n-01-66.pdf

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Part III
Administrative, Procedural, and Miscellaneous
Proposed Audit Guidance for External Auditors of Qualified Intermediaries
Notice 2001-66
This notice requests comments on the attached proposed audit guidelines for
qualified intermediaries (QI). QI’s are a key component of the withholding and reporting
regulations that became effective on January 1, 2001 (T.D. 8734, 1997-2 C.B. 109, and
T.D. 8881, 2000-23 I.R.B. 1158).
I. BACKGROUND
Generally, a QI is a non-U.S. financial institution that has entered into a
contractual agreement with the Internal Revenue Service (IRS). Under the agreement,
the QI generally agrees to report annually certain aggregate information concerning the
beneficial owners of U.S. source payments and to make any necessary tax payments to
the IRS. Additionally, the QI agrees to engage an external auditor to verify that it is in
compliance with the QI agreement. In return, the QI avoids the expense and burden of
forwarding documentation with respect to each beneficial owner to a U.S. withholding
agent in order to claim reductions in U.S. withholding tax. The QI also enjoys other
significant benefits under the new rules, including the ability to rely on a collective
refund procedure for its customers.
The IRS and Treasury have worked closely with the financial community in
developing the QI system. The audit guidelines attached to this notice are being issued
in proposed form specifically to continue the dialogue with the financial community on
how to implement the audit procedures of the QI agreements in a way that minimizes
costs to the QIs while preserving the compliance goals of the withholding regulations.
The IRS and Treasury recognize that achieving these goals requires that the audit
process preserves the cooperative nature and effectiveness of the QI system.
II. THE PROPOSED THREE PART QI AUDIT PROCESS
The guidelines attached to this notice reflect a three part audit process. As
described further below, whether a particular QI’s audit will progress through all three
parts generally will depend upon the results of each part. IRS expects that, if a QI
demonstrates a satisfactory level of compliance with the QI agreement in the first part of
the audit process, the QI will not be required to complete any further parts in the
process during that audit cycle.

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A. PART 1: Basic Fact Finding
Part 1 consists of basic fact finding. The external auditor performs the tasks
detailed in the attached audit guidelines. From these fact finding activities, the auditor
will develop a report of numerical results. The attached audit guidelines contain precise
directions on what numerical information must be included in the auditor’s report. The
auditor will send a hard copy of this initial report to the IRS. The IRS intends to develop
a standard electronic report form.
If the numerical results of a particular QI’s audit demonstrate a high level of
compliance with the QI agreement, then it is expected that the IRS generally will notify
the QI that its audit is complete and that no additional steps need to be taken. If,
however, the numerical results suggest that the QI has experienced some difficulties in
meeting its obligations under the agreement, then the IRS will notify the QI that it is
proceeding to Part 2 of the audit process.
B. PART 2: Follow Up Fact Finding
In Part 2 of the audit process, the IRS will contact the auditor and ask about
certain numerical results in the auditor’s report. If additional information is needed, the
IRS will direct the auditor to perform additional procedures and to report on the results.
The goal of this step of the audit process will be to identify the cause for the numerical
results and to determine whether corrective actions are readily discernible.
For example, an audit report may show that the auditor was unable to associate
beneficial owner information with a specified percentage of the QI’s accounts. By
discussing the facts with the auditor, the IRS may be able to determine that the problem
was attributable to deficient account opening procedures in one of the QI’s branches. If
the IRS is satisfied that the QI had taken corrective steps to ensure that the branch was
appropriately opening new accounts, and if the QI has otherwise shown a high level of
compliance with the QI agreement, then there would be no need to proceed to Part 3 of
the audit process. Under other circumstances, however, the IRS may determine that
further work must be done to resolve the issues raised in Part 1 of the audit process.
C. PART 3: Audit Meeting with QI
If the concerns arising from the numerical results reported in Part 1 of the audit
process cannot be resolved by directed fact finding in Part 2, then the IRS will propose
to meet with the QI to attempt mutually to clarify and resolve those concerns. This part
is designed specifically to provide a forum where a productive dialogue between the IRS
and the QI can occur. Treasury and the IRS continue to believe that the QI system,
which allows the IRS’s compliance goals to be met while minimizing the administrative
burdens on financial institutions, is a critical component of the withholding regulations.
Accordingly, the IRS will seek to develop mutually acceptable solutions to the issues
that arise in the course of administering the QI agreements so that it will not become
necessary to terminate a QI agreement.

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III. Key Concepts for Comment in the Attached Audit Guidelines
The IRS and Treasury invite comments on all sections of both this Notice and the
attached proposed audit guidelines. This section is intended to draw attention to
particularly important aspects of the audit guidelines that are designed to lessen
burdens on financial institutions serving as QIs.
A. Submission of Audit Plans.
Under the proposed audit guidelines, the submission of an audit plan to the IRS
prior to performing the audit is not necessary if the external auditor plans to follow the
audit guidelines. If, however, the external auditor plans to modify or deviate from the
audit guidelines, then an audit plan should be submitted to the IRS for prior approval.
For example, the external auditor may propose to use multistage, cluster, stratification
or some other sampling methodology in conducting its audit. In such cases, the
external auditor should submit a written audit plan and should identify, and explain the
reasons for, any proposed modifications or deviations from the audit guidelines.
B. Discretionary Waivers of External Audit.
The proposed audit guidelines allow QIs to request that the IRS waive the
performance of an audit by an external auditor in three cases. In the first case, a QI
may request a waiver of the external audit if it has received not more than $250,000 in
reportable payments during the year to be audited. Instead of an external audit in this
case, the QI must submit copies of its Forms 1042 and 945, copies of the Forms 1042-S
issued to it and filed by it, and copies of its Forms W-8IMY provided to its withholding
agents, along with information about the number of its account holders of various
classes.
In the second case, a QI may request a waiver of the external audit if it has made
reportable payments to no more than 2000 direct and indirect account holders during
the year to be audited. Instead of an external audit in this case, the QI must itself
perform the audit procedures and report to the IRS in accordance with the audit
guidelines. Statistical sampling will not be permitted in this case. The IRS will not
agree to waive the external audit for the first audit year of the first term of the QI
Agreement in this case. The IRS will not agree to waive the performance of an external
audit for a Private Arrangement Intermediary (PAI).
In the third case, a QI may request a waiver of the external audit if it has a
substantial and independent internal audit department and its internal audit department
has audited the QI’s compliance under the QI agreement for each of the three years
preceding the year to be audited. Instead of an external audit in this case, the QI’s
internal audit department must perform the audit and report to the IRS in accordance
with the audit guidelines. Statistical sampling will be permitted in this case.
Whether the IRS will waive the external audit in any case is discretionary. In the

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second and third cases, the IRS will not waive the external audit for more than one audit
year during any one term of the QI agreement.
C. External Auditor’s Reliance on Internal Auditors.
The proposed audit guidelines allow the external auditor to use a QI’s internal
audit staff and internal audit reports to any extent the external auditor chooses.
Nevertheless, the external auditor remains personally responsible for the conduct of the
audit. The external auditor must disclose in the audit report specifically how and when it
has used internal audit staff and reports. Further, the external auditor must certify that
the use of the internal audit personnel and reports has not affected the accuracy of the
external auditor’s report.
D. Projection of Underwithholding.
The QI agreement provides that if statistical sampling has been used and the
auditor determines that underwithholding has occurred with respect to the sampled
accounts, the IRS will determine the total amount of underwithheld tax by projecting the
underwithholding over the entire population of similar accounts.
Under the proposed audit guidelines, if the auditor uses a sample and has found
that underwithholding has occurred with respect to an account in the sample, the auditor
must report the underwithholding in the report for step 1 of the audit. In step 2 of the
audit, the IRS would direct the external auditor to perform any additional procedures
necessary to collect any information required to determine whether it is appropriate to
project the underwithholding and any information required to make a projection. The
IRS will employ a projection method that is consistent with the sampling methodology
used. In step 3 of the audit, the QI may address whether projection is appropriate and
may propose a projection using another amount of underwithholding based on a more
accurate population, a more accurate projection technique, or an examination of all
similar accounts.
IV. Comments.
Written comments must be received by December 12, 2001. Send comments to
CC:DOM:CORP:R (NOT-151112-01), Room 5228, Internal Revenue Service, Ben
Franklin Station, Washington, DC 20224. Alternatively, comments may be hand
delivered between the hours of 8:00 AM and 5:00 PM to: CC:DOM:CORP:R (NOT-
151112-01), Courier’s Desk, Internal Revenue Service, 1111 Constitution Ave. NW,
Washington, DC.
Contact Information
For further information regarding this Notice, contact Carl Cooper or Laurie
Hatten-Boyd of the Office of the Associate Chief Counsel (International), Internal
Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224. Mr.

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Cooper and Ms. Hatten-Boyd may be contacted by telephone at 202-622-3840 (not a
toll-free call).
APPENDIX
(PROPOSED) GUIDANCE
FOR EXTERNAL AUDITORS OF QUALIFIED INTERMEDIARIES
Section 4 of Rev. Proc. 2000-12, 2000-4 I.R.B. 387, 388, provides the final text of
the Qualified Intermediary Agreement (“QI Agreement”) between the Internal Revenue
Service (“IRS”) and a qualified intermediary (“QI”). Section 10 of the QI Agreement
provides external audit procedures. In section 10, the IRS agrees not to conduct an on-
site audit of the QI provided the QI engages an external auditor to conduct an audit in
accordance with the procedures detailed therein. Under those procedures, the external
auditor examines the QI to verify whether it is in compliance with the QI Agreement and
makes a report to the IRS. Section 10 of the QI Agreement is reproduced below in
bolded text for reference. Following each paragraph of section 10, procedural guidance
on audit issues is provided under the heading Audit Guidance numbered to correspond
to the QI Agreement. The audit guidance under sections 10.01 to 10.03 includes
procedures that a QI may follow to request an IRS audit or a waiver of audit. Section
10.03(A), (B), (C) and (D) describe Part 1 of the audit process. This section includes
the procedures that an external auditor should follow in examining the QI and the
information to be included in the external auditor’s report to the IRS. Section 10.04
provides guidance on the use of statistical sampling and projection of underwithholding.
Section 10.05 provides further guidance on the form, content and submission of the
external auditor’s report. Section 10.06 provides guidance on Parts 2 and 3 of the audit
process. The audit guidance does not amend, modify, or interpret the QI Agreement.
QI Agreement Sec. 10.01. In General. Unless QI requests an IRS audit in lieu of
an external audit, the IRS agrees not to conduct an on-site audit of QI, or any PAI
with which QI has an agreement, with respect to withholding and reporting
obligations covered by this Agreement provided that an external auditor
designated in Appendix B of this Agreement conducts an audit of QI, and any
PAI, in accordance with this section 10. QI shall permit the external auditor to
have access to all relevant records of QI for purposes of performing the external
audit, including information regarding specific account holders. QI shall permit
the IRS to communicate directly with the external auditor and to review the audit
procedures followed by the external auditor. QI represents that there are no legal
prohibitions that prevent the external auditor from examining any information
relevant to the external audit to be performed under this section 10 and that there
are no legal prohibitions that prevent the IRS from communicating directly with
the auditor. QI shall permit the IRS to examine the external auditor’s work papers
and reports. However, the external auditor is not required to divulge the identity

