For nonresident aliens, the short answer is “often yes.” U.S. banks and other financial institutions are generally required to report certain types of interest paid to nonresident individuals to the IRS, even though much of that interest is exempt from U.S. income tax. The IRS then uses that data both for its own enforcement and, in many cases, for automatic information exchange with foreign tax authorities. As with so much in international tax, the details matter.
How U.S. Tax Law Treats Nonresident Bank Interest
Under the Internal Revenue Code, nonresident alien individuals are taxed only on limited categories of U.S.-source income and on income that is effectively connected with a U.S. trade or business. Fixed or determinable annual or periodical (FDAP) items, such as interest, dividends, and many types of passive income, are generally subject to a flat 30 percent withholding tax unless an income tax treaty reduces the rate.
However, Congress carved out an essential exception for bank deposit interest and certain other types of “portfolio interest.” Internal Revenue Code section 871(i)(2)(A) provides that interest on deposits with U.S. banks, savings and loan institutions, and similar depositary institutions is not subject to U.S. tax for nonresident aliens if it is not effectively connected with a U.S. trade or business. In practice, that means a nonresident with a standard savings or CD account at a U.S. bank usually owes no U.S. tax on the interest.
Other interests, such as interest on U.S. corporate bonds, may also escape U.S. tax under the “portfolio interest” rules in section 871(h), provided specific requirements are met (for example, the obligation is in registered form and the holder certifies foreign status). Those payments are still U.S.-source FDAP income, but the Code treats them as exempt when the portfolio-interest conditions are satisfied.
The key distinction is between tax liability and information reporting. The fact that bank interest is often exempt from U.S. tax does not mean U.S. financial institutions are free to ignore it. Separate provisions in section 6049 and the related Treasury regulations govern when banks must report interest paid to nonresidents to the IRS.
Deposit Interest Reporting: Form 1042-S and the “Listed Jurisdictions”
Treasury regulations under section 6049 require U.S. banks and similar payors to report specific deposit interest paid to nonresident alien individuals on Form 1042-S. Regulation § 1.6049-4(b)(5) provides that when a payor pays aggregate interest of 10 dollars or more in a calendar year that is “reportable under § 1.6049-8(a)” to a nonresident alien individual, the payor must file an information return on Form 1042-S for that year.
Regulation § 1.6049-8(a), in turn, defines the covered interest as bank deposit interest described in section 871(i)(2)(A) that is paid to a nonresident alien individual who is a resident of a country listed in an “applicable revenue procedure” as having an information-exchange agreement with the United States. The IRS updates that list periodically. For example, Revenue Procedure 2023-36, published in late 2023, refreshed the list of jurisdictions whose residents are subject to this deposit-interest reporting and with which the United States has determined that automatic exchange of this information is appropriate.
The mechanics look like this in practice:
- A nonresident individual opens an interest-bearing account at a U.S. bank and provides Form W-8BEN certifying foreign status and country of residence.
- If the individual is resident in one of the “listed” jurisdictions, and the bank pays at least $10 of reportable deposit interest during the year, the bank must file Form 1042-S with the IRS for that payee and year.
- The interest remains exempt from U.S. income tax as bank deposit interest, assuming it is not effectively connected with a U.S. trade or business, but the IRS now has a record of the payments and may, under applicable treaties or tax-information-exchange agreements, share that information with the depositor’s home country.
The regulations also allow, but do not require, a payor to “over-comply” by electing to report deposit interest paid to all nonresident alien individuals, not just those residing in listed countries. A bank can make that election simply by filing Forms 1042-S for all such nonresident depositors.
Separate rules treat banks and other payors as withholding agents for non-exempt interest, such as U.S.-source bond interest that does not qualify as portfolio interest. Those payments are subject to the standard Chapter 3 withholding and Form 1042-S reporting regime, independent of the special deposit-interest rules.
