Internal Revenue Bulletin 2002-35 (PDF rendition): IRS Notices

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2002–53, page 427.
Federal rates; adjusted federal rates; adjusted federal long-
term rate and the long-term exempt rate. For purposes of
sections 382, 1274, 1288, and other sections of the Code,
tables set forth the rates for September 2002.
Rev. Proc. 2002–55, page 435.
This procedure contains the final audit guidance for an exter-
nal auditor engaged by a qualified intermediary (QI) to verify the
QI’s compliance with the withholding agreement entered into with
the Service pursuant to Rev. Proc. 2000–12, 2000–1 C.B. 387,
and regulations section 1.1441–1(e)(5).
EXEMPT ORGANIZATIONS
Announcement 2002–77, page 471.
A list is provided of organizations now classified as private foun-
dations.
ADMINISTRATIVE
T.D. 9014, page 429.
Final regulations under section 6109 of the Code allow income
tax return preparers to elect an alternative to their social secu-
rity number for purposes of identifying themselves on returns they
prepare.
Notice 2002–58, page 432.
Capital gains and losses; sale or exchange. Taxpayers are
informed that the election under section 311(e) of the Taxpayer
Relief Act of 1997 to treat certain assets held on January 1,
2001, as having been sold and then reacquired on that date is
properly made by following certain IRS forms and instructions.
Under appropriate circumstances, the Service will grant re-
quests to make a late election under sections 301.9100–1
through 301.9100–3 of the regulations.
Rev. Proc. 2002–54, page 432.
Changes in method of accounting; prior consent; auto-
matic consent. This procedure relates to the application of the
1-year section 481(a) adjustment period to pending or recently
approved applications for changes in method of accounting un-
der Rev. Proc. 97–27 and to applications filed under Rev. Proc.
2002–9. This procedure also relates to certain changes to and
from UNICAP methods of accounting. Rev. Proc. 2002–9 am-
plified, clarified, and modified. Rev. Proc. 2002–19 amplified and
clarified.
Rev. Proc. 2002–55, page 435.
This procedure contains the final audit guidance for an exter-
nal auditor engaged by a qualified intermediary (QI) to verify the
QI’s compliance with the withholding agreement entered into with
the Service pursuant to Rev. Proc. 2000–12, 2000–1 C.B. 387,
and regulations section 1.1441–1(e)(5).
Announcement 2002–76, page 471.
This document provides clarification and changes to Publica-
tion 1220,Specifications for Filing Forms 1098, 1099, 5498
and W–2G Electronically or Magnetically.
Bulletin No. 2002–35
September 3, 2002
Announcements of Disbarments and Suspensions begin on page 474.
Finding Lists begin on page ii.
Index for July and August begins on page iv.

The IRS Mission
Provide America’s taxpayers top quality service by helping them
understand and meet their tax responsibilities and by applying
the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of the
Commissioner of Internal Revenue for announcing official rul-
ings and procedures of the Internal Revenue Service and for pub-
lishing Treasury Decisions, Executive Orders, Tax Conventions,
legislation, court decisions, and other items of general inter-
est. It is published weekly and may be obtained from the Super-
intendent of Documents on a subscription basis. Bulletin contents
are consolidated semiannually into Cumulative Bulletins, which
are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, modify,
or amend any of those previously published in the Bulletin. All pub-
lished rulings apply retroactively unless otherwise indicated. Pro-
cedures relating solely to matters of internal management are
not published; however, statements of internal practices and pro-
cedures that affect the rights and duties of taxpayers are pub-
lished.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpay-
ers or technical advice to Service field offices, identifying de-
tails and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be re-
lied on, used, or cited as precedents by Service personnel in the
disposition of other cases. In applying published rulings and pro-
cedures, the effect of subsequent legislation, regulations, court
decisions, rulings, and procedures must be considered, and Ser-
vice personnel and others concerned are cautioned against reach-
ing the same conclusions in other cases unless the facts and
circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.
Part III.—Administrative, Procedural, and
Miscellaneous.
To the extent practicable, pertinent cross references to these sub-
jects are contained in the other Parts and Subparts. Also in-
cluded in this part are Bank Secrecy Act Administrative Rulings.