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of QI’s account holders to the IRS.
Audit Guidance Sec. 10.01:
10.01.1. IRS Audit. A QI that is not prohibited by law from disclosing account holder
information may request an IRS onsite audit instead of an external audit. To request an
IRS audit, the QI must submit a written request to the IRS before March 31 of the year
following the specific year to be audited (“audit year”). The QI must send the request to
the following address:
Internal Revenue Service
LMSB:FS:QI
290 Broadway
New York, NY 10007-1867
USA
If the IRS agrees to conduct an audit of the QI, the IRS will send the QI a written
response within 90 days of the date the IRS received the request. In some cases, the
IRS will conduct an audit by correspondence. For instance, in the case of a QI that has
made reportable payments to no more than 50 accounts covered by the QI Agreement,
the IRS may conduct an audit by correspondence. For purposes of this guidance,
“accounts covered by the QI Agreement” are accounts maintained by the QI for its direct
account holders (which include intermediaries and flow-through entities) to which the QI
has made reportable payments during the audit year from the QI’s accounts with
withholding agents that the QI has designated as QI accounts.
10.01.2. External Audit Waiver ($250,000 Threshold). A QI may request that the IRS
waive the performance of the audit by an external auditor for an audit year if the QI has
received reportable payments during that year that do not exceed $250,000. To
calculate the $250,000 threshold, the QI must aggregate all reportable payments
(including payments beneficially owned by the QI) made to its accounts with withholding
agents that the QI has designated as QI accounts. The QI must submit its request for a
waiver to the IRS in accordance with Audit Guidance 10.01.1 (AG10.01.1).
The QI should include in its request:
(a) Copies (for the audit year) of its Forms 1042 and 945, the Forms 1042-S issued
to it, the Forms 1042-S and 1099 issued by it, and the Forms W-8IMY (including
summaries of withholding statements) provided by it to its withholding agents;
(b) A reconciliation of the Forms 1042-S issued to the QI and the Forms 1042-S
issued by the QI; and
(c) A statement made under penalties of perjury by a person named as a
responsible party for performance in the QI’s application for a QI Agreement
(“responsible party”) that:
(1)States
(i) The number of the QI’s direct account holders during the
audit year;

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(ii) The number of the QI’s indirect account holders during the
audit year; and
(iii) Within each category, the number of account holders that
were U.S. exempt recipients, U.S. non-exempt recipients,
intermediaries, flow-through entities, and undocumented
account holders;
(2)States the total amount of any underwithholding or collective refund
for the audit year;
(3)States that no event of default under section 11 of the QI
Agreement has occurred during the audit year;
(4)States that the QI does not refer account holders to an affiliated
entity with the effect of circumventing the $250,000 threshold; and
(5)Certifies that the QI was in compliance with the QI Agreement
during the audit year.
The IRS may contact the QI to request additional information. If the IRS agrees to
waive the performance of the audit for the audit year, the IRS will send the QI a written
response within 90 days of the date the IRS received the request. The IRS will not
agree to waive the performance of an audit for a Private Arrangement Intermediary
(“PAI”).
10.01.3. External Audit Waiver (2000 Account Holder Threshold). A QI may request
that the IRS waive the performance of the audit by an external auditor for an audit year
if, during the audit year, the QI has made reportable payments to no more than 2000
direct and indirect account holders covered by the QI Agreement. The QI must submit
its request for a waiver to the IRS in accordance with AG 10.01.1. The QI must include
in its request a statement, made under penalties of perjury by the responsible party, that
states:
(a)The number of account holders to which the QI has made such payments;
(b)The aggregate amount of reportable payments (including payments beneficially
owned by the QI) made to its accounts with withholding agents that the QI has
designated as QI accounts;
(c) The QI does not refer account holders to an affiliated entity with the effect of
circumventing the 2000 account holder threshold; and
(d) That, in lieu of the external audit, the QI itself will apply the procedures set forth
in section 10 of the QI Agreement. In doing so, the QI agrees to examine each
account holder and to submit a report to the IRS signed by the responsible party.
The IRS may contact the QI to request additional information. The QI must agree that
its performance of the audit will be governed in all respects by section 10 of the QI
Agreement as if the persons conducting the audit were the external auditor referred to in
that section. The IRS will not permit the use of statistical sampling by the QI. The IRS
will not agree to waive the external audit for more than one audit year during any one
term of the QI Agreement. If the IRS agrees to waive the performance of the audit for
the audit year, the IRS will send the QI a written response within 90 days of the date the

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IRS receives the request. The IRS will not agree to waive the performance of an audit
for a PAI. The IRS will not agree to waive the external audit for the first audit year of the
first term of the QI Agreement.
10.01.4. External Audit Waiver (Annual Internal Audits). A QI may request that the IRS
waive the performance of the audit by an external auditor for an audit year if the QI
maintains a substantial and independent internal audit staff, and the QI’s internal
auditors have conducted an audit of the QI’s compliance with the QI Agreement each
year for the three years preceding the audit year. The QI must submit its request for a
waiver to the IRS in accordance with AG 10.01.1. The QI must include in its request a
statement, made under penalties of perjury by the responsible party, that states:
(a)The number of direct account holders and the number of indirect account holders
to which the QI has made such payments;
(b)The aggregate amount of reportable payments (including payments beneficially
owned by the QI) made to its accounts with withholding agents that the QI has
designated as QI accounts;
(c)How the internal audit staff is organized, including position descriptions, the
number of individuals in each position, the names of the individual or individuals
with overall responsibility for internal audit, the routine functions of the internal
auditors within the QI, and the persons to whom the internal auditors report;
(d)In brief summaries, the procedures performed, the findings, and the conclusions
or recommendations of each annual audit of the QI’s compliance with the QI
Agreement conducted by the QI’s internal auditors in each of the three years
preceding the audit year; and
(e)That, in lieu of the external audit, the QI itself will apply the procedures set forth
in section 10 of the QI Agreement to those accounts.
The IRS may contact the QI to request additional information. The QI must agree that
its performance of the audit will be governed in all respects by section 10 of the QI
Agreement as if the persons conducting the audit were the external auditor referred to in
that section. The IRS will not agree to waive the external audit for more than one audit
year during any one term of the QI Agreement. If the IRS agrees to waive the
performance of the audit for the audit year, the IRS will send the QI a written response
within 90 days of the date the IRS receives the request. The IRS will not agree to waive
the performance of an audit for a PAI.
QI Agreement Sec. 10.02. Designation of External Auditor. QI’s external auditor
must be one of the auditors listed in Appendix B of this Agreement, unless QI and
the IRS agree, prior to the audit, to substitute another auditor. QI shall not
propose an external auditor unless it has a reasonable belief that the auditor is
subject to laws, regulations, or rules that impose sanctions for failure to exercise
its independence and to perform the audit competently. The IRS has the right to
reject a proposed external auditor, or to revoke its acceptance of an external
auditor, if the IRS, in its sole discretion, reasonably believes that the auditor is

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not independent or cannot perform an effective audit under this Agreement.
Audit Guidance Sec. 10.02:
10.02.1. Auditor Approval. To obtain assurance that an external auditor will be
acceptable to the IRS, the QI or the external auditor may submit a written request
explaining the qualifications of the external auditor to the IRS at any time. The QI or the
external auditor should send the request to the address provided in AG 10.01.1. The
IRS will send the QI or the external auditor a written response within 90 days of the date
the IRS receives the request.
10.02.2. Auditor Independence. A QI and its external auditor must disclose to the IRS
any circumstances that compromise or reasonably appear to compromise the external
auditor’s independence or ability to perform an effective audit. To make a disclosure,
the QI or the external auditor must submit a written statement explaining the
circumstances and any steps taken to address them as soon as such circumstances are
discovered. The disclosure must be sent to the address provided in AG 10.01.1. If the
IRS determines that the external auditor is not acceptable, it will send the QI and the
external auditor a written notice to that effect within 90 days of the date the IRS receives
the disclosure.
QI Agreement Sec. 10.03. Timing and Scope of External Audits. QI shall have the
external auditor conduct an audit of the second full calendar year and the fifth full
calendar year that this Agreement is in effect, subject to section 10.06 of this
Agreement. The external auditor shall verify whether QI is in compliance with this
Agreement by conducting an audit that meets the requirements of this section
10.03. The external auditor shall verify whether QI is in compliance with its QI
agreement by providing a report to the IRS. The report must be received by the
IRS, at the address set forth in section 12.06 of this Agreement, no later than June
30 of the year following the year being audited. The IRS may, however, upon
request by the external auditor, extend the due date of the audit report upon good
cause. The report must disclose that the external auditor has, at a minimum,
performed the following checks listed in this paragraph 10.03, and set forth how
each of those checks was performed and the results of the checks. QI’s (or a
PAI’s) external auditor is encouraged to contact the IRS at the address set forth in
section 12.06 of this Agreement and submit an audit plan (which includes, if
relevant, the extent to which the external auditor proposes to rely on QI’s internal
audit procedures) prior to performing the audit so that the audit may be
conducted in the most efficient and least costly manner possible.
Audit Guidance Sec. 10.03:
10.03.1. Specifications of Audit Report. For guidance on the form and contents of the
external auditor’s report, submitting the report to the IRS, the due date of the report and
extensions of the due date, see AG 10.05.

