Latest Round in Tax Evasion Fight Pits Banks vs. IRS
Byline: Kevin Wack
WASHINGTON a 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. …