Bank Secrecy Act Administrative Rulings are issued by the De-
partment of the Treasury’s Office of the Assistant Secretary (En-
forcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the first Bulletin of the succeeding semiannual pe-
riod, respectively.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
September 3, 20022002–35 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 2002. See Rev. Rul. 2002–53, on this
page.
Section 280G.—Golden Para-
chute Payments
Federal short-term, mid-term, and long-term rates
are set forth for the month of September 2002. See
Rev. Rul. 2002–53, on this page.
Section 382.—Limitation on
Net Operating Loss Carryfor-
wards and Certain Built-In
Losses Following Ownership
Change
The adjusted applicable federal long-term rate is
set forth for the month of September 2002. See Rev.
Rul. 2002–53, on this page.
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 2002. See Rev. Rul. 2002–53, on this
page.
Section 467.—Certain Pay-
ments for the Use of Property
or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 2002. See Rev. Rul. 2002–53, on this
page.
Section 468.—Special Rules
for Mining and Solid Waste
Reclamation and Closing
Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 2002. See Rev. Rul. 2002–53, on this
page.
Section 482.—Allocation of
Income and Deductions
Among Taxpayers
Federal short-term, mid-term, and long-term rates
are set forth for the month of September 2002. See
Rev. Rul. 2002–53, on this page.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 2002. See Rev. Rul. 2002–53, on this
page.
Section 642.—Special Rules
for Credits and Deductions
Federal short-term, mid-term, and long-term rates
are set forth for the month of September 2002. See
Rev. Rul. 2002–53, on this page.
Section 807.—Rules for Cer-
tain Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 2002. See Rev. Rul. 2002–53, on this
page.
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 2002. See Rev. Rul. 2002–53, on this
page.
Section 1274.—Determin-
ation of Issue Price in the
Case of Certain Debt
Instruments Issued for
Property
(Also sections 42, 280G, 382, 412, 467, 468, 482, 483,
642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate and the
long-term exempt rate. For purposes of
sections 382, 1274, 1288, and other sec-
tions of the Code, tables set forth the rates
for September 2002.
Rev. Rul. 2002–53
This revenue ruling provides various pre-
scribed rates for federal income tax pur-
poses for September 2002 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month for
purposes of section 1274(d) of the Inter-
nal Revenue Code. Table 2 contains the
short-term, mid-term, and long-term ad-
justed applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the long-
term tax-exempt rate described in section
382(f). Table 4 contains the appropriate per-
centages for determining the low-income
housing credit described in section 42(b)(2)
for buildings placed in service during the
current month. Finally, Table 5 contains the
federal rate for determining the present
value of annuity, an interest for life or for
a term of years, or a remainder or a rever-
sionary interest for purposes of section
7520.
2002–35 I.R.B.427September 3, 2002

REV. RUL. 2002–53 TABLE 1
Applicable Federal Rates (AFR) for September 2002
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-Term
AFR2.13%2.12%2.11%2.11%
110% AFR2.34%2.33%2.32%2.32%
120% AFR2.56%2.54%2.53%2.53%
130% AFR2.78%2.76%2.75%2.74%
Mid-Term
AFR3.75%3.72%3.70%3.69%
110% AFR4.13%4.09%4.07%4.06%
120% AFR4.51%4.46%4.44%4.42%
130% AFR4.90%4.84%4.81%4.79%
150% AFR5.66%5.58%5.54%5.52%
175% AFR6.62%6.51%6.46%6.42%
Long-Term
AFR5.23%5.16%5.13%5.11%
110% AFR5.76%5.68%5.64%5.61%
120% AFR6.29%6.19%6.14%6.11%
130% AFR6.82%6.71%6.65%6.62%
REV. RUL. 2002–53 TABLE 2
Adjusted AFR for September 2002
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
adjusted AFR1.71%1.70%1.70%1.69%
Mid-term
adjusted AFR3.20%3.17%3.16%3.15%
Long-term
adjusted AFR4.63%4.58%4.55%4.54%
September 3, 20024282002–35 I.R.B.

