According to the Department of Justice, on Monday, January 13, 2013, the District Court in the District of Columbia dismissed a challenge filed by the Florida Bankers Association and Texas Bankers Association challenging 2012 amendments to the Department of the Treasury’s interest-reporting regulations. The regulations require U.S. banks to report to the Internal Revenue Service (IRS) information about accounts earning more than $10 of interest beginning in 2013 that are held by non-resident aliens of all countries with which the United States has a tax treaty or other information exchange agreement. These new reporting requirements help the United States’ ability to comply with requests from its treaty and exchange partners and implement the Foreign Account Tax Compliance Act (FATCA).

FATCA (and its 2012 revisions) target tax non-compliance by U.S. taxpayers with foreign accounts.  To fulfill its objectives of collecting revenue and enforcing the tax laws against U.S. taxpayers with foreign accounts FATCA focuses on reporting.  In addition to the reports an individual U.S. taxpayer must file (e.g., the FBAR), foreign and domestic financial institutions must also file various reports, including the domestic reporting requirement which was the subject of the court’s ruling.  Specifically, that all U.S. banks must report any accounts held by non-resident aliens if that account collects more than $10 in annual interest.

The purpose of this reporting requirement indirectly supports the IRS’ tax compliance and revenue collection purposes.  Specifically, these reports focusing on non-resident aliens  in the U.S. will help the IRS  with requests from foreign governments seeking to investigate the tax conduct of their citizens who may have unreported bank accounts in the United States.  According to the IRS, the collection of such information from U.S. banks is essential to the success of various exchange agreements and treaties the United States has entered into with foreign governments.  By having this information available the IRS believes that foreign governments will more readily share information about U.S. taxpayers with accounts in that foreign government’s  jurisdiction because the U.S. could provide reciprocal information about the citizens of that foreign country who may be evading that country’s taxes.

In essence, to defeat bank secrecy overseas, the IRS is resorting to the wholesale collection of information regarding U.S. accounts held by non-resident aliens.  Purportedly, this information will only be used for tax collection purposes vis-a-vis its exchange agreements with foreign governments.  But never before has the U.S. Government had such wholesale access to  financial information without some sort of individualized suspicion (e.g., via a subpoena, warrant, suspicious activity report (SAR), etc.).  Now, as long as the account is held by a non-resident alien and collects more than $10 in interest, the U.S. Government will have access to the information.

With this immensely broad information in its possession, the IRS and other federal agencies may conduct their own review of the information for evidence of domestic criminal activity.  The information gleaned by the U.S. from such reports may eventually assist law enforcement investigations in cases wholly unrelated to tax collection.  And in turn, these investigations may expose non-resident aliens to criminal exposure for conduct that would have otherwise gone undetected without some sort of particularized suspicion.

Of particular concern would be non-resident aliens who may operate unlicensed money transmitting businesses or who may conduct business with individuals or entities with links to narcotics trafficking or sanctioned jurisdictions or persons (think family remittances).  It will be interesting to see if, and how, the collection of such information shapes the landscape of federal criminal investigations and whether defense attorneys will be alerted to the fact that the investigation against their clients started with a FATCA report designed to help foreign governments collect foreign taxes (i.e., Brady Rule).  Right now the list of countries that the United States has exchange agreements with are those traditionally associated with tax evasion and our European allies.  The unintended consequences of the U.S. Government’s collection of such information should get even more interesting when Middle Eastern and North African governments begin entering into exchange agreements with the United States.

This post is authored by Ferrari & Associates, P.C., a law firm specializing in federal criminal defense matters. Feel free to contact us at (202) 280-6370 or info@ferrariassociatespc.com.