WASHINGTON — An IRS proposal to require U.S. banks to report the interest earned by certain foreign depositors has revived a decade-old fight in the battle over how far authorities should go to fight tax evasion.

It is an issue with much more emotional resonance than most matters that come before the House subcommittee on financial institutions. At a hearing Thursday, witnesses who oppose the proposed regulation said that it might lead to kidnappings in foreign countries, while a supporter of the IRS proposal argued that its opponents have a vested interest in shielding criminals.

Under the proposal, banks would have to report interest earned in individual accounts by a category of individuals known as non-resident aliens. Often these people spend part of the year in the United States, but they are citizens and residents of another country.

Bankers, particularly those in Florida and Texas, which have a large share of deposits from residents of Latin American countries, argued the plan may spark a flurry of withdrawals from American banks, hurting lending and potentially imperiling institutions that rely heavily on foreign deposits.

"I don't understand why this was proposed at a time when our economy is soft and we're trying to create jobs," said Alex Sanchez, president and chief executive officer of the Florida Bankers Association.

But supporters argue the plan would allow the IRS to catch tax evaders in other countries. Interest on foreign bank deposits is not taxable in the United States, but the money in those accounts could be evidence of tax evasion in another country. If the IRS had information on such bank accounts, they could share it with authorities in nations with which the United States has tax treaties.

Rebecca Wilkins of Citizens for Tax Justice, which supports the regulation, said that people who are paying taxes in their home countries have nothing to fear.

"Only depositors who are tax evaders, money launderers, drug dealers, human traffickers, other criminals will have an incentive to move their funds," she said.

But the witnesses who opposed the IRS regulation said that it would require banks to invest in new technology. Their arguments got a sympathetic hearing from both Republican and Democratic members of the subcommittee.

"Why should we be worried about collecting taxes for other countries?" asked Rep. Blaine Luetkemeyer, R-Mo. "That's not our problem, is it?"

But Wilkins argued that it is in the interests of the United States to help other countries recover the taxes they're owed. She cited an estimate from a 2008 Senate report that the United States loses approximately $100 billion each year to tax evasion, and said that American officials need to be able to show that they're helping other countries fight tax evasion in order to expect help in return.

Ten years ago, the IRS attempted to impose the same regulation, but it received blowback from Congress. The regulation that the IRS ultimately adopted in 2002 limits the rule's application to depositors from Canada.

Canada is a safer, less corrupt place than Mexico and Venezuela, the only two nations in the Western hemisphere that have tax-sharing treaties with the United States, opponents of the regulation argued. They and their congressional supporters said that if the U.S. government shares personal financial information with authorities in those countries, the account holders and their relatives could be the targets of kidnappers.

"For us to think that Mexico and Venezuela under Hugo Chavez respect our privacy laws is absurd," Sanchez said.

House Financial Services Chairman Spencer Bachus made a similar argument.

"Now, every day we read about a kidnapping in some of these countries, and in some cases the death of the victim. Do we really want this blood on our hands?" he asked.

But Wilkins responded forcefully to that argument, saying: "I want to tell you, the U.S. already has blood on its hands."

"For every dollar of tax revenue that is taken out of the governments of developing countries, it impairs the ability of those countries to provide health and safety measures, to feed its citizens, to provide sanitation, to provide health care, to provide military and police that is not corrupt," she said. "Every time we facilitate a dollar coming out of those economies, we have blood on our hands."

Neither side in the debate was able to cite an estimate on the amount of bank deposits that would leave the United States as a result of the IRS proposal. The plan's opponents said they have pressed U.S. officials for a cost-benefit analysis, but the government has never produced one.

Thomas Cardwell, former commissioner of the Florida Office of Financial Institutions, cited a survey that found that at 16 state-chartered banks in Florida, 41% of the deposits were from non-resident aliens.

"What would happen if these deposits, or some subset of them, were lost?" Cardwell asked. "A deposit run of 15% would put an institution in jeopardy."

Wilkins responded that she thinks the risk of a lot of capital leaving the United States is small.

"But you don't know that?" asked Rep. James Renacci, R-Ohio.

Wilkins acknowledged that she didn't have solid numbers, but said that her opponents don't, either.

The IRS regulation was proposed back in January, but it has yet to be finalized. Opponents of the plan include the Independent Community Bankers of America and the American Bankers Association.

"Individuals have a choice among solvent, stable banking systems in which to keep deposits, which are easily transferred from one country to another," the ICBA said in a statement submitted to the subcommittee. "Any adverse change in terms may be enough to make them revisit their choices, or at a minimum, demand higher rates."

Bills to stop the regulation have been introduced in both the House and Senate. The House bill was referred to the Ways and Means Committee, which has yet to act on the measure.

-- This article first appeared on American Banker.


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