REV. RUL. 2002–53 TABLE 3
Rates Under Section 382 for September 2002
Adjusted federal long-term rate for the current month4.63%
Long-term tax-exempt rate for ownership changes
during the current month (the highest of the adjusted
federal long-term rates for the current month and the prior two months.)4.91%
REV. RUL. 2002–53 TABLE 4
Appropriate Percentages Under Section 42(b)(2)
for September 2002
Appropriate percentage for the 70% present value low-income housing credit8.04%
Appropriate percentage for the 30% present value low-income housing credit3.45%
REV. RUL. 2002–53 TABLE 5
Rates Under Section 7520 for September 2002
Applicable federal rate for determining the present value of an annuity, an interest
for life or a term of years, or a remainder or reversionary interest4.6%
Section 1288.—Treatment of
Original Issue Discounts on
Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 2002. See Rev. Rul. 2002–53, page 427.
Section 6109.—Identifying
Numbers
26 CFR 1.6109–2A: Furnishing identifying number
of income tax return preparer.
T.D. 9014
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Furnishing Identifying Number
of Income Tax Return
Preparer
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations that allow income tax re-
turn preparers to elect an alternative to their
social security number for purposes of iden-
tifying themselves on returns they pre-
pare. The regulations are needed to
implement section 6109(a) as amended by
the Internal Revenue Service Restructur-
ing and Reform Act of 1998. The regula-
tions affect individual preparers who elect
to identify themselves using a number other
than their social security number.
DATES:Effective Date: These regula-
tions are effective August 12, 2002.
2002–35 I.R.B.429September 3, 2002

Applicability Date: For dates of appli-
cability, see§§1.6109–2A(d) and 1.6109–
2(d).
FOR FURTHER INFORMATION CON-
TACT: Michelle B. Baxter, (202) 622–
4910 (not a toll-free call).
SUPPLEMENTARY INFORMATION:
Background
Section 6109(a)(4) of the Internal Rev-
enue Code provides that any return or claim
for refund prepared by an income tax re-
turn preparer must bear the identifying num-
ber of the preparer as required by
regulations prescribed by the Secretary. Prior
to the amendment of section 6109(a) by the
Internal Revenue Service Restructuring and
Reform Act of 1998 (Public Law 105–
206, 112 Stat. 685 (RRA’98)), section
6109(a) limited the identifying number of
an individual preparer to that preparer’s so-
cial security number.
Section 3710 of RRA’98 amended sec-
tion 6109(a) by removing the requirement
that an individual preparer’s identifying
number be the preparer’s social security ac-
count number. Instead, under section
6109(a)(4), the Secretary may prescribe al-
ternatives to the social security account
number for purposes of identifying indi-
vidual preparers.
On December 21, 1998, the IRS pub-
lished Notice 98–63, 1998–2 C.B. 758, to
inform preparers of the IRS’s intention to
develop a system of alternative identify-
ing numbers. On August 12, 1999, the Ser-
vice published a temporary regulation (T.D.
8835, 1999–2 C.B. 317) permitting a pre-
parer to use an alternative identifying num-
ber.Federal Register(64 FR 43910). On
August 12, 1999, the Service also pub-
lished a notice of proposed rulemaking
(REG–105237–99, 1999–2 C.B. 331) al-
lowing a preparer to use an alternative to
their social security number for purposes of
identifying themselves on returns they pre-
pare.Federal Register(64 FR 43969). No
public hearing was requested or held. No
written comments were received. The pro-
posed regulations are adopted by this Trea-
sury decision, and the corresponding
temporary regulations are removed.
Explanation of Provisions
This document contains amendments to
the Income Tax Regulations (26 CFR part
1) to allow individual preparers to either use
their social security number or elect an al-
ternative identifying number for purposes
of identifying themselves on returns they
prepare. The IRS developed Form W–7P,
Application for Preparer Tax Identifica-
tion Number, on which preparers may ap-
ply for an alternative identifying number.
Effective Date
The final regulations under§1.6109–2
apply to returns or claims for refund filed
after December 31, 1999. The current rules
of§1.6109–2, which are retained in
§1.6109–2A, continue to apply with re-
spect to returns or claims for refund filed
prior to January 1, 2000.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because these
regulations do not impose a collection of
information on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Internal Revenue Code, these regu-
lations will be submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on their im-
pact on small business.
Drafting Information
The principal author of these regula-
tions is Michelle B. Baxter, Office of As-
sociate Chief Counsel (Procedure and
Administration), Administrative Provi-
sions and Judicial Practice Division. How-
ever, other personnel from the IRS and
Treasury Department participated in their
development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par.2.Immediatelyfollowing
§1.6115–1, an undesignated center head-
ing is added to read as follows:
REGULATIONS APPLICABLE TO
RETURNS OR CLAIMS FOR
REFUND FILED PRIOR TO
JANUARY 1, 2000.
