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Jeff Ring, CPA

New Reporting Obligations for Interest Paid to Nonresident Aliens

2013-06-21

What are the reporting obligations for interest paid to nonresident aliens?

Ever since the IRS published final regulations, we regularly get this question. While the answer is fairly straightforward, you do have to be aware of several dates and forms, and take certain actions to determine your customers’ resident status. Below we provide information you need to gain control of this challenge and ensure proper compliance with the regulations.

New effective dates for information reporting

The IRS published final regulations effective April 19, 2012, on information reporting of interest paid to nonresident aliens. The reporting requirements are effective for payments beginning on January 1, 2013. Additional information return reporting is required for interest payments to nonresident aliens for the calendar year ending December 31, 2013.

A review of the facts you need during this process:

  • Who are nonresident aliens?
    An individual is a nonresident alien if he or she is neither a citizen nor a resident of the United States. Noncitizens can be considered resident aliens if they are lawful permanent residents, meet a “substantial presence test” based on days in the United States, make an election to be considered a resident alien (only applicable in certain circumstances) or have a green card.
  • What type of interest must be reported?
    Reportable interest includes interest on deposits with a bank, savings institution, thrift, or credit union, as well as amounts held by life insurance companies on which interest is paid. Interest is reportable even if there is no withholding requirement. Interest effectively connected with the conduct of a trade or business carried on within the United States is not covered by the newly issued regulations and need not be reported on Form(s) 1042.

Step One: Review your customer accounts to identify nonresident aliens

Most of your new customers will complete a Form W-9, Request for Taxpayer Identification Number and Certification. This form is specifically designed for U.S. citizens and resident aliens.

Nonresident aliens would instead complete Form W-8BEN, Beneficial Owners Certificate of Foreign Status for U.S. Tax Withholding. As the payor or middleman, your institution can rely upon the permanent residence address provided on a valid Form W-8BEN to determine the country in which a nonresident alien lives unless you have reason to know the documentation is not correct.

Form W-8BEN is typically effective until a change of circumstance occurs. If it does not include a US taxpayer identification, it will generally remain effective for three years from the end of the year it is filed. For example, Form W-8BEN signed on September 30, 2005, is effective until December 31, 2008.

However, we recommend a review of your customer accounts to identify all nonresident aliens. Further, we recommend your institution request a newly completed Form W-8BEN for all customers in order to be certain you are complying with the newly issued regulations.

Step Two: File Forms 1042-S with the IRS and send copies to your customers

If your financial institution pays reportable interest to nonresident aliens, you will have to make an information return on Form 1042-S. If the interest paid to the depositor during the year is less than $10 a Form 1042-S is not required.

Form 1042-S for 2013 must be filed by March 15, 2014, and a copy must be furnished to your customer as well. The IRS has published a memo listing the top ten errors in completing Form 1042-S.

Summary: How is this different from previous practices?

The new regulations may increase the number of forms you file because the 1042-S reporting now includes ordinary interest and income reporting even when the income does not require withholding.

These changes are part of a broader initiative to expand cross border reporting in relation to the Foreign Account Tax Compliance Act (FATCA). For more information about other reporting requirements related to FATCA, please read our article and table of forms and deadlines for foreign connection filing requirements.

For any questions about your nonresident alien income reporting requirements, contact Jeffrey Ring.

Reference: Required forms

  • W-8BEN: Beneficial Owners Certificate of Foreign Status for U.S. Tax Withholding
  • Form 1042: Annual Withholding Tax Return for U.S. Source Income of Foreign Persons 
  • Form 1042-S: Foreign Persons U.S. Source Income Subject to Withholding
  • Form 1042-T: Annual Summary and Transmittal of Forms 1042-S