WASHINGTON-CUNA and NAFCU told the Internal Revenue Service (IRS) that the costs outweigh the benefits in its proposal to change the reporting of interest paid to nonresident aliens in formal comment letters November 14, the same day the comment period closed. The proposed rule would require credit unions and other financial institutions to report the interest of nonresident aliens living in any one of 16 nations. CUNA requested that the IRS withdraw the rule "on the grounds that the costs to financial institutions and consumers associated with compliance will far outweigh any benefit to the IRS and that the IRS has not demonstrated that the proposal is necessary to implement a statutory provision of the tax code." CUNA Associate General Counsel Mary Dunn asserted that the IRS has not demonstrated the necessity of the change and credit unions already "shoulder a significant compliance burden as the result of current IRS reporting requirements." NAFCU President and CEO Fred Becker wrote in a brief comment letter, "While NAFCU appreciates that the IRS has scaled back the scope of application compared to the previous proposal, NAFCU believes the current proposal nonetheless imposes significant programming burdens and increases compliance and operational costs." He continued, "NAFCU supports efforts to increase taxpayer compliance through tax treaties and information exchange agreements; however, NAFCU believes the proposed rule's expected benefits are outweighed by the burdens it would impose. NAFCU respectfully requests that the IRS withdraw the proposed rule." The initial proposal required reporting for all countries with which the U.S. has a tax treaty, while current law only requires reporting for Canada. The 16 nations on the list contained in the latest proposal include Australia, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, and the United Kingdom. Dunn admitted that the number of countries to report has been reduced in the new proposal, but that only means that credit unions and other financial institutions have to keep track of which countries are on the list. CUNA also expressed concern that the list could grow substantially. CUNA's initial concern regarding the treatment of joint accounts remains unresolved, Dunn wrote. While the new proposal attempts to facilitate joint account reporting, she said it does not go far enough. The previous proposal required reporting for all joint nonresident alien account holders who are residents of nations with tax treaties with the U.S. The new proposed regulation would permit institutions to report interest for any one of the joint account holders, so long as all of the joint account holders have provided a Form W-8 certifying their status as a foreign person. "In addition, requiring institutions to establish different treatment, including separate procedures and processing that would encompass the harsh result of backup withholding, for account holders who do not provide a Form W-8 continues to raise operational concerns for institutions, as well as issues of fairness for such account holders," Dunn wrote. "Currently, the IRS does not require this result for Canadian nonresident aliens, and we do not believe the IRS has provided sufficient justification for changing the rule, as it proposes to do in the context of expanding the scope of its regulations on nonresident alien reporting." Aside from the actual changes proposed to current regulation, the attorney pointed out that any expanded regulatory requirements are particularly burdensome on credit unions. "Cumulatively, the burden of compliance with these requirements is substantial, particularly for smaller credit unions," Dunn said. "About two-thirds 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." She indicated that credit unions would have to purchase new data processing systems, if they have any to begin with, to identify nonresident aliens' accounts and prepare additional IRS paperwork. She also found questionable the IRS' estimate that the average annual burden of 500 hours per 2,000 respondents. If the rule is promulgated, Dunn asked that institutions be given additional time beyond the deadline of after December 31 of the year the rule is finalized. "Financial institutions should have at least a full year after the rule is published before it applies to payments," she advocated. [email protected]