Par. 3. Section 1.6109–2 is redesignated
as§1.6109–2A, and transferred immedi-
ately after the undesignated center head-
ing“REGULATIONS APPLICABLE TO
RETURNS OR CLAIMS FOR REFUND
FILED PRIOR TO JANUARY 1, 2000.”
Par. 4. The second sentence of redesig-
nated§1.6109–2A(d) is revised to read:
§1.6109–2A Furnishing identifying num-
ber of income tax return preparer.
*****
(d)***For returns or claims for re-
fund filed after December 31, 1999, see
§1.6109–2(a).
*****
Par. 5. New§1.6109–2 is added to read
as follows:
§1.6109–2 Income tax return preparers
furnishing identifying numbers for
returns or claims for refund filed after
December 31, 1999.
(a)Furnishing identifying number.—
(1) Each return of tax, or claim for re-
fund of tax, under subtitle A of the Internal
Revenue Code prepared by one or more in-
come tax return preparers must include the
identifying number of the preparer required
by§1.6695–1(b) to sign the return or claim
for refund. In addition, if there is a part-
nership or employment arrangement be-
tween two or more preparers, the identifying
number of the partnership or employer must
also appear on the return or claim for re-
fund. For the definition of the term“in-
come tax return preparer”(or“preparer”)
see section 7701(a)(36) and§301.7701–
15 of this chapter.
(2) The identifying number of a pre-
parer who is an individual (not described
in paragraph (a)(3) of this section) is that
individual’s social security account num-
ber, or such alternative number as may be
prescribed by the Internal Revenue Ser-
vice in forms, instructions, or other appro-
priate guidance.
(3) The identifying number of a pre-
parer (whether an individual, corporation,
September 3, 20024302002–35 I.R.B.

or partnership) who employs or engages one
or more persons to prepare the return or
claim for refund (other than for the pre-
parer) is that preparer’s employer identifi-
cation number.
(b) and (c) [Reserved]. For further guid-
ance, see§1.6109–2A(b) and (c).
(d)Effective date. Paragraph (a) of this
section and this paragraph (d) apply to re-
turns or claims for refund filed after De-
cember 31, 1999. For returns or claims for
refund filed prior to January 1, 2000, see
§1.6109–2A(a).
§ 1.6109–2T [Removed]
Par. 6. Section 1.6109–2T is removed.
David A. Mader,
Acting Deputy Commissioner
of Internal Revenue.
Approved August 8, 2002.
Pamela F. Olson,
Acting Assistant
Secretary of the Treasury.
(Filed by the Office of the Federal Register on August 12,
2002, 2:56 p.m., and published in the issue of the Federal Reg-
ister for Wednesday, August 14, 2002, 67 F.R. 52862)
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 2002. See Rev. Rul. 2002–53, page 427.
Section 7872.—Treatment of
Loans With Below-Market In-
terest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 2002. See Rev. Rul. 2002–53, page 427.
2002–35 I.R.B.431September 3, 2002

Part III. Administrative, Procedural, and Miscellaneous
Election to Include in Gross
Income Gain on Assets Held
on January 1, 2001
Notice 2002–58
This notice informs taxpayers that the
election under§311(e) of the Taxpayer Re-
lief Act of 1997 (TRA 97), 1997–4 (Vol. 1)
C.B. 1, 49–50 (as amended by§314(c) of
P.L. 106–554 and§414 of P.L. 107–147),
to treat certain assets held on January 1,
2001, as having been sold and then reac-
quired on that date is properly made by fol-
lowing the instructions for Form 4797,Sales
of Business Property, or Schedule D,Capi-
tal Gains and Losses, for Form 1040, 1120,
1120S, 1065, or 1041. Under appropriate
circumstances, the Internal Revenue Ser-
vice will grant requests to make a late elec-
tion under§311(e) of TRA 97 and this
notice under§301.9100–1 through
301.9100–3 of the Procedure and Admin-
istration Regulations.
