Banking Associations Challenge IRS Reporting Requirements for Foreign Account Holders

On January 29, two bankers associations filed a petition for certiorari seeking U.S. Supreme Court review of a decision from the United States Court of Appeals for the District of Columbia Circuit that the Anti-Injunction Act prevents them from challenging a Treasury regulation requiring banks to report the amount of interest earned by nonresident alien account holders.  The regulations, contained in Treas. Reg. §§ 1.6049-4 and -8, were issued pursuant to Treasury’s authority granted to it by Congress in the Foreign Account Tax Compliance Act (FATCA).  The regulations are intended to help the U.S. comply with its obligation to turn over certain information about foreign assets held in U.S. banks in exchange for other countries providing information to Treasury about U.S. assets held overseas.

The bankers associations argue that the IRS requirements will cause far more harm to banks than anticipated, asserting that the IRS violated laws mandating a cost benefit analysis of certain regulations.  Though the focus of the litigation has been a procedural hurdle preventing the lawsuit, the case could have significant implications if the bankers associations are able to challenge the regulations.  Currently, the banks claim that the regulations have caused substantial numbers of nonresident customers to close their accounts out of fear that the banks will disclose their information to the customers’ home governments.  The banks are concerned that the outflow of these deposits will outweigh the revenue benefits of the FATCA regulations, which are supposed to arise from a clampdown on U.S. tax evaders.  As a result, the bankers associations seek to overturn the appeals court decision preventing them from challenging the rule without first violating it, since violation could result in institutional fines and criminal imprisonment of their officers.  The Court of Appeals rules that the Anti-Injunction Act prevents the court from enjoining the reporting requirement because the penalty for noncompliance with the reporting obligation is the imposition of penalties under section 6721, and such penalties are treated as taxes.

In late February, the bankers associations’ request  gained support in the form of three amicus briefs.  The first, written by Minnesota Law School professor Kristin E. Hickman, argues that the IRS has a history of overstepping its statutory authority and has done so again with the regulations at issue.  The second, filed by the Cause of Action Institute, argues that more robust judicial review of IRS rulemaking is required and that a taxpayer should not be required to violate the law before having the ability to challenge the legality of the rule.  The final amicus brief, filed by the National Federation of Independent Business Legal Center and the Cato Institute, similarly argues that Treasury has strayed from the requirements of the Administrative Procedure Act and that the Supreme Court should resolve the interpretative split between the Anti-Injunction Act and the Tax Injunction Act to allow lower courts to properly adjudicate challenges to tax regulations.