The IRS released an advanced version of Revenue Procedure 2016-56 that requires three more countries – Israel, the Republic of Korea and Saint Lucia – to participate in the automatic exchange of information on bank interest paid to nonresident alien individuals for interest paid on or after January 1, 2017. There are now 40 countries participating in the automatic exchange program.
Generally, nonresident individuals are exempt from U.S. taxation on the receipt of interest on bank deposits (unless the interest is effectively connected with a U.S. trade or business). This exemption is designed to encourage capital investment in the U.S. and the reporting requirements do not affect the taxation of interest income from bank deposits. The reporting requirements were adopted in 2012 to increase information exchange necessary to combat offshore tax evasion that exists because of the exemption.
The Treasury Department believes that reciprocal information exchange will allow the IRS to gather more information and combat U.S. tax evasion by U.S. taxpayers to falsely claim to be nonresidents when establishing bank accounts in foreign countries and thereby attempt to avoid U.S. taxation on interest income.
The IRS may only share information with a foreign government who has entered into a mutual information exchange agreement. The U.S. only enters into information exchange agreements after the U.S. Treasury and IRS are satisfied that the foreign government has strict confidentiality protocols and protections. The IRS is statutorily barred from sharing information with another country without such an agreement in place. All U.S. information exchange agreements require that the information exchanged under the agreement be treated and protected as secret by the foreign government.
As has been the case for the last decade, U.S. is ramping up enforcement through use of information reporting requirements, which is one of the most effective tools it has to combat tax evasion.