On August 27, 2019, the IRS released Revenue Procedure 2019-23, which adds Georgia to the list of countries with which the United States now has an agreement to exchange bank account information. The IRS also added Curacao and Cyprus to the list of jurisdictions that the IRS and the US Department of the Treasury (Treasury) deem appropriate for the exchange of US-source bank deposit interest.
Accordingly, any US source bank deposit interest aggregating $10 or more in a calendar year to an individual resident in a jurisdiction included on the newly expanded list in Rev. Proc. 2019-23 will need to be reported on a Form 1042-S.
In April 2012, Treasury revised Section 6049 regulations, dramatically changing how financial institutions are required to report US-source bank deposit interest paid to non-US individuals on or after January 1, 2013. Prior to this update, financial institutions were only required to report US-source bank deposit interest paid to Canadian individuals on a Form 1042-S.
While there was significant pushback from the financial industry, Treasury was under pressure to finalize the regulations impacting bank deposit interest because of the withholding and information exchange provisions present in the Foreign Account Tax Compliance Act (FATCA).
Accordingly, Rev. Proc. 2012-24 provided the initial expanded list of 68 jurisdictions that would require reporting for US-source bank deposit interest paid to individual account holders on Forms 1042-S. Annually updated revenue procedures expanded the list further. Currently, there are approximately 90 countries in scope for bank deposit interest reporting.
Impact on Filers
Information reporting requirements for bank deposit interest are consistently evolving. It’s likely that trend will only continue, which makes compliance challenging. It’s important that institutions that make payments of US-source bank deposit interest to foreign account holders take the following actions.
Non-US Individual Account Holders
All non-US individual account holders must be documented with forms W-8BEN; joint accounts require a Form W-8BEN for each account holder. If a foreign individual account holder doesn’t have a valid Form W-8BEN on file, they should be presumed to be a US person subject to backup withholding and Form 1099-INT reporting.
Documented non-US individuals who are residents in one of the jurisdictions listed in Rev. Proc. 2019-23 will be required to be reported on Forms 1042-S if payments of bank deposit interest for the calendar year are $10 or more.
Non-US Entity Account Holders
All non-US entity account holders must be properly documented with Forms W-8BEN-E, W-8IMY, W-8EXP, or W-8ECI. If a non-US entity hasn’t submitted a valid FATCA certification, they’re subject to 30% FATCA withholding on bank deposit interest. The payment and associated withholding will be required to be reported on a Form 1042-S with no de minimis threshold.
If non-US entity account holders are properly documented for FATCA purposes, payments of bank deposit interest made to their accounts won’t be subject to reporting or withholding.
It’s important to note that the requirement to report bank deposit interest isn’t limited to financial institutions. Partnerships with non-US partners that allocate payments of bank deposit interest are required to report as well.
Many institutions choose to report all non-US individual account holders receiving bank deposit interest of more than $10 to avoid failure-to-report penalties.
Penalties for reporting failures can be significant. They’re initially applied at $50 for forms filed or corrected after the deadline, but within 30 days, and can increase up to $270 per form.
To avoid penalties, consider whether or not you’re paying bank deposit interest that would be in scope for Form 1042-S reporting, and take the necessary actions to prepare ahead of the filing deadlines.
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