Why Nonresident Interest Reporting Still Creates Real Risk
From a nonresident’s perspective, the fact that bank deposit interest is exempt from U.S. income tax can create a false sense of security. Even where no U.S. tax is due, U.S. banks’ interest reporting has several profound implications.
First, some nonresidents live in countries that tax worldwide investment income. When a U.S. bank reports deposit interest paid to a resident of a listed jurisdiction, and the IRS automatically exchanges that information under an applicable treaty or tax-information-exchange agreement, the foreign tax authority may use it to enforce that country’s own income tax rules. U.S. exemption does not shield the income from foreign tax, and the data trail makes it much easier for a home country to detect unreported accounts.
Second, missteps in documentation or residency status can unexpectedly pull a nonresident into the U.S. system. If a bank does not have a valid Form W-8BEN on file, the presumption rules can force the institution to treat the payee as a U.S. person, issue a Form 1099-INT, and apply backup withholding. For individuals who have spent significant time in the United States or have obtained a green card, the “nonresident” label may not match their actual U.S. tax status. The substantial presence test and green card rules can make someone a U.S. tax resident even if they consider themselves a foreign investor, which means the exempt-interest assumptions may be incorrect, and a complete Form 1040 filing obligation may exist.
Third, interest reporting often dovetails with broader cross-border enforcement. U.S. banks must comply with anti-money laundering rules, “know your customer” standards, and suspicious activity reporting under the Bank Secrecy Act. While those obligations are legally distinct from IRS interest reporting, in practice, they create a rich information environment that can support both civil tax examinations and, in extreme cases, criminal tax investigations in which accounts are used to hide income or launder funds.
Patterns that tend to attract attention include large or unexplained inflows and outflows compared to reported income, use of multiple nominee accounts or entities, or inconsistencies between certification forms (such as W-8BEN and W-9) and other facts in the file. When the IRS sees those kinds of “badges of fraud,” a case that begins as a routine nonresident information match can evolve into an “eggshell” examination where every statement and document may affect whether the matter remains civil or escalates into a criminal tax inquiry.
Finally, the distinction between deposit interest and other interest is critical. A nonresident who holds both exempt bank deposits and taxable U.S.-source interest (for example, certain related-party loans or obligations that do not meet the portfolio-interest rules) can easily misclassify payments. If the IRS later concludes that taxable FDAP interest was improperly treated as exempt, it can assess withholding tax, interest, and penalties, and, in egregious cases, may argue willful tax evasion.
Contact the Tax Law Offices of David W. Klasing if You Have Nonresident Bank Interest or Cross-Border Reporting Concerns
If you are a nonresident with U.S. bank accounts, a foreign investor using U.S. financial institutions, or a current or former U.S. person who has treated yourself as nonresident for tax purposes, you are wise to clarify how the interest-reporting rules actually apply to you before the IRS or a foreign tax authority forces the issue. The intersection of deposit-interest exemptions, Form W-8BEN certifications, automatic information exchange, and evolving digital enforcement tools makes this a classic high-risk area where small mistakes can have outsized consequences.
At the Tax Law Offices of David W. Klasing, our nationally recognized dual-licensed Civil and Criminal Tax Defense Attorneys and CPAs focus on precisely these kinds of cross-border, multi-jurisdictional tax problems. We help clients determine their correct U.S. tax status, analyze how U.S. and foreign rules apply to their interest income, and design strategies to correct past noncompliance while minimizing both civil penalties and criminal exposure wherever possible. When a high-risk IRS audit or parallel foreign investigation is already underway, we step in to control all communications with the government, manage document production, and position the matter to give it the best possible chance of remaining civil and resolving on the most favorable terms the facts allow.
Our dual-licensed tax attorneys and CPAs offer confidential, reduced-rate initial consultations in which we review your U.S. and foreign bank relationships, explain how the nonresident interest-reporting rules apply to your specific facts, and outline practical options for moving forward before the IRS or a foreign authority makes the first move. To schedule a consultation, call the Tax Law Offices of David W. Klasing at (800) 681-1295 or contact us online HERE today.
