Law Office of Charles W. Cope, PLLC | Two Bankers Associations Sue to Delay Effective Date of Expanded Deposit Interest Reporting
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  • Two Bankers Associations Sue to Delay Effective Date of Expanded Deposit Interest Reporting
    April 2013
    On April 18, 2013 the Florida and Texas Bankers Associations filed a complaint in United States District Court for the District of Columbia seeking (i) a declaratory judgment that final regulations issued by the IRS and Treasury in 2012 under section 6049 were promulgated in violation of the Administrative Procedure Act (“APA”) and the Regulatory Flexibility Act (“RFA”), and (ii) an order staying the enforcement of those regulations.[1] The regulations require banks and other financial institutions to report to the IRS annually interest paid on deposits by nonresident aliens resident in certain countries with which the United States has in effect an income tax or other convention or bilateral agreement requiring the exchange of tax information.
    On January 7, 2011 the Treasury and the IRS published proposed regulations under section 6049 that would have required reporting to the IRS of interest on deposits paid to nonresident aliens. The proposed regulations (the "2011 proposed regulations") withdrew more limited proposed regulations issued in 2002 (the "2002 proposed regulations"). The 2002 proposed regulations would have required reporting of payment of deposit interest to nonresident alien individual's resident in only a limited number of countries. The 2002 proposed regulations were strongly opposed by the banking industry, never were issued in final form and never took effect.
    After a public hearing at the IRS on the 2011 proposed regulations and the review of extensive written comments, the IRS and Treasury issued the regulations in final form (the "2012 final regulations") in April 2012 with an effective date of April 19, 2012. The preamble to the 2012 final regulations provides various policy reasons for this expanded information reporting. One of the reasons given was the need for the United States to be in a position to reciprocate in providing financial account information when requesting a foreign government to provide financial account information in compliance with FATCA. The preamble states:
    Like the United States, those foreign governments are keenly interested in addressing offshore tax evasion by their own residents and need tax information from other jurisdictions, including the United States, to support their efforts. These regulations will facilitate intergovernmental cooperation on FATCA implementation by better enabling the IRS, in appropriate circumstances, to reciprocate by exchanging information with foreign governments for tax administration purposes."
    The Complaint
    The complaint alleges that depository institutions in the United States have been harmed by the 2012 final regulations because "security concerns over the potential leakage and abuse of personal asset information [by some foreign governments] . . . has led many non-resident aliens to withdraw or transfer money held in interest-bearing bank accounts in the United States." The complaint offers various examples of particular cases in which nonresident aliens have withdrawn funds. The 2012 final regulations also are alleged to impose "a substantial economic hardship on such banks, which must develop and implement ongoing procedures for gathering and reporting such information."
    The plaintiff's legal basis for injunctive relief is based on the government's alleged failure to comply with the RFA and the APA. With respect to the APA, the complaint alleges that the government failed to consider and respond to significant comments, and now to actual evidence as to the deposit outflow caused by the adoption of the 2012 final regulations. Also, the government allegedly failed to develop the kind of detailed and factual administrative record contemplated by the APA.  With respect to the RFA, the government failed to issue an initial regulatory flexibility analysis and/or a final regulatory flexibility analysis.
    The author believes that the odds that the plaintiffs will succeed in the courts are poor. For years, the IRS’s position has been that it is not required to comply with the APA when issuing regulations and that position has not been successfully challenged.  Also, the IRS and Treasury provided for a notice and comment period when the 2011 proposed regulation were issued, which is one of the APA’s key requirements. Like the Villareal case, this complaint provides yet another example of the real economic consequences of the reporting of financial information and the exchange of that information by governments.
    [1] Case 1:13-cv-00529-JEB (Filed 04/18/13).