CUNA Comment Letter

CUNA Opposes IRS Proposal on Reporting of Deposit Interest to Nonresident Aliens and Requests Opportunity to Testify at IRS hearing

May 31, 2001

Internal Revenue Service
CC:M&SP:RU (REG-126100-00)
Room 5226
POB 7604
Ben Franklin Station
Washington, DC 20044

RE: Proposed Changes to IRS Rules on Reporting Requirements for Interest on Deposits Maintained in the U.S. and Paid to Nonresident Individuals

Dear Commissioner Rossotti:

On behalf of the Credit Union National Association, thank you for the opportunity to submit our comments on the proposed changes to the Internal Revenue Service’s regulations on the reporting requirements for interest on deposits maintained at the U.S. office(s) of financial institutions and paid to nonresident alien individuals. CUNA represents more than 90% of our nation’s over 10,500 state and federal credit unions. Approximately 80 million consumers belong to credit unions.

Summary of CUNA’s Views

• CUNA opposes the new proposal

• CUNA respectfully requests the IRS to withdraw the proposal.

CUNA’s Comments on the Proposal

Credit unions must currently comply with a number of federal tax reporting requirements regarding consumers’ income and financial activities. These include but are not limited to reporting regarding payment of interest and dividends, Individual Retirement Account deductions or contributions, interest on loans secured by real property, student loans, discharge of indebtedness, foreclosures and abandonment of property and others. Credit unions must also comply with IRS requirements for backup withholding and other IRS regulations.

Cumulatively, the burden of compliance with these requirements is substantial, particularly for smaller credit unions. 70% of all credit unions have assets of less than $20 million and nearly one-third are operated by unpaid volunteers. Any new requirement must be evaluated in the context of these current requirements.

In our view, given the considerable compliance responsibilities imposed under IRS rules that financial institutions are already meeting, we believe the IRS should refrain from developing new reporting obligations for financial institutions, unless such requirements are demonstrated to be essential in order to implement a provision in the federal tax code. We do not believe that the IRS has clearly demonstrated the need for the proposal.

We believe the costs associated with compliance under the proposal will be substantial. Based on information from our members, credit unions that are covered by the agency’s requirement to report interest paid to nonresident alien individuals who are residents of Canada generally do so on a manual basis as they have fewer than 250 filings, the threshold for filing by magnetic media. If the IRS extends the information reporting requirements for all nonresident aliens, some covered credit unions may still not have 250 filings but could have a significant number of individuals for whom they must report, making manual procedures much more complicated if not impractical.

Credit unions do not generally have data processing systems that have been programmed to identify nonresident alien individuals’ accounts and prepare IRS Form1042-S. For credit unions that are automated, and many smaller ones are not, new software would have to be purchased, or current systems would have to be substantially altered, at an appreciable cost to the credit union.

The proposed changes regarding joint accounts will be particularly problematic. In general, credit unions report interest income for primary accountholders and often do not have easy access to addresses for joint account holders or have the addresses in a format that is readily retrievable. Because the proposal would require reporting for joint account holders, even if they are not the primary account holder, we believe the changes necessary to meet this requirement would be very costly.

In several key ways, credit unions are different from commercial banks and other financial institutions that would be covered by the proposal. Because credit unions are financial cooperatives, the costs of compliance with any regulation, including this new proposal, are borne by the members of the credit union who own it. Thus, the proposal will not only impact credit unions as covered entities, but also their consumer members.

The IRS has estimated that the average annual burden per respondent will be 15 minutes, with a total annual reporting burden of 500 hours for 2,000 respondents. The IRS has not provided information as to how it arrived at these figures, which appear to be low, and we urge the IRS to clarify how it determined these estimates. We also question the IRS’s Special Analyses accompanying the proposal regarding whether the rule is a significant regulatory action, the applicability of the Administrative Procedure Act and the applicability of the Regulatory Flexibility Act. We request that the IRS provide the basis for its determinations on these issues before proceeding with this rulemaking.

Perhaps more important for credit unions and their members than the cost of compliance are the public policy issues raised by the proposal. As indicated above, we do not believe the need for this proposal has been substantiated. Yet, if adopted, it would divert limited credit union resources away from credit union members—credit unions’ primary function is to serve the financial needs of their members—into information reporting activities which may be of marginal use to the IRS.

Further, we think the IRS should consider the impact of this proposal could have on undocumented persons in this country and the fact that the reporting requirement may have a chilling effect on the quality of life for certain growing populations, including Hispanic individuals. If the proposal is adopted, such individuals may be extremely reluctant to use the services of traditional financial institutions and turn instead to unscrupulous vendors, which escape reporting requirements and charge unconscionable fees for financial services. (Also, the proposal may encourage financial institutions to avoid paying interest on accounts to bypass the compliance burdens this proposal will inflict.) At the very least, if the IRS does go forward with the proposal, we urge the agency to provide public assurances that it will not share information obtained through 1042-S reporting with other agencies.

If the IRS determines that it must go forward with the proposal, we urge it to give institutions sufficient time to be notified of these amendments, to arrange for changes to their systems and to implement reprogramming and other operational changes. Financial institutions should have at least a full year after the rule is published before it applies to payments.

For the reasons discussed above, we strongly oppose this proposal and request that the IRS withdraw it on the grounds that the costs to financial institutions and consumers associated with compliance will far outweigh any benefit to the IRS. Further, the IRS has not demonstrated the necessity of this rule.

Thank you for consideration of our views. Please feel free to contact me at 202-218-7769 if you have any questions about our letter or request to appear at the public hearing.

Sincerely,

Mary Mitchell Dunn
Associate General Counsel and
Senior Vice President