Nonresident Alien Deposit Interest Reporting Requirements Are Now in Effect

Starting January 1, 2013, all commercial banks, savings institutions, credit unions, securities brokerages and insurance companies must report interest on deposits paid to nonresident alien individuals to the IRS and to the client for tax year 2013 on IRS Form 1042-S. Not included in the new reporting requirement is interest paid to foreign entities. The controversial requirement was adopted in connection with the Foreign Accounts Tax Compliance Act (FATCA).

The reporting requirement applies to payments to residents of any country having a tax information exchange agreement under which the IRS will provide and receive information. In this effort, the U.S. is expected to engage in intergovernmental agreements with over 50 countries around the world to combat tax evasion.

On November 19, 2012, the U.S. entered into an information sharing agreement with Mexico. This has raised privacy concerns for Mexican nationals, and U.S. banks are experiencing a reduction in deposits from Mexican nationals. Under the agreement, information shared automatically with Mexico includes the name, address, taxpayer identification number, gross amount of U.S.–sourced dividends, interest paid on depository accounts and income paid or credited to the account to the extent it is otherwise subject to reporting for U.S. Federal income tax purposes. In response to the new reporting requirements, many banks are now offering non-interest deposit accounts to Mexican nationals as well as considering certain other products that are similar to deposits, but may not involve the payment of interest required to be reported.

While some FATCA regulations have been delayed, the reporting requirement of financial institutions on nonresident alien individuals’ deposit interest aggregating $10 or more is final and effective for 2013. First reports are due to the IRS by March 15, 2014 -- banks must begin collecting this information now.

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This e-Alert was authored by Katherine Patton Noll of Cox Smith's Tax practice, and Karen M. Neeley and Cary Plotkin Kavy of Cox Smith's Banking and Financial Institutions practice.

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