Our understanding is that foreign customers presenting a W-8BEN Form have a three-year period after opening an interest-bearing account to obtain either a social security number or an ITIN, and until such time, we do not have to report the interest to the IRS. Is that correct? We had an issue where we reported accounts that had earned more than $10 in interest.

The general rule is that interest income paid by a U.S. bank to a nonresident alien is nontaxable and nonreportable, but note that there are several exceptions to this rule. Exceptions include interest income that is “connected with a U.S. trade or business” or is paid to a resident of Canada (interest paid to Canadian residents is reportable but not subject to withholding). Consequently, we believe that you should treat interest income as nonreportable for nonresident aliens who do not appear to be connected with a U.S. trade or business and who are not Canadian residents — otherwise, you may have an obligation to report interest income over the $10 reporting threshold.

We are not aware of any rule stating that interest income paid to a nonresident alien automatically becomes reportable after three years. The income would be reportable if the nonresident alien became a resident of the U.S. over the course of three years, of course. Additionally, the W-8BEN form generally has to be updated every three years, but this would not affect whether interest income paid to a customer providing the W-8BEN form is reportable.

For resources related to our guidance, please see:

IRS Webpage, Federal Income Tax Withholding and Reporting on Other Kinds of U.S. Source Income Paid to Nonresident Aliens (“If the interest income is paid by a U.S. bank, a U.S. savings & loan company, a U.S. credit union, or a U.S. insurance company to a nonresident alien, it is nontaxable and nonreportable (no 1099 or 1042-S reporting) unless the interest income is effectively connected with a U.S. trade or business. However, U.S. bank interest paid to a resident of Canada is reportable on Form 1042-S but is not subject to withholding (Treasury Regulation 1.6049-8(a)). If the interest income is “portfolio interest” and earned by a nonresident alien, then the interest income is reportable on Form 1042-S but nontaxable (Refer to Chapter 3 ‘Exclusions From Gross Income’ – ‘Interest Income’ – ‘Portfolio Interest’ in Chapter 3 of Publication 519, U.S. Tax Guide for Aliens). . . .”)

IRS Webpage, Federal Income Tax Withholding and Reporting on Other Kinds of U.S. Source Income Paid to Nonresident Aliens (“A nonresident alien individual should not deliver Form W-9 to a U.S. bank, U.S. savings and loan association, U.S. credit union, or U.S. insurance company. Instead, he should deliver Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to such institutions in order to put them on notice that he is a nonresident alien and that the interest income accruing to his account at such institutions is not reportable to the IRS, except in the case of U.S. bank accounts held by residents of Canada.”)

IRS Publication 519, U.S. Tax Guide for Aliens, Interest Income (“Interest income that is not connected with a U.S. trade or business is excluded from income if it is from: Deposits (including certificates of deposit) with persons in the banking business . . . .”)

31 days during the current year, and

183 days during the 3-year period that includes the current year and the 2 years immediately preceding the current year. To satisfy the 183-day requirement, count:

All of the days you were present in the current year,

One-third of the days you were present in the first year before the current year, and

One-sixth of the days you were present in the second year before the current year.”)

IRS Publication 515, Deposit interest paid to certain nonresident alien individuals (“Deposit interest paid to certain nonresident alien individuals. Interest earned by residents of certain foreign countries is subject to information reporting. Deposit interest of $10 or more paid to any nonresident alien individual who is a resident of a foreign country with which the United States has agreed to exchange tax information pursuant to an income tax treaty or other convention or bilateral agreement, must be reported on Form 1042-S.”)
IRS Topic No. 851, Resident and Nonresident Aliens (“You satisfy the substantial presence test, and are therefore treated as a resident alien for a calendar year, if you have been physically present in the United States on at least:

IRS Form W-8BEN Instructions (“If you are claiming treaty benefits, you are generally required to provide an ITIN if you do not provide a tax identifying number issued to you by your jurisdiction of tax residence on line 6.”)

IRS Form W-8BEN Instructions (“Expiration of Form W-8BEN. Generally, a Form W-8BEN will remain in effect for purposes of establishing foreign status for a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes any information on the form incorrect. For example, a Form W-8BEN signed on September 30, 2015, remains valid through December 31, 2018.
However, under certain conditions a Form W-8BEN will remain in effect indefinitely until a change of circumstances occurs. To determine the period of validity for Form W-8BEN for purposes of chapter 4, see Regulations section 1.1471-3(c)(6)(ii). To determine the period of validity for Form W-8BEN for purposes of chapter 3, see Regulations section 1.1441-1(e)(4)(ii).”)