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10.03.2. Submission of Audit Plan. Submission of an audit plan to the IRS prior to
performing the audit is not necessary unless the external auditor plans to modify or
deviate from the procedures described in AG 10.03 and 10.04. In such circumstances,
the external auditor should submit a written plan, identifying and explaining the reasons
for any planned modifications or deviations from those procedures, prior to performing
the audit. The external auditor should submit the audit plan to the address provided in
AG 10.01.1. The IRS will send the external auditor a written response within 90 days of
the date the IRS receives the audit plan.
10.03.3. Use of Internal Audit. The external auditor is required to perform the audit
itself. The external auditor may use the QI’s internal audit personnel and internal audit
reports to any extent the external auditor chooses to do so. In that case, the external
auditor remains responsible for the conduct of the audit as if the external auditor had
personally performed the audit. In its report to the IRS, the external auditor must
disclose specifically when and how it has used the QI’s internal audit personnel and
reports in conducting the audit and must certify that the use of the internal audit
personnel and reports has not affected the accuracy of the external auditor’s report.
10.03.4. Use of Copies. In conducting the audit, the external auditor may use copies of
any account records or written materials provided by the QI. Nevertheless, the QI must
permit the external auditor to have access to the complete and unaltered account holder
records in the original, if the external auditor deems it necessary to examine originals.
QI Agreement 10.03(A). Documentation. The external auditor must–
(1) Verify that QI has training materials, manuals, and directives that instruct the
appropriate QI employees how to request, collect, review, and maintain
documentation in accordance with this Agreement;
Audit Guidance 10.03(A)(1):
10.03(A)(1).1. Review of Documentation Training. The external auditor must:
Step 1:Identify the QI’s employees that are responsible for opening and
maintaining customer accounts.
Step 2:Collect any written training materials, manuals, and directives used by
those employees.
Step 3:Inspect the written training materials, manuals, and directives to determine
whether they contain instructions specific to accounts covered by the QI
Agreement on how to request, collect, review, and maintain
documentation.
10.03(A)(1).2. Documentation Training Report. The external auditor must specifically
report:

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Report 1:Whether the QI has written training materials, manuals, and directives that
contain instructions specific to accounts covered by the QI Agreement on
how to request, collect, review, and maintain customer documentation.
QI Agreement Sec. 10.03(A)(2). Review QI’s account opening procedures and
interview QI’s employees, to determine if appropriate documentation is requested
from account holders and, if obtained, that it is reviewed and maintained in
accordance with this Agreement;
Audit Guidelines 10.03(A)(2)
10.03(A)(2).1. Review of Account Opening Procedures. The external auditor must:
Step 1:Identify the QI employees responsible for opening and maintaining
customer accounts and select representative employees for interview.
Step 2:Ask the selected employees how accounts covered by the QI Agreement
are opened, what documentation is requested, how the documentation is
obtained, and how the documentation is reviewed and maintained.
10.03(A)(2).2. Account Opening Procedures Report. The external auditor must
specifically report:
Report 1:The number of employees interviewed.
Report 2:The number of employee responses that indicate that Forms W-8 and
documents listed in the Attachment to the QI Agreement are not routinely
requested, reviewed, cross checked against other account information, or
maintained in accordance with section 5.12 of the QI Agreement.
QI Agreement Sec. 10.03(A)(3). Verify that QI follows procedures designed to
inform account holders that claim a reduced rate of withholding under an income
tax treaty about any applicable limitation on benefits procedures;
Audit Guidance 10.03(A)(3):
10.03(A)(3).1. Review Limitation on Benefits (LOB) Procedure. The external auditor
must:
Step 1:Ask the QI employees selected for interview under AG 10.03(A)(2) Step 1
how account holders that are not individuals claim a reduced rate of
withholding under an income tax treaty.
10.03(A)(3).2. LOB Procedure Report. The external auditor must specifically report:

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Report 1:The number of employee responses that indicate that such customers are
not informed about any applicable limitation on benefits provisions.
QI Agreement 10.03(A)(4). Review QI’s accounts, using a valid sample of
accounts for which treaty benefits are claimed, to ensure that QI is obtaining the
treaty statements required by section 5.03(B);
Audit Guidance 10.03(A)(4):
10.03(A)(4).1. Review of Treaty Statements. The external auditor must:
Step 1:Identify all accounts covered by the QI Agreement that are held by direct
account holders that are not U.S. non-exempt recipients, or select a valid
sample of such accounts in accordance with AG 10.04.
Step 2:From the accounts identified or selected in Step 1, segregate the accounts
for which treaty benefits are claimed.
Step 3:From the accounts for which treaty benefits are claimed, segregate the
accounts for which documentary evidence has been obtained.
Step 4:From the accounts for which documentary evidence has been obtained,
segregate those accounts held by account holders that are not individuals
or governments.
Step 5:For the accounts segregated in Step 4, inspect each account holder’s
documentation to determine whether it contains a valid treaty statement
described in section 5.03(B) of the QI Agreement. A valid treaty statement
must be signed by the beneficial owner. A treaty statement may be
incorporated into another document that is signed by the beneficial owner.
Step 6:For the accounts segregated in Step 4, identify:
(a)All accounts covered by the QI Agreement held by intermediaries or
flow through entities for which recipient specific reporting is
required under section 8.02(B) and (C) or section 8.04 of the QI
Agreement.
(b) The number in Step 6(a) that are intermediaries.
(c) The number in Step 6(a) that are flow through entities
(d)The number of indirect account holders holding through
intermediaries that are direct account holders; and
(e)The number of indirect account holders holding through each flow
through entity that is a direct account holder.
Step 7:(a)For purposes of Step 7 and the following sections, the external
auditor must identify the indirect account holders for which recipient

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specific reporting is required or select a valid sample of such
account holders in accordance with AG 10.04. From the indirect
account holders identified or selected, segregate the indirect
account holders for which treaty benefits are claimed.
(b) From the indirect account holders segregated in (a), segregate the
indirect account holders for which documentary evidence has been
obtained.
(c) From the indirect account holders segregated in (b), segregate
indirect account holders that are not individuals or governments.
(d)For the indirect account holders segregated in (c), inspect each
indirect account holder’s documentation to determine whether it
contains a valid treaty statement described in section 5.03(B) of the
QI Agreement.
10.03(A)(4).2. Treaty Statements Report. The external auditor must specifically report:
Report 1:The number of accounts determined under each of Steps 1, 2, 3, and 4.
Report 2:The number of accounts segregated in Step 4 that do not contain a valid
treaty statement described in section 5.03(B) of the QI Agreement.
Report 3:The number of indirect account holders determined under Step 6(a)
through (e).
Report 4:The number of indirect account holders identified, selected (if sampling is
used), and segregated under Step 7 (a) through (c).
Report 5:The number of indirect account holders whose documentation does not
contain a valid treaty statement described in section 5.03(B) of the QI
Agreement.
QI Agreement Sec. 10.03(A)(5). Review information, using a valid sample,
contained in account holder files to determine if the documentation validity
standards of section 5.10 of this Agreement are being met. For example, the
external auditor must verify that changes in account holder information (e.g., a
change of address to a U.S. address or change of account holder status from
foreign to U.S.) are being conveyed to QI’s withholding agent, or, if QI assumes
primary NRA withholding responsibility or primary Form 1099 reporting and
backup withholding responsibility, that QI is applying the appropriate withholding
rate;
Audit Guidance 10.03(A)(5):
10.03(A)(5).1. Review of Documentation Validity (Foreign Persons and U.S. Exempt
Recipients). The external auditor must:

14
Step 1:Identify all accounts covered by the QI Agreement that are held by direct
account holders that are not U.S. non-exempt recipients, or use the same
sample selected in AG 10.03(A)(4).1 Step 1.
Step 2:Sort those accounts according to whether they contain the following types
of documentation:
(a)Form W-8BEN;
(b) Form W-8EXP;
(c) Form W-8ECI;
(d) Form W-8IMY;
(e) Form W-9;
(f)Documentary Evidence; and
(g) no documentation.
Step 3:FORM W-8BEN:
(a)For accounts documented with a Form W-8BEN, inspect Part I of
the Form W-8BEN. Determine that the following lines are
completed and consistent with each other:
(i)Line 1 (name of individual or organization that is the
beneficial owner);
(ii) Line 2 (country of incorporation or organization), for non-
individuals;
(iii) Line 3 (type of beneficial owner);
(iv) Line 4 (permanent residence address, including country) A
permanent residence address cannot be a P.O. Box, in-care-
of address or an address at a financial institution, including a
hold mail address (except when the beneficial owner is a
financial institution); and
(v) Signature and date.
(A) Determine that December 31 of the audit year was
within three full calendar years following the year of
signature; and
(B) Determine that the certifications attested under
penalties of perjury have not been modified.
(b)For a Form W-8BEN for which the beneficial owner has claimed
treaty benefits, inspect Part II of the Form W-8BEN. Determine that
the following lines are completed and consistent with each other
and with Part I of the Form:
(i) Line 9a (residence certification, including name of country);
and
(ii) Line 9c (section 894 and LOB certification), but only for non-
individuals.
Step 4:FORM W-8EXP. For accounts documented with Form W-8EXP, inspect
Form W-8EXP. Determine that the following lines are completed and

15
consistent with each other:
(a) Line 1 (name of organization);
(b) Line 2 (country of incorporation or organization);
(c) Line 3 (type of entity);
(d) Line 4 (permanent residence address, including country), A
permanent residence address cannot be a P.O. Box, in-care-of
address or an address at a financial institution, including a hold mail
address (except when the beneficial owner is a financial institution);
(e) Either:
(i) Line 9a and 9b or 9c; or
(ii) Line 10 (and organization is designated by executive order
under 22 U.S.C. 288 through 288(f)); or
(iii) Line 11; or
(iv) Line 12a (including date) or 12b (including attached opinion
from U.S. counsel), and, for section 501(c)(3) organizations,
Line12c (including affidavit) or 12d, and Line 6; or
(v) Line 13; and
(f) Signature and date.
(i) Determine that the certifications attested under penalties of
perjury have not been modified.
Step 5:FORM W-8ECI. For accounts documented with Form W-8ECI, inspect the
Form W-8ECI. Determine that the following lines are completed and
consistent with each other:
(a)Line 1 (name of organization);
(b)Line 2 (country of incorporation or organization);
(c) Line 3 (type of entity);
(d)Line 4 (permanent residence address, including country), A
permanent residence address cannot be a P.O. Box, in-care-of
address or an address at a financial institution, including a hold mail
address (except when the beneficial owner is a financial institution);
(e)Line 5 (business address in the United States);
(f)Line 6 (U.S. taxpayer identification number);
(g)Line 9 (list of items of income that are effectively connected with the
conduct of a trade or business in the United States); and
(h)Signature and date.
(i) Determine that December 31 of the audit year was within
three full calendar years following the year of signature; and
(ii)Determine that the certifications attested under penalties of
perjury have not been modified.
Step 6:FORM W-8IMY. For accounts documented with Form W-8IMY, inspect
the Form W-8IMY. Determine that the following lines are completed and
consistent with each other:
(a)Line 1 (name of individual or organization);
(b)Line 2 (country of incorporation or organization), for non-individuals;

16
(c)Line 3 (type of entity);
(d)Line 4 (permanent residence address, including country). A
permanent residence address cannot be a P.O. Box, in-care-of
address or an address at a financial institution, including a hold mail
address (except when the beneficial owner is a financial institution).
(e)Either:
(i)Line 9a and Line 6 (QI-EIN);
(ii)Line 10a;
(iii)Line 11 and Line 6 (EIN), and Line 12 or Line 13;
(iv)Line 14 and Line 6; or
(v) Line 15 (and, if line 3 (nonwithholding foreign grantor trust) is
checked, Line 6 (EIN)); and
(f)Signature and date.
(i) Determine that the certifications attested under penalties of
perjury have not been modified.
Step 7:FORM W-9. For accounts documented with Form W-9, inspect the Form
W-9. Determine that the following lines are completed and consistent with
each other:
(a)Name;
(b)U.S. taxpayer identification number;
(c)Part II (For U.S. payees exempt from backup withholding); and
(d)Signature and date.
(i)Determine that the certifications attested under penalties of
perjury have not been modified.
Step 8:DOCUMENTARY EVIDENCE. For accounts documented with
documentary evidence, inspect the documentary evidence. Determine:
(a)Whether the documentary evidence is one of the types listed in the
applicable Attachment to the QI Agreement,
(b)Whether it appears to be in proper form when compared to
documents of the same type listed in the Attachment,
(c)Whether it:
(i) Supports the account holder’s foreign status and, for an
account holder that claims treaty benefits, supports the
account holder’s residence in the treaty country, or
(ii) Supports the account holder’s status as a U.S. exempt
recipient.
(d)In the case of an international organization, whether the
organization is designated by executive order under 22 U.S.C. 288
through 288(f).
(e)In the case of a foreign government or foreign central bank of issue,
whether the documentary evidence supports the account holder’s
status as such.
Step 9:For each account determined to be documented under Steps 3 through 8,
examine the account opening statement, any other account documents or

