Are you Reporting Interest Paid to Foreign Persons at Your Bank?

By Stuart Lyons February 16, 2015

Does your bank have Canadian or other foreign account holders that earn interest income?  If you are banking in northern New England, this may very well be applicable to you.

Starting in 2013, U.S. banks that have interest bearing deposits owned by foreign individuals (Canadian residents or any other foreign person) that paid more than $10 of interest income are now required to annually report that interest income to the Internal Revenue Service. This interest is not reported on a 1099-INT, but on an IRS Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding.” This is not a withholding tax obligation, but only a reporting obligation, and it only applies to the nonbusiness bank deposits of individuals. These forms 1042-S take the place of the normal 1099-INT that would be used for domestic interest income reporting.

The account must be maintained at a U.S. office of the bank, rather than a foreign office. The account must pay interest of $10 or more—the regulation is for reporting of interest, not the mere existence of accounts, and the account must not be connected to a U.S. trade or business.

You also should have procedures in place to obtain the requisite IRS forms W-8BEN, W-8BEN-E, or W-8ECI for each account owned by a foreign person. These forms document the foreign status of the account holder and this information is used to properly report the income on the form 1042-S.

What does the IRS do with this information?  Well, in this new age of cross border cooperation and information sharing, the U.S. has an agreement with Canada and a host of other foreign countries to share this information so that those countries can match this income with their own local resident’s income tax reporting of that income.

IRS Form 1042-S reporting is due on March 15 following the end of the applicable calendar year. When completing the Form 1042-S, use income code 29 in box 1 and exemption code 2 in box 3a for chapter 3 purposes and the applicable chapter 4 exemption code in box 4a, if any.

This interest income reporting requirement is just one of the many U.S. income reporting obligations required for payments made to foreign persons. If you have other questions in this area, please contact me or your BNN tax service provider.