many critics that the regulation will lead to unwarranted invasion of financial privacy. The article describes how Congress has already had to limit Americans’ financial privacy in order to provide the IRS with adequate tools for verifying the accuracy of income tax returns. The article then argues that, assuming appropriate safeguards are in place, broader information exchange with our treaty partners will not significantly diminish the existing degree of privacy. The final part of the article suggests that some criticism of the proposed regulation may have the objective of replacing the income tax with another tax system that would afford greater financial privacy.
The article will not address the effects of the proposed regulation on the well-being of U.S. banks or on the U.S. economy nor will it address arguments that the Treasury may lack the authority to issue the regulation under current law.
Recommended Citation
Cynthia Blum,
Sharing Bank Deposit Information With Other Countries: Should Tax Compliance or Privacy Claims Prevail?,
6 Fla. Tax Rev.
(2005).
Available at: https://scholarship.law.ufl.edu/ftr/vol6/iss1/8