17
memoranda and any correspondence associated with the account (for
purposes of this section, “the account holder’s file”). Determine:
(a)Whether the identifying information in the documentation matches
the identifying information in the account holder’s file (taking into
account any updated information that links the identifying
information in the documentation to the identifying information in
the account holder’s file),
(b)Whether, in the case of an account documented with documentary
evidence, the documentary evidence and the account holder’s file
contains only: an address at a financial institution, including a hold
mail instruction (except when the financial institution is the
beneficial owner), an in-care-of address, or a P.O. Box, and if so,
whether the QI has satisfied the additional requirements of section
5.10(B)(2)(i) of the QI Agreement.
(c)Whether the documentation or the account holder’s file shows a
U.S. mailing or residence address for the account holder or
standing instructions to pay from the account to a U.S. address or
to an account maintained in the United States, and if so, whether:
(i)The account holder is a U.S. person, or
(ii)In the case of documentary evidence, the QI has satisfied
the additional requirements of section 5.10(B)(2)(i), (ii) and
(iii) of the QI Agreement or, in the case of Forms W-8, the QI
has satisfied the additional requirements of section 1.1441-
7(b)(5) of the regulations.
(d)For accounts where the beneficial owner has claimed treaty
benefits, whether the documentation or the account holder’s file
shows a residence address or mailing address, or a P.O. Box, in-
care-of address or an address at a financial institution, including a
hold mail instruction (except when the financial institution is the
beneficial owner), that is not in the applicable treaty country, or
standing instructions to pay from the account to an address outside
the treaty country or to an account maintained outside the treaty
country, and if so, whether:
(i)In the case of documentary evidence, the QI has satisfied
the additional requirements of section 5.10(B)(3) of the QI
Agreement; or
(ii)In the case of Forms W-8, the QI has satisfied the additional
requirements of section 1.1441-7(b)(6) of the regulations.
(e)Include in the category of accounts with no documentation
(AG10.03(A)(5).1 Step 2(g)) all accounts:
(i)That are not documented with Forms W-8BEN, W-8EXP, W-
8IMY, W-8ECI, W-9 or documentary evidence that is listed in
the applicable Attachment to the QI Agreement, and
(ii)That are documented with Forms W-8 or documentary
evidence that is inadequate after applying the additional
requirements of AG10.03(A)(5).1 Step 9(b)-(d).

18
Step 10(a) Identify all indirect account holders for which recipient specific
reporting is required under section 8.02(B) and (C) or section 8.04 of the QI Agreement,
or use the same sample of indirect account holders selected under AG 10.03(A)(4).1
Step 7.
(b)From those indirect account holders, segregate the indirect account
holders that are not U.S. non-exempt recipients.
(c) Inspect the documentation for each indirect account holder
segregated in Step 10(b) to determine whether the documentation
validity standards of section 5.03(C) of the QI Agreement are
satisfied by performing the procedures under AG 10.03(A)(5) with
the following modifications:
(i) Part II of the Form W-8BEN is not complete unless line 9b
and line 6 are completed, except in the case of a claim of
treaty benefits for income from a marketable security.
(ii) Documentary evidence establishing entitlement to treaty
benefits must be documentary evidence described in section
5.03(A)(3) of the QI Agreement. Also, except in the case of
income from a marketable security, a TIN is required.
(iii) Documentary evidence for purposes other than establishing
entitlement to treaty benefits must be documentary evidence
described in Treas. Reg. 1.1441-1(c)(17).
Step 11:For indirect account holders, the external auditor must apply Steps 1
through 9.
10.03(A)(5).2. Documentation Validity Report (Foreign Persons and U.S. Exempt
Recipients). The external auditor must specifically report:
Report 1:The number of accounts identified or selected under Step 1.
Report 2:The number of accounts segregated under Step 2.
Report 3:The number of Forms W-8BEN inspected under Step 3(a) and the number
of Forms W-8BEN that did not satisfy the criteria under that section.
Report 4:The number of Forms W-8BEN inspected under Step 3(b) and the
number of Forms W-8BEN that did not satisfy the criteria under that
section.
Report 5:The number of Forms W-8EXP inspected under Step 4 and the number of
Forms W-8EXP that did not satisfy the criteria under that section.
Report 6:The number of Forms W-8ECI inspected under Step 5 and the number of
Forms W-8ECI that did not satisfy the criteria under that section.
Report 7:The number of Forms W-8IMY inspected under Step 6 and the number of

19
Forms W-8IMY that did not satisfy the criteria under that section.
Report 8:The number of Forms W-9 inspected under Step 7 and the number of
Forms W-9 that did not satisfy the criteria under that section.
Report 9:The number of accounts:
(a) Documented with documentary evidence inspected under Step 8;
(b) Reviewed under Step 8 that did not satisfy criteria (a) or (b) of that
section;
(c) Reviewed under Step 8 that satisfy the criteria of either section
(c)(i) or (ii);
(d) Reviewed under Step 8 that did not satisfy the criteria of either (c)(i)
or (ii); and
(e) Described in each of (d) and (e) of Step 8 and the number of
accounts that did not satisfy the criteria of (d) and (e) of Step 8.
Report 10:The number of accounts:
(a) That did not satisfy the criteria of Step 9(a);
(b) Described in Step 9(b) and the number of accounts that did not
satisfy the additional criteria of that step;
(c) Described in Step 9(c), the number of accounts described in (c)(i)
of that step, and the number of accounts that did not satisfy (c)(ii) of
that step; and
(d) Described in Step 9(d) and the number of accounts that did not
satisfy the criteria of (d)(i) or (ii) of that step.
Report 11:The number of accounts described in each of (i) and (ii) of Step 9(e).
Report 12:For indirect account holders, the external auditor must separately
complete Report 1 through 11.
QI Agreement Sec. 10.03(A)(6). Review accounts, using a valid sample of U.S.
non-exempt recipient account holders, to determine if QI is obtaining Forms W-9
from those customers whose identity is not prohibited by law from disclosure,
and that QI is transmitting those forms to a withholding agent to the extent QI
does not assume primary Form 1099 reporting and backup withholding
responsibility with respect to reportable amounts and, if applicable, designated
broker proceeds;
Audit Guidance 10.03(A)(6):
10.03(A)(6).1. Review of Documentation Validity (Disclosed U.S. Non-exempt
Recipients) The external auditor must:
Step 1:Identify all accounts covered by the QI Agreement that are held by direct
account holders that are U.S. non-exempt recipients, or select a valid

20
sample of such accounts in accordance with AG 10.04.
Step 2:From those accounts, segregate the accounts of those U.S. non-exempt
recipients whose identity is not prohibited by law from disclosure, including
the accounts of U.S. non-exempt recipients that have waived the
prohibitions against disclosure.
Step 3:Obtain copies of the QI’s Forms W-8IMYand inspect them to determine
whether the QI has assumed primary Form 1099 and backup withholding
responsibility. From the accounts segregated in Step 2, segregate the
accounts of U.S. non-exempt recipients for which the QI has not assumed
primary Form 1099 reporting and backup withholding responsibility.
Step 4:From the accounts segregated in Step 3, segregate the accounts
documented with Form W-9 and determine that each Form W-9 satisfies
the criteria of AG10.03(A)(5).1 Step 7.
Step 5:From the accounts segregated in Step 3, segregate the accounts that are
not documented with Form W-9 and the accounts for which the Forms W-
9 did not satisfy the criteria of AG10.03(A)(5).1 Step 7.
Step 6:Obtain the withholding statements associated with QI’s Forms W-8IMY.
Step 7:For each Form W-9 that satisfies the criteria of AG10.03(A)(5).1 Step 7,
match the name and TIN on the Form W-9 to the name and TIN on the
withholding statement.
Step 8:For each account segregated in Step 5, match the name, and (if provided)
address and TIN of the U.S. non-exempt recipient to the name, address
and TIN on the withholding statement.
Step 9:(a)Identify all accounts covered by the QI Agreement for which
recipient specific reporting is required under section 8.02(B) and
(C) or section 8.04 of the QI Agreement.
(b)Identify the indirect account holders holding through those
accounts, or use the same sample selected under AG 10.03(A)(4).1
Step 7.
(c)Segregate the indirect account holders that are U.S. non-exempt
recipients.
(d) Apply Steps 2 through 8.
10.03(A)(6).2. Documentation Validity (U.S. Non-exempt Recipients) Report. The
external auditor must specifically report:
Report 1:The number of accounts segregated under each of Steps 1, 2, 3, 4, and 5.
Report 2:The number of accounts that did not satisfy the criteria of Steps 7 and 8.

21
Report 3:For indirect account holders, the external auditor must report:
(a)The number of indirect account holders identified and segregated
under Step 9;
(b)The number of indirect account holders identified and segregated
under Steps 2 through 5; and
(c)The number of indirect account holders that did not satisfy the
criteria of Steps 7 and 8.
QI Agreement Sec. 10.03(A)(7). Review accounts, using a valid sample of U.S.
non-exempt recipient account holders whose identity and account information is
prohibited by law, including by contract, from disclosure, to verify that–
(i) Such accounts exist in only rare and unusual circumstances (and detailing in
the audit report the nature of such circumstances); and
(ii) The procedures of section 6.04 have been, and are being, followed.
Audit Guidance 10.03(A)(7):
10.03(A)(7).1. Account Review of U.S. Non-exempt Recipients (Disclosure Prohibited).
The external auditor must:
Step 1:Identify all accounts covered by the QI Agreement that are held by direct
account holders that are U.S. non-exempt recipients, or use the same
sample selected for AG 10.03(A)(6).
Step 2:From those accounts, segregate the accounts of those U.S. non-exempt
recipients whose identity is prohibited by law from disclosure, excluding
the accounts of U.S. non-exempt recipients that have waived the
prohibitions against disclosure.
Step 3:From the accounts segregated in Step 2, segregate the accounts opened
by U.S. non-exempt recipients on or after January 1, 2001.
Step 4:Obtain a letter from the responsible party explaining why the accounts in
section 10.07(A)(7).1 Step 2 exist and how the procedures of section 6.04
of the QI Agreement have been and are being applied.
10.03(A)(7).2. Account Review of U.S. Non-exempt Recipients (Disclosure Prohibited)
Report. The external auditor must specifically:
Report 1:Report the number of accounts segregated under Steps 1, 2, and 3; and
Report 2:Include a copy of the letter obtained under Step 4.

