WASHINGTON (CN) - Banks will now have to report interest earned by nonresident aliens if a federal ruling against banking groups in Texas and Florida stands.
Reporting requirements that the Internal Revenue Service issued in 2012 force U.S. banks to divulge the amount of interest that account holders residing in foreign countries earn. These reports will purportedly help the country comply with various exchange treaties, which also benefit the United States by providing it with information about American taxpayer assets held in offshore accounts.
In a 2013 complaint, the Florida and Texas Bankers Associations challenged the new requirements under the Administrative Procedure Act and the Regulatory Flexibility Act.
"The Bankers Associations contend ... that the IRS got the economics of its decision wrong and that the requirements will cause far more harm to banks than anticipated," U.S. District Judge James Boasberg summarized.
Granting the government summary judgment Monday, Boasberg credited the conclusion from the IRS "that the regulations will improve U.S. tax compliance, deter foreign and domestic tax evasion, impose a minimal reporting burden on banks, and not cause any rational actor - other than a tax evader - to withdraw his funds from U.S. accounts."
Older rules required banks to report interest earned by U.S. citizens and residents, according to the ruling. That IRS taxes that interest.
Under the new reporting regulations, banks now have to report the interests paid to certain nonresident aliens even though they do not pay U.S. taxes on their interest.
"The IRS is on a constant quest to bridge the so-called 'tax gap' - that is, the $450 billion gap between what taxpayers owe the government and what they actually pay," Boasberg wrote. "Part of this gap is caused by a lack of taxpayer candor regarding assets retained in off-shore accounts."
In dismissing the Administrative Procedure Act claims of the banking associations, Boasberg found that the agency's actions "here are both eminently reasonable and supported by the evidence."
He made even easier work in dismissing the groups' argument that the regulations would punish small business in violation of the Regulatory Flexibility Act, finding that the IRS analyzed the direct impact and found it to be minimal.