The Internal Revenue Service has issued final regulations and guidance on reporting interest paid to nonresident aliens, along with a revenue procedure listing the countries with which the U.S. has a bilateral exchange of information agreement.

The two documents released Tuesday are intended to implement the controversial Foreign Account Tax Compliance Act. FATCA was included as part of the HIRE Act of 2010, and requires foreign financial institutions to report on the holdings of U.S. taxpayers (see Taxpayers Strained by New FATCA Requirements).

TD 9584, Guidance on Reporting Interest Paid to Nonresident Aliens; Final Regulations, contains final regulations regarding the reporting requirements for interest that relates to deposits maintained at U.S. offices of certain financial institutions and is paid to certain nonresident alien individuals. The regulations will affect commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest on deposits.

The financial institutions would be required to report on the interest they pay to nonresident aliens, and the IRS would then be able to share the information with tax authorities in other countries, thus securing their cooperation in sharing information from banks in their countries with the IRS.

“The reporting required by these regulations is essential to the U.S. Government’s efforts to combat offshore tax evasion for several reasons,” said the document. “First, it ensures that the IRS can, in appropriate circumstances, exchange information relating to tax enforcement with other jurisdictions. In order to ensure that U.S. taxpayers cannot evade U.S. tax by hiding income and assets offshore, the United States must be able to obtain information from other countries regarding income earned and assets held in those countries by U.S. taxpayers. Under present law, the measures available to assist the United States in obtaining this information include both treaty relationships and statutory provisions. The effectiveness of these measures depends significantly, however, on the United States’ ability to reciprocate.”

The IRS noted that the regulations would facilitate intergovernmental cooperation on FATCA implementation by better enabling the agency, in appropriate circumstances, to reciprocate by exchanging information with foreign governments for tax administration purposes. “Finally, the reporting of information required by these regulations will also directly enhance U.S. tax compliance by making it more difficult for U.S. taxpayers with U.S. deposits to falsely claim to be nonresidents in order to avoid U.S. taxation on their deposit interest income,” the IRS added.

The other document issued by the IRS on Tuesday, Revenue Procedure 2012-24, is being published to facilitate implementation of the final regulations in Treasury Decision 9584 requiring financial institutions to report interest paid to nonresident aliens who reside in countries with which the U.S. has a bilateral exchange of information agreement. This revenue procedure contains two lists of countries with which the U.S. has such an agreement.

Tax attorney Phil Hodgen of Hodgen Law Group PC in Pasadena, Calif., criticized the new IRS regulations. "It is obvious hypocrisy to allow U.S. banks to hide U.S.-source income information while strong-arming other countries (and their banks) into disclosing information about U.S. taxpayers," he said. "The IRS has backed itself into this corner and must force disclosure of interest paid to nonresidents or be laughed out of the diplomatic room. The move will have predictable consequences for U.S. banks. I would expect capital flight to commence. I already encourage nonresident clients to bank outside the United States, as much for the paperwork problems as anything else. This will add one more reason for them to avoid bringing capital to the United States."