22
QI Agreement Sec. 10.03(A)(8). Review QI’s agreements with its PAIs to ensure
that the obligations imposed on the PAIs are identical to the obligations imposed
on QI under this Agreement, except as otherwise provided in section 4.02.
Audit Guidance 10.03(A)(8):
10.03(A)(8).1. Review PAI Obligations. The external auditor must:
Step 1:Obtain copies of the QI Agreement and all PAI agreements.
Step 2:Inspect each PAI agreement to determine whether:
(a)The PAI agreement covers all offices of the PAI located in a country
listed in Appendix A of the QI Agreement;
(b) The PAI agreement provides that the QI include all reportable
payments made by the PAI in the QI’s Forms 945 and 1099 and
1042 and 1042-S;
(c) The PAI agreement requires the PAI to provide the QI with all
information necessary for the QI to meet its obligations under the
QI Agreement;
(d) There are not any provisions limiting the PAI’s liability for
underwithholding or reporting due to the PAI’s failure to perform its
obligations under the PAI agreement;
(e) The PAI agreement requires the PAI to disclose U.S. non-exempt
recipients to the same extent as the QI Agreement;
(f) The PAI agreement permits the PAI to assume primary withholding
responsibility or primary Form 1099 reporting and backup
withholding responsibility;
(g) The PAI is subject to audit procedures that are identical to those
applicable to the QI under the QI Agreement and that the PAI’s
designated auditor is listed in Appendix B of the QI Agreement or
has been approved by the IRS for that PAI; and
(h) The PAI is subject to all other obligations of the QI under the QI
Agreement.
Step 3:Obtain a copy of the notice identifying each PAI filed by the QI with the
IRS described in section 4.01(B) of the QI Agreement and determine that
the date of filing for each notice precedes the date of the first payment
received by the PAI from the QI pursuant to the PAI agreement.
Step 4:Obtain a copy of the PAI’s W-8IMY provided to the QI and determine that
it satisfies the criteria of AG10.03(A)(5).1 Step 6.
10.03(A)(8).2. PAI Obligations Report. The external auditor must specifically report:
Report 1:The number of PAI agreements;
Report 2:The number of PAI agreements that did not satisfy the criteria of each of

23
Step 2(a) through (h); and
Report 3:The number of PAI agreements that did not satisfy the criteria of Step 3.
Report 4:The number of Forms W-IMY obtained in Step 4 and the number of Forms
W-8IMY that did not satisfy the criteria of Step 6.
QI Agreement Sec. 10.03(A)(9). State in its external audit report if the auditor is
aware that QI is in material violation or is under investigation for violation of any
of the know-your-customer rules, practices, or procedures applicable to the
offices audited.
Audit Guidance 10.03(A)(9):
10.03(A)(9).1. Knowledge of KYC Investigations. The external auditor must:
Step 1:Obtain a letter signed by the responsible party and by the QI’s legal
counsel stating whether either is aware that the QI is in material violation
or is under investigation for violation of any of the know-your-customer
rules, practices, or procedures applicable to all branches of the QI located
in countries named in the Attachments to the QI Agreement.
10.03(A)(9).2. KYC Investigations Report. The external auditor must specifically report:
Report 1:Whether, based on the information in the letter described in Step 1 and on
its own information, the external auditor is aware of any such material
violations or investigations and, if so, identify them.
Report 2:The external auditor must attach to its report:
(a)A copy of the letter described in Step 1.
QI Agreement Sec. 10.03(A)(10). State in its external audit report if the auditor is
aware that QI removes U.S. non-exempt recipients from accounts covered by this
Agreement for the purpose of circumventing the Form 1099 reporting and backup
withholding provisions of this Agreement.
Audit Guidance 10.03(A)(10):
10.03(A)(10).1. Review for Removal of U.S. Non-exempt Recipients. The external
auditor must:
Step 1:Identify all accounts covered by the QI Agreement that are held by direct
account holders that are U.S. non-exempt recipients, or use the sample
selected in AG 10.03(A)(6).1 Step 1.

24
Step 2:Inspect account closing records to determine whether the account was
closed during the audit year.
Step 3:Inspect account transfer records to determine whether any assets have
been transferred to another account held by the same account holder
during the audit year.
10.03(A)(10).2. Removal of U.S. Non-exempt Recipients Report. The external auditor
must specifically report:
Report 1:The number of accounts covered by the QI Agreement held by U.S. non-
exempt recipients that were closed during the audit year.
Report 2:Whether the external auditor is aware of any accounts with the QI not
covered by the QI Agreement held by the same U.S. non-exempt
recipients that were opened during the audit year, and if so, the number of
such accounts.
Report 3:Whether the external auditor is aware of any transfers of assets from an
account covered by the QI Agreement held by a U.S. non-exempt
recipient to another account with the QI not covered by the QI Agreement
held by the same U.S. non-exempt recipient, and if so, the number of
accounts to which such transfers were made.
Report 4:Whether the external auditor is aware that the QI removes U.S. non-
exempt recipients from accounts covered by the QI Agreement for the
purpose of circumventing the Form 1099 reporting and backup withholding
provisions of the QI Agreement.
QI Agreement Sec. 10.03(B)(1). Withholding Rate Pools. The external auditor
must–
(1) Verify that QI has training materials, manuals, and directives that instruct the
appropriate QI employees how to determine withholding rate pools based on
documentation and the presumption rules;
Audit Guidance 10.03.(B)(1):
10.03(B)(1).1. Review of Withholding Rate Pool Training Materials. The external
auditor must:
Step 1:Identify the QI’s employees that are responsible for determining
withholding rate pools.
Step 2:Collect any written training materials, manuals, and directives used by
those employees.

25
Step 3:Inspect the written training materials, manuals, and directives to determine
whether they contain specific instructions on how to determine withholding
rate pools based on documentation and the presumption rules.
10.03(B)(1).2. Withholding Rate Pool Training Materials Report. The external auditor
must specifically report:
Report 1:Whether the QI has written training materials, manuals, and directives that
contain specific instructions on how to determine withholding rate pools
based on documentation and the presumption rules.
QI Agreement Sec. 10.03(B)(2). Interview employees responsible for determining
withholding rate pools to ascertain if they are adequately trained to determine
those pools and that they follow adequate procedures for determining those
pools;
Audit Guidance 10.03(B)(2):
10.03(B)(2).1. Review of Personnel Training (Withholding Rate Pool). The external
auditor must:
Step 1:Identify the QI’s employees that are responsible for determining
withholding rate pools and select representative employees for interview.
Step 2:Ask the selected employees whether they have received any formal or
informal training on determining withholding rate pools and if so, ask the
selected employees to describe the training, when it occurred, and how
much time was devoted to it.
Step 3:Ask the selected employees how an account is assigned to withholding
rate pools.
10.03(B)(2).2. Personnel Training (Withholding Rate Pool) Report. The external auditor
must report:
Report 1:The number of employees interviewed.
Report 2:The number of employee responses that indicate that the employee has
not received training on how to determine withholding rate pools.
Report 3:The number of employee responses that indicate that accounts are
assigned to withholding rate pools without routinely referring to
documentation, presumptions, the type of income earned, and the
withholding rate applied.

26
QI Agreement Sec. 10.03(B)(3). Review QI’s procedures for preparing the
withholding statements associated with QI’s Forms W-8IMY and verify that the
withholding statements provided to withholding agents convey complete and
correct information on a timely basis;
Audit Guidance 10.03(B)(3):
10.03(B)(3).1. Review of Withholding Statements. The external auditor must:
Step 1:Identify the QI’s employees that are responsible for preparing withholding
statements and providing them to withholding agents, and select
representative employees for interview.
Step 2:Ask the selected employees how withholding statements are prepared and
provided to withholding agents.
Step 3:Obtain copies of the withholding statements provided to withholding
agents and records of payments from the withholding agents to the QI.
Step 4:Inspect the withholding statements to determine whether they are
consistent with the payment records.
Step 5:Inspect the withholding statements to determine whether the withholding
statement information was updated and provided to the withholding agent
before the withholding agent made payments.
10.03(B)(3).2. Withholding Statement Report. The external auditor must report:
Report 1:The number of employees interviewed.
Report 2:The number of employee responses that indicate that withholding
statement information was not routinely reviewed, updated and provided
to the withholding agent before the withholding agent made payments.
Report 3:The number of payments with respect to which the withholding statements
were inconsistent.
Report 4:The number of payments with respect to which the withholding statement
information was not updated or provided to the withholding agent before
payment.
QI Agreement Sec. 10.03(B)(4). Perform test checks, using a valid sample of
account holders assigned to each withholding rate pool, and cross check that
assignment against the documentation provided by, or presumption rules that
apply to, the account holder, the type of income earned, and the withholding rate
applied;

27
Audit Guidance:
10.03(B)(4).1. Review Withholding Rate Pool Classification. The external auditor must:
Step 1:Identify all accounts covered by the QI Agreement that are held by direct
account holders that are not U.S. non-exempt recipients, or use the same
sample selected under AG10.03(A)(4).1 Step 1.
Step 2:Obtain copies of the QI’s Forms W-8IMYand inspect them to determine
whether the QI has assumed primary NRA withholding responsibility. For
accounts covered by the QI Agreement for which the QI has not assumed
such responsibility, the external auditor must perform the procedures
described below.
Step 3:Obtain:
(a)The account statements and records that show the investment and
the type of income earned and the amounts of withholding; and
(b)The account records that show how the QI has classified the type
of income and withholding rate for purposes of its withholding rate
pools.
Step 4:(a)Based on the records described in Step 3(a), classify the accounts
according to the type of income paid to each account. An account
to which more than one type of income has been paid must be
placed into multiple income classifications.
(b)Based on the documentation for the account (after the
determinations under AG 10.03(A)(4) and (5) have been made) and
applicable presumptions under section 5.13 of the QI Agreement,
determine the withholding rate and further classify the accounts
within an income classification according to withholding rate. An
account within an income classification to which more than one
withholding rate has been applied must be placed into multiple
withholding rate classifications.
Step 5:Determine whether the classifications under Step 4(a) and (b) match the
QI’s classifications in the account records described in Step 3(b).
Step 6:(a)Identify all accounts covered by the QI Agreement for which
recipient specific reporting is required under section 8.02(B) and
(C) or section 8.04 of the QI Agreement;
(b) Identify the indirect account holders holding through those
accounts, or use the same sample selected under AG 10.03(A)(4).1
Step 7.
(c) Segregate the indirect account holders that are not U.S. non-
exempt recipients.

28
(d)Apply Steps 2 through 5 to those indirect account holders.
10.03(B)(4).2. Withholding Rate Pool Classification Report. The external auditor must
specifically report:
Report 1:The number of accounts identified or selected as a sample in Step 1.
Report 2:The number of accounts in Report 1 classified under Step 4(a) and (b).
Report 3:The number of accounts in Report 1 for which the QI’s classifications do
not match the account records under Step 5.
Report 4:For indirect account holders,
(a)The number of indirect account holders under Step 6(a) through (c);
and
(b)The number of indirect account holders under Step 4(a) and (b) and
Step 5.
QI Agreement Sec. 10.03(B)(5). Perform test checks, using a valid sample of
accounts of U.S. non-exempt recipients, to verify that appropriate withholding
rate pools are established for U.S. non-exempt recipients; and
Audit Guidance 10.03(B)(5):
10.03(B)(5).1. Review of Withholding Rate Pool Classification (U.S. Non-exempt
Recipients). The external auditor must:
Step 1:Identify all accounts covered by the QI Agreement that are held by direct
account holders that are U.S. non-exempt recipients, or use the same
sample selected under AG 10.03(A)(6).1 Step 1.
Step 2:From those accounts, segregate the accounts of those U.S. non-exempt
recipients whose identity is not prohibited by law from disclosure, including
the accounts of U.S. non-exempt recipients that have waived the
prohibitions against disclosure.
Step 3:Obtain copies of the QI’s Forms W-8IMYand inspect them to determine
whether the QI has assumed primary Form 1099 and backup withholding
responsibility. From the accounts segregated in Step 2, segregate the
accounts of U.S. non-exempt recipients for which the QI has not assumed
primary Form 1099 reporting and backup withholding responsibility.
Step 4:Obtain:
(a) The account statements and records that show the investment and
the type of income earned and the amounts backup withheld (if
any); and

29
(b) The withholding statements associated with the Forms W-8IMY.
Step 5:Based on the records described in Step 4(a), classify the pools within
each account according to the type of reportable payment made to each
account. The external auditor must apply this Step 5 and Step 6 whether
or not the QI is using the alternative procedure contained in section
6.03(B) of the QI Agreement.
Step 6:Determine whether the classifications and amounts of income and
amounts backup withheld (if any) under Step 5 match classifications and
amounts in the withholding statements described in Step 4(b).
Step 7:For indirect account holders:
(a) Identify all accounts covered by the QI Agreement for which
recipient specific reporting is required under section 8.02(B) and
(C) or section 8.04 of the QI Agreement;
(b) Identify the indirect account holders holding through those
accounts, or use the same sample selected under AG 10.03(A)(4).1
Step 7.
(c) From the indirect account holders identified or selected in (b),
segregate the indirect account holders that are U.S. non-exempt
recipients.
(d) Apply Steps 2 through 6 to the indirect account holders segregated
in (c).
10.03(B)(5).2. Withholding Rate Pool Classification (U.S. Non-exempt Recipient)
Report. The external auditor must specifically report:
Report 1:The number of accounts segregated under Steps 1, 2, and 3.
Report 2:The number of accounts for which the classifications and amounts do not
match the classifications and amounts in the QI’s withholding statements.
Report 3:For indirect account holders,
(a) The number of indirect account holders under Step 7(a) through (c);
(b) The number of indirect account holders under Step 2; and
(c) The number of indirect account holders for which the classifications
and amounts do not match the classifications and amounts in the
QI’s withholding statements.
QI Agreement Sec. 10.03(B)(6). Verify, if QI is using the alternative procedure for
U.S. non-exempt recipients contained in section 6.03(B) of this Agreement, that QI
is providing sufficient and timely information to withholding agents that allocates

30
reportable payments to U.S. non-exempt recipients.
Audit Guidance 10.03(B)(6):
10.03(B)(6).1. Review of Alternative Procedure. The external auditor must:
Step 1:Inspect the withholding statements associated with the Forms W-8IMY to
determine whether the allocation information for each account was
provided to the withholding agent no later than January 15 of the year
following the year of payment.
10.03(B)(6).2. Alternative Procedure Report. The external auditor must specifically
report:
Report 1:The number of accounts for which allocation information was not provided
to the withholding agent by January 15 of the year following the year of
payment.
QI Agreement Sec. 10.03(C)(1). Withholding Responsibilities. The external
auditor must–
(1) To the extent QI has assumed primary NRA withholding responsibility,
perform test checks, using a valid sample of foreign account holders, to verify
that QI is withholding the proper amounts;
Audit Guidance 10.03(C)(1):
10.03(C)(1).1. Review of Withholding (NRA Withholding Assumed). The external
auditor must:
Step 1:Identify all accounts covered by the QI Agreement that are held by direct
account holders that are not U.S. non-exempt recipients, or use the same
sample selected under AG10.03(A)(4).1 Step 1.
Step 2:Obtain copies of the QI’s Forms W-8IMYand inspect them to determine
whether the QI has assumed primary NRA withholding responsibility. For
accounts covered by the QI Agreement for which the QI has assumed
such responsibility, the external auditor must perform the procedures
described below.
Step 3:Obtain the account statements and records that show the investment and
the type of income earned and the amounts of withholding.
Step 4:(a) Based on the records described in Step 3, classify the accounts
according to the type of income paid to each account. An account to
which more than one type of income has been paid must be placed into

31
multiple income classifications.
(b) Based on the documentation for the account (after the determinations
under AG 10.03(A)(4) and (5) have been made), determine the
withholding rate and further classify the accounts within an income
classification according to withholding rate. An account within an income
classification to which more than one withholding rate has been applied
must be placed into multiple withholding rate classifications.
Step 5:For each account, determine the amount (if any) by which the amount of
withholding based on the classifications under Step 4(a) and Step 4(b)
exceeds the amount withheld by the QI.
Step 6:(a) Identify all accounts covered by the QI Agreement for which
recipient specific reporting is required under section 8.02(B) and
(C) or section 8.04 of the QI Agreement;
(b)Identify the indirect account holders holding through those
accounts, or use the same sample selected under AG 10.03(A)(4).1
Step 7.
(c)From the indirect account holders identified or selected in (c),
segregate the indirect account holders that are not U.S. non-
exempt recipients.
(d)Obtain copies of the QI’s Forms W-8IMY and inspect them to
determine whether the QI has assumed primary NRA withholding.
For accounts covered by the QI Agreement for which the QI has
assumed such responsibility, the external auditor must perform the
procedures described below.
(e)Complete Steps 4(a) through (c) and Step 5.
10.03(C)(1).2. Withholding (NRA Withholding Assumed) Report. The external must
report:
Report 1:The amount of underwithholding for each account examined within each
withholding rate classification in Step 1.
Report 2:The amount of underwithholding for each indirect account holder
examined within each withholding rate classification.
QI Agreement 10.03(C)(2). To the extent QI has not assumed primary NRA
withholding responsibility, verify that QI has fulfilled its responsibilities under
section 3.02 of this Agreement;
Audit Guidance 10.03(C)(2):
10.03(C)(2).1. Review of Responsibilities under Section 3.02. The external auditor
must:

32
Step 1:For each account required to be reported under AG10.03(B)(4).2 Report 3
and each indirect account holder required to be reported under
AG10.03(B)(4).2 Report 4(b), determine the amount (if any) by which the
amount of withholding based on the classifications under AG10.03(B)(4).1
Step 4(a) and Step 4(b) exceeds the amount withheld.
10.03(C)(2).2. Responsibilities under Section 3.02 Report. The external must report:
Report 1:The amount of under withholding for each account and each indirect
account holder within each withholding classification.
QI Agreement 10.03(C)(3). To the extent QI has assumed primary Form 1099
reporting and backup withholding responsibility, perform test checks using a
valid sample of U.S. non-exempt recipient account holders to verify that QI
backup withheld when required;
Audit Guidance 10.03(C)(3):
10.03(C)(3).1. Review of Backup Withholding (Responsibilities Assumed). The
external auditor must:
Step 1:Identify all accounts covered by the QI Agreement that are held by direct
account holders that are U.S. non-exempt recipients, or use the same
sample selected under AG 10.03(A)(6).1 Step 1.
Step 2:From the accounts identified or selected in Step 1, segregate the accounts
of those U.S. non-exempt recipients whose identity is not prohibited by law
from disclosure, including the accounts of U.S. non-exempt recipients that
have waived the prohibitions against disclosure.
Step 3:Obtain copies of the QI’s Forms W-8IMY and inspect them to determine
whether the QI has assumed primary Form 1099 and backup withholding
responsibility. From the accounts segregated in Step 2, segregate the
accounts of U.S. non-exempt recipients for which the QI has assumed
primary Form 1099 reporting and backup withholding responsibility.
Step 4:Obtain the account statements and records that show the investment and
the type of income earned and the amounts backup withheld (if any).
Step 5:Based on the records described in AG10.03(A)(6).1, determine whether
account holder’s file contains the account holder’s TIN.
Step 6:If the account holder’s file does not contain the account holder’s TIN,
determine whether the QI imposed backup withholding on reportable
payments at the correct rate.

33
Step 7:(a)Identify all accounts covered by the QI Agreement for which
recipient specific reporting is required under section 8.02(B) and
(C) or section 8.04 of the QI Agreement;
(b)Identify the indirect account holders holding through those
accounts, or use the same sample selected under AG 10.03(A)(4).1
Step 7;
(c)From the indirect account holders in (b), segregate the indirect
account holders that are U.S. non-exempt recipients.
(d) Apply Steps 2 through 6 to those indirect account holders.
10.03(B)(5).2. Backup Withholding Report (Responsibilities Assumed). The external
auditor must specifically report:
Report 1:The amount of underwithholding for each account and each indirect
account holder that does not contain the account holder’s TIN.
QI Agreement Sec. 10.03(C)(4). To the extent QI has not assumed primary Form
1099 reporting and backup withholding responsibility, perform test checks using
a valid sample of U.S. non-exempt account holders to verify that QI has fulfilled
its backup withholding responsibilities under sections 3.04, 3.05 and 3.06 of this
Agreement;
Audit Guidance 10.03(C)(4):
10.03(C)(4).1 Backup Withholding Review (Responsibilities Not Assumed). The
external auditor must:
Step 1:For each account required to be reported under AG10.03(B)(5).2 Report 2
and each indirect account holder required to be reported under
AG10.03(B)(5).2 Report 3(c), determine whether backup withholding was
imposed at the correct amount.
10.03(C)(4).2. Backup Withholding Report (Responsibilities Not Assumed) The external
must report:
Report 1:The amount of underwithholding for each account and each indirect
account holder for which backup withholding is required.
QI Agreement Sec. 10.03(C)(5). Review the accounts of U.S. non-exempt
recipient account holders whose identity is prohibited by law, including by
contract, from disclosure and verify that QI or another payor is backup
withholding on reportable payments made to such account holders;
Audit Guidance 10.03(C)(5):

34
10.03(C)(5).1. Review of Backup Withholding on Reportable Payments (Disclosure
Prohibited). The external auditor must:
Step 1:For each account required to be reported under AG10.03(A)(7).2 Report
2, determine whether backup withholding was imposed at the correct
amount.
10.03(C)(5).2. Backup Withholding on Reportable Payments (Disclosure Prohibited)
Report. The external must report:
Report 1:The amount of under withholding for each account for which backup
withholding is required.
QI Agreement Sec. 10.03(C)(6). Review a valid sample of accounts of U.S. non-
exempt recipient account holders and determine if assets that generate or could
generate reportable payments are held in an account of any U.S. non-exempt
recipient account holders whose identity is prohibited by law, including by
contract, from disclosure, and ascertain the reason why such assets have not
been disposed of or the account holder disclosed;
Audit Guidance 10.03(C)(6):
10.03(C)(6).1. Review of Assets Held by U.S. Non-exempt Recipients (Disclosure
Prohibited). The external auditor must:
Step 1:For each account required to be reported under AG10.03(A)(7).2 Report
2, obtain a letter from the responsible party explaining the reason why
assets that generate or could generate reportable payments have not
been disposed of or the account holder disclosed.
10.03(C)(6).2. Assets Held by U.S. Non-exempt Recipients (Disclosure Prohibited)
Report. The external auditor must:
Report 1: Include a copy of the letter obtained in Step 1 with its report.
QI Agreement Sec. 10.03(C)(7). Verify that amounts withheld were timely
deposited in accordance with section 3.08 of this Agreement.
Audit Guidance 10.03(C)(7):
10.03(C)(7).1. Review of Timely Deposits. The external auditor must:
Step 1:Obtain the QI’s records of payments covered by the QI Agreement, the
QI’s Form 1042 and the QI’s records of tax deposits.

35
Step 2:Determine that the payment dates timely correspond with the deposit
dates for any required deposits.
10.03(C)(7).2. Timely Deposits Report. The external auditor must report:
Report 1:Any payment dates that do not timely correspond with deposit dates.
QI Agreement Sec. 10.03(D)(1). Return Filing and Information Reporting. The
external auditor must–
(1) Obtain copies of original and amended Forms 1042 and Forms 945, and any
schedules, statements, or attachments required to be filed with those forms, and
determine whether the amounts of income, taxes, and other information reported
on those forms are accurate by–
(i) Reviewing work papers;
(ii) Reviewing Forms W-8IMY, together with the associated withholding
statements, that QI has provided to withholding agents;
(iii) Reviewing copies of Forms 1042-S that withholding agents have provided QI;
(iv) Reviewing account statements from withholding agents;
(v) Reviewing correspondence between QI and withholding agents; and
(vi) Interviewing personnel responsible for preparing the Forms 1042 and 945 and
the work papers used to prepare those forms.
Audit Guidance 10.03(D)(1):
10.03(D)(1).1. Review of Forms 1042 and 945. The external auditor must:
Step 1:Obtain copies of:
(a)The QI’s Forms W-8IMY and associated withholding statements,
Forms 1042 and 945, and the Forms 1042-S issued to the QI and
the Forms 1042-S filed by the QI (for PAI’s, obtain the reporting
pool information provided to its QI); and
(b)The copies of the QI’s records of payments from withholding agents
and of payments to the QI’s reporting pools, other QI’s and
withholding foreign partnerships and trusts, other recipients for
which recipient specific reporting is required under section 8.02 of
the QI Agreement, U.S. non-exempt recipients, and U.S. exempt
recipients as a class.
Step 2:Reconcile the amounts reported paid to the QI on the Forms 1042-S
issued to the QI, the amounts reported paid by the QI on the Forms 1042-

36
S filed by the QI, the amounts shown paid by the QI to U.S. non-exempt
recipients on its withholding statements and in the QI’s records of
payments, and the amounts shown paid by the QI to U.S. exempt
recipients as a class in the QI’s records of payments, and the amounts
reported on the QI’s Forms 1042 and 945.
10.03(D)(1).2. Forms 1042 and 945 Report. The external auditor must report:
Report 1:(a)The aggregate amount reported paid to the QI on the Forms 1042-
S issued to the QI;
(b)The aggregate amount reported paid by the QI on Forms 1042-S to
each reporting pool;
(c)The aggregate amount reported paid by the QI on Forms 1042-S to
other QI’s as a class;
(d)The aggregate amount reported paid by the QI on Forms 1042-S to
indirect account holders;
(e)The aggregate amount shown paid by the QI to U.S. non-exempt
recipients as a class;
(f)The aggregate amount shown paid by the QI to U.S. exempt
recipients as a class;
(g)The total amounts withheld by the QI; and
(h)The total amounts withheld by others.
Report 2:The aggregate amount of any adjustments under section 9 of the QI
agreement incorporated in each amount in Report 1.
Report 3:The aggregate amount of any other adjustments that were incorporated in
the amounts reported under Report 1 in performing the reconciliation
under Step 2.
Report 4:Attach a copy of the QI’s Form 1042.
QI Agreement Sec. 10.03(D)(2). Obtain copies of original and corrected Forms
1042-S and Forms 1099 together with the work papers used to prepare those
forms and determine whether the amounts reported on those forms are accurate
by–
(i) Reviewing the Forms 1042-S received from withholding agents;
(ii) Reviewing the Forms W-8IMY, and the associated withholding statements, that
QI has provided withholding agents;
(iii) Reviewing a valid sample of account statements issued by QI to account
holders; and
(iv) Interviewing QI’s personnel responsible for preparing the Forms 1042-S and,
if applicable, Forms 1099, and the work papers used to prepare those forms.

37
Audit Guidance 10.03(D)(2):
10.03(D)(2).1. Review of Forms 1042-S and 1099. The external auditor must:
Step 1:Obtain copies of:
(a)The QI’s records of payments from withholding agents and the QI’s
records of payments to the QI’s reporting pools and to any other
QIs (or PAIs) contained in the sample selected for AG 10.03(A)(4),
and
(b)The Forms 1042-S filed by the QI for each reporting pool and any
such QIs.
Step 2:Match the QI’s records of payments to the amounts reported for each
reporting pool and any QI’s described in Step 1(a) on the QI’s Forms
1042-S.
Step 3:Identify:
(a)All accounts covered by the QI Agreement for which recipient
specific reporting is required under section 8.02(B) and (C) or
section 8.04 of the QI Agreement; and
(b)The indirect account holders holding through those accounts, or
use the same sample selected under AG 10.03(A)(4).1 Step 7.
Step 4:Obtain copies of:
(a)The Forms 1042-S and Forms 1099 filed by the QI for each indirect
account holder;
(b)The Forms W-8IMY and associated withholding statements
applicable to each indirect account holder;
(c)The QI’s records of payments to each indirect account holder; and
(d)The documentation for each indirect account holder.
Step 5:Match the QI’s records of payments to the amounts reported for each
indirect account holder on the QI’s Forms 1042-S and 1099.
Step 6: (a)In the case of a QI that assumed primary Form 1099 and backup
withholding responsibility, identify all accounts covered by the QI
Agreement that are held by U.S. non-exempt recipients, or use the
same sample as in AG 10.03(A)(6).1 Step 1.
(b)Match the QI’s records of payments to the amounts reported
on each Form 1099 filed by the QI.
10.03(D)(2).2. Forms 1042-S and 1099 Report. The external auditor must
report:
Report 1:For each pool or QI for which the amounts paid and the amounts
reported do not match, the amounts of income reported on each

38
Form 1042-S under Step 2, and the amounts paid to each pool or
QI.
Report 2:The number of:
(a)Nonqualified intermediaries and flow through entities that are
direct account holders under Step 3(a);
(b)Indirect account holders under Step 3(b);
Report 3:The number of indirect account holders for which the payments
made do not match the payments reported on Forms 1042-S and
on Forms 1099, and for those account holders the amounts
reported on each form and the amounts paid to each indirect
account holder.
Report 4:The number of non-exempt recipients for which the payments made
do not match the payments reported on Forms 1099, and for those
accounts the amounts reported on each form and the amounts paid
to each non-exempt recipient.
QI Agreement Sec. 10.03(D)(3). Thoroughly review the statements attached
to amended Forms 1042 filed to claim a refund, ascertain their veracity, and
determine the causes of any overwithholding reported and ensure QI did
not issue Forms 1042-S to persons whom it included as part of its
collective credit or refund.
Audit Guidance 10.03(D)(3):
10.03(D)(3).1. Review of Refunds. The external auditor must:
Step 1:Obtain
(a)The QI’s amended Form 1042 (including the attached
statements), the Forms 1042-S filed by the QI, and the
Forms 1042-S issued to the QI;
(b)The QI’s records of payments from withholding agents and
the QI’s records of payments to the QI’s reporting pools; and
(c)The QI’s records of payments to the account holders who
received a refund of overwithholding from the QI.
Step 2:Inspect the QI’s records of payments to determine whether
overwithholding occurred and the amount of the overwithholding.
Step 3:Match the amount of income, withholding, and overwithholding with
the QI’s Form 1042.
Step 4:Identify the reporting pool or pools to which the overwithholding is

39
attributable and the amount of overwithholding attributable to each
pool.
Step 5:Identify the account holders who received a refund of the
overwithholding from the QI.
Step 6:Identify all Forms 1042-S filed by the QI on a recipient specific
basis.
Step 7:Match the account holders identified under Step 5 with the Forms
1042-S identified under Step 6.
10.03(D)(3).2. Refund Report. The external auditor must report:
Report 1:The total amount of overwithholding under Step 2.
Report 2:The amounts of overwithholding by each pool under Step 4.
Report 3:The number of account holders identified under Step 5.
Report 4:The number of account holders that do not match with Forms 1042-
S under Step 7.
QI Agreement Sec. 10.03(D)(4). Determine, in the case of collective credits
or refunds, that QI repaid the appropriate account holders prior to
requesting a collective refund or credit.
Audit Guidance 10.03(D)(4):
10.03(D)(4).1. Review of Account Holder Repayment Prior to Refund. The
external auditor must:
Step 1:Obtain:
(a)The QI’s amended Form 1042 (including attached
statements); and
(b)The QI’s records of payments to the account holders who
received a refund of overwithholding from the QI.
Step 2:Inspect the QI’s Form 1042 and records of payments to determine
that the dates of payments of overwithholding made to each
account holder were prior to the date of filing the Form 1042.
10.03(D)(4).2. Account Holder Repayment Prior to Refund Report: The external
auditor must report:
Report 1:The amount of overwithholding paid to each account holder that

40
occurred after the date of filing the Form 1042.
QI Agreement Sec. 10.03(E). Change in Circumstances. The external
auditor must verify that in the course of the audit it has not discovered any
significant change in circumstances, as described in section 11.03(A), (D),
or (E) of this Agreement.
Audit Guidance 10.03(E):
10.03(E).1. Review of Change in Circumstance. The external auditor must:
Step 1:Obtain a letter signed by the responsible party and by the QI’s legal
counsel stating:
(a)Whether there has been an acquisition of all, or substantially
all, of the QI’s assets in any transaction in which the QI is not
the surviving legal entity;
(b)Any material changes in the know-your-customer rules and
procedures set forth in the Attachments to the QI
Agreement; and
(c)Any significant changes in the QI’s business practices that
affect the QI’s ability to meet its obligations under the QI
Agreement.
10.03(E).2. Change in Circumstance Report. The external auditor must report a
change in circumstances by:
Report 1:Attaching a copy of the letter under Step 1.
QI Agreement Sec. 10.04. Use of Statistical Sampling If the external
auditor is required to make a determination based on a valid sample of
accounts, it shall use a statistical sampling whenever an examination of all
of accounts within a particular class of accounts would be prohibitive in
terms of time and expense. If it is reasonable to examine all accounts in
connection with a particular issue, statistical sampling techniques shall not
be used. If statistical sampling techniques are required, the external
auditor must determine a sample size that provides a 95 percent
confidence level. If statistical sampling has been used and the auditor
determines that underwithholding has occurred with respect to the
sampled accounts, the IRS will determine the total amount of
underwithheld tax by projecting the underwithholding over the entire
population of similar accounts. For this purpose, QI agrees to provide the
IRS with the information (e.g., number of accounts and amounts) required
to project the underwithholding. QI shall either report and pay, in
accordance with section 9.06 of this Agreement, the underwithheld tax
determined under the IRS projection or propose another amount of
underwithholding based on a more accurate population, a more accurate

41
projection technique, or an examination of all similar accounts. If the IRS
does not agree with the amount proposed by QI, the IRS shall assess a tax
by making a return under section 6020 of the Code.
Audit Guidance 10.04:
10.04.1. When to Use Statistical Sampling. The external auditor is permitted to
select three statistical samples for use in performing the procedures in AG10.03.
These are the samples permitted to be selected in:
(a)AG10.03(A)(4).1 Step 1 (a sample of all accounts covered by the
QI Agreement that are held by direct account holders that are not
U.S. non-exempt recipients);
(b) AG10.03(A)(6).1 Step 1 (a sample of all accounts covered by the
QI Agreement that are held by direct account holders that are U.S.
non-exempt recipients); and
(d) AG 10.03(A)(4).1 Step 7 (a sample of the indirect account holders
for which recipient specific reporting is required).
The external auditor may always elect to conduct a 100 percent review instead of
selecting a statistical sample. The statistical sampling methodology used in
these guidelines cannot be used for any other tax purpose.
10.04.2. Sample Size. The external auditor is permitted to select a sample only if
there are more than 50 accounts from which to select a sample in 10.04.1(a) or
(b) or more than 50 indirect account holders from which to select a sample in
10.04.1(c).
10.04.3. Sample Formula. The external auditor must determine the sample size
by using the following formula:
t
2
PQ
d
2
Sample Size =
___________________________
1

+

_1__

(

t
2
PQ _
1)
N
d
2
where t= 1.96 (confidence coefficient at 95 percent two sided)
P= 5 percent (error rate)
Q= 1-P
d = 2 percent (precision level)
N= total population
The sample size will not exceed 456 (as determined by the formula above) or 50

42
percent of the population, whichever is smaller. In no event may the sample size
be lower than 50.
10.04.4. Number Generator. The external auditor must select the sample by
using a random number generator.
10.04.5. Records of Sampling Methodology. The external auditor is required to
record its statistical sampling procedures and to maintain the ability to
reconstruct the sample.
10.04.6. Alternative Sampling Methods. Multistage, cluster, stratification or other
sampling methodology may be used with the consent of the IRS. The sample
size may be adjusted to achieve a 5 percent error rate, a 2 percent precision
level and a 95 percent two sided confidence level. See AG 10.03.2 (Submission
of Audit Plan).
10.04.7. Projection. If the external auditor has used a sample and has
determined that underwithholding under AG 10.03(C)(1), (2), (3), (4) or (5) has
occurred, then the IRS will determine the total amount of underwithheld tax by
projecting the underwithholding over the entire population of similar accounts
using a projection method that is consistent with the sampling method used. For
example, if a simple unrestricted random sample as provided in these guidelines
has been used, then the IRS may determine the total amount of underwithheld
tax by projecting the underwitholding over the entire population of similar
accounts as follows:
(a)Dividing the amount of underwithholding for the sample by the
number of accounts (or indirect account holders) in the sample; and
(b) Multiplying the result in (a) by the total number of accounts in the
population.
(c) If the external auditor has used a sample and has determined that
overwithholding has occurred, the QI may not project the amount of
overwithholding in order to claim a refund. For samples of direct
account holders, the IRS will offset any underwithholding in the
sample against any overwithholding in the sample, provided that
the QI enters into a closing agreement (Form 906) that QI will not
file a claim for refund for any overwithholding that the external
auditor has discovered.
(d) The IRS will determine whether it is appropriate to project an
amount of underwithholding when the facts show that:
(i) The amount is the consequence of an identified error; and
(ii)The error was not repeated throughout the population over
which it would be projected.
(e) The QI may propose that it is not appropriate to project an amount

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of underwithholding when the QI shows that:
(i)The underwithholding was the consequence of an identified
error,
(ii)The QI has corrected the error in the sample in which it was
discovered,
(iii)The QI has corrected the error throughout the population
from which the sample was drawn,
(iv)The QI has established safeguards to prevent repetition of
the error in the future, and
(v) As a consequence of the correction, the facts as corrected
show that there was actually no underwithholding during the
audit year. (Penalties and interest may nevertheless be
imposed.)
The QI may also propose an alternative projected underwithholding tax
adjustment based on facts and circumstances. See Audit meeting in
AG10.06 Step 3 for procedures for making such proposals.
Sec. 10.05. External Auditor’s Report. Upon completion of the audit of QI
and any PAI, the external auditor shall issue a report, or reports, of audit
findings directly to the IRS by sending the original report to the IRS at the
address set forth in section 12.06 of this Agreement by June 30 following
the calendar year being audited, or if that date falls on a Saturday or
Sunday, the next U.S. business day. The report must be in writing, in
English, and currency amounts must be stated in U.S. dollars. The report
must fully describe the scope of the audit, the methodologies (including
sampling techniques) used to determine whether QI is in compliance with
the provisions of this Agreement, and the result of each such
determination. The report must also specifically address each of the items
in section 10.03 of this Agreement.
Audit Guidance 10.05:
10.05.1. Auditor’s Report Requirements. The external auditor’s report must:
(a)List the external auditor’s name, address, contact person and
contact person’s telephone number.
(b)List the QI’s name, address, QI-EIN, responsible party and
responsible party’s telephone number.
(c)List each procedure required under these Audit Guidelines in the
order listed in the Audit Guidelines with a notation that the
procedure was performed.
(d)Identify the audit year.
(e)List, under each procedure, the items required to be reported under
these Audit Guidelines in the order listed in the Audit Guidelines.
(f)Include any items required to be attached to the report as Appendix
1. These items should be cross-referenced in the report with

44
footnotes.
(g)Include any information that requires a narrative response and any
other information that the external auditor wishes to include as
Appendix 2. These items should be cross-referenced in the report
with footnotes.
(h)Contain a certification signed by the external auditor that the
required procedures have been competently performed and that the
information reported is accurate and complete.
10.05.2. Electronic Report. The IRS intends to develop a standard electronic
report form. For audit reports due after the publication date of that form, the
external auditor must also complete that form and send it to the IRS in the
manner required by the form.
10.05.3. Report Due Dates. The external auditor must send the hard copy audit
report to the IRS at the address set forth in section 12.06 of the QI Agreement by
June 30 of the year following the audit year. The external auditor and the QI may
jointly request an extension of the due date of the report by submitting a request
for extension in writing signed by the external auditor and by the QI’s responsible
party to the IRS at the address in AG 10.01.1 by June 30 of the year following
the audit year. The request should state the date to which the extension is
requested, explain the reason for the extension and include telephone numbers
for the external auditor’s contact person and the QI’s responsible party. The IRS
will send the external auditor and the QI a written response as soon as
practicable after receiving the request.
Sec. 10.06. Expanding Scope and Timing of External Audit. Upon review of
the external auditor’s report, the IRS may request, and QI must permit, the
external auditor to perform additional audit procedures, or to expand the
external audit to cover some or all of the calendar years for which the
period of limitations for assessment of taxes has not expired. In addition,
the IRS may request, and QI agrees to permit, the external auditor to
perform an audit for one or more calendar years not scheduled for audit
under section 10.03 of this Agreement.
Audit Guidance 10.06:
10.06.1 IRS Review of Audit Report. Within 90 days after the IRS receives the
external auditor’s report, the IRS will review the report and, if the IRS determines
that no further action is necessary, then the IRS will send a written notice to the
QI and the external auditor informing them of this determination.
10.06.2 Audit Part 2: IRS Directed Procedures. The IRS may determine that
additional fact finding is necessary. In such cases, the IRS will contact the
external auditor and the QI by telephone or in writing within 90 days after the IRS
receives the external auditor’s report. The IRS will direct the external auditor to

45
perform specific audit procedures and to report in writing the results of those
procedures. The IRS directed procedures may include instructing the external
auditor to forward to the IRS certain of the external auditor’s work papers and
reports or instructing the external auditor to perform specific procedures (or
perform an audit in accordance with these Audit Guidelines) for the audit year or
for years other than the audit year. The IRS will stipulate a due date not more
than 90 days from the date of its instructions to the external auditor for the
external auditor’s report on the results of any IRS directed procedures. The
external auditor may request an extension of the due date in accordance with AG
10.05 at any time before the due date. Within 90 days after receiving the
external auditor’s report on the results of the initial IRS directed procedures, the
IRS will contact the external auditor and the QI. If the IRS determines that
additional fact finding is necessary, then the IRS may direct the external auditor
to perform further additional procedures under this section until the IRS
determines that the facts have been sufficiently developed. If the IRS determines
that the audit is complete, the IRS will notify the external auditor and the QI in
writing of the completion of the audit and of any actions that it will take as a result
of the audit.
10.06.3. Audit Part 3: Audit Meeting. At any time after the external auditor has
submitted its report on the initial IRS directed procedures and before the IRS
notifies the QI and the external auditor of the completion of the audit, either the
IRS or the QI may request an audit meeting between the IRS and the QI to
accelerate fact finding, and to clarify and resolve concerns. To request and
schedule a meeting, the IRS will contact the QI’s responsible party by telephone
or in writing, and the QI may contact the IRS at the address in AG 10.01 by
telephone or in writing. The IRS will meet with the QI within 90 days of the date
the IRS receives or makes the request, or at such other time as the IRS and the
QI may agree. If the IRS and the QI agree, the employees of the external auditor
who are acting in the capacity of external auditors under the QI Agreement may
attend the audit meeting in that capacity, and other employees of the same firm
may attend in other capacities. The IRS may continue to direct the external
auditor to perform specific audit procedures under AG10.06.2 without regard to
whether an audit meeting has been scheduled or held. After the first audit
meeting, either the IRS or the QI may request further audit meetings at any time
before the IRS notifies the external auditor and the QI of the completion of the
audit.