Under§1(h)(1) of the Internal Rev-
enue Code, gain resulting from the sale or
exchange of most capital assets is taxed at
a capital gains rate of 20 percent (10 per-
cent for gain otherwise taxed at an ordi-
nary rate of 15 percent or less). Section
1(h)(2)(B) provides that the 20-percent capi-
tal gains rate is reduced to 18 percent for
qualified 5-year gain resulting from the sale
or exchange of property with a holding pe-
riod beginning after December 31, 2000.
Qualified 5-year gain is defined generally
by§1(h)(9) as“the aggregate long-term
capital gain from property held for more
than 5 years.”
Section 311(e) of TRA 97 allows a non-
corporate taxpayer holding a capital asset
on January 1, 2001, to elect to treat that as-
set as having been both sold and reac-
quired on that date for an amount equal to
its fair market value (a§311(e) election).
If a taxpayer makes a§311(e) election, the
holding period for the elected asset be-
gins after December 31, 2000. This makes
the asset eligible for the 18-percent rate if
it is later sold after having been held by the
taxpayer for more than 5 years from the
date of the deemed sale and reacquisi-
tion.
A taxpayer makes a§311(e) election by
following the instructions for the appro-
priate Schedule D or Form 4797. Under
these instructions, the taxpayer must re-
port the resulting gain in gross income on
the tax return for the tax year that includes
the date of the deemed sale and attach a
statement to the return stating that the elec-
tion is being made under§311(e) of TRA
97 and listing the assets for which the elec-
tion is being made. The tax return on which
the gain is reported must be filed by its due
date, including extensions.
Pursuant to§301.9100–2, taxpayers who
timely filed their tax returns without mak-
ing the§311(e) election for one or more
eligible assets may still make the election
by filing an amended return within 6
months of the due date of the original re-
turn, excluding extensions. One of the fol-
lowing statements must be written at the top
of the amended return:“Election Under
Section 311 of the Taxpayer Relief Act of
1997”or“FILED PURSUANT TO
§301.9100–2.”
If a taxpayer (i) did not timely file an
original return on which a§311(e) elec-
tion could have been made, as described
above, or (ii) failed to make a§311(e) elec-
tion with respect to one or more eligible as-
sets on a timely-filed original return and
failed to make the§311(e) election on an
amended return filed within 6 months of the
due date of that original return, then the tax-
payer may apply for relief under
§301.9100–3, in accordance with the pro-
visions of Rev. Proc. 2002–1, 2002–1 I.R.B.
1 (or any successor).
Drafting Information
The principal author of this notice is
Amy Pfalzgraf of the Office of the Asso-
ciate Chief Counsel (Income Tax and Ac-
counting). For further information regarding
this notice, contact Ms. Pfalzgraf at (202)
622–4950 (not a toll-free call).
26 CFR 601.204: Changes in accounting periods
and methods of accounting.
(Also Part 1,§§263A, 446, 481; 1.263A–1,
1.263A–2, 1.263A–3, 1.446–1, 1.481–1, 1.481–4.)
Rev. Proc. 2002–54
SECTION 1. PURPOSE
.01 This revenue procedure amplifies and
clarifies Rev. Proc. 2002–19, 2002–13 I.R.B.
696, relating to changes in method of ac-
counting under§446 of the Internal Rev-
enue Code. Rev. Proc. 2002–19 modifies
Rev. Proc. 97–27, 1997–1 C.B. 680, and
Rev. Proc. 2002–9, 2002–3 I.R.B. 327, (as
modified and clarified by Announcement
2002–17, 2002–8 I.R.B. 561), in part to re-
duce the§481(a) adjustment period for net
negative§481(a) adjustments for a change
from 4 years to 1 year, applicable gener-
ally to taxable years ending on or after De-
cember 31, 2001. Since the issuance of Rev.
Proc. 2002–19 on March 14, 2002, cer-
tain questions have arisen about the appli-
cation of the new 1-year§481(a)
adjustment period to pending or recently ap-
proved applications for changes in method
of accounting under Rev. Proc. 97–27 and
to applications filed under Rev. Proc.
2002–9.
.02 This revenue procedure also clari-
fies and modifies Rev. Proc. 2002–9, as
modified and clarified by Announcement
2002–17. Since the issuance of Rev. Proc.
2002–9 on January 7, 2002, the Internal
Revenue Service has received several com-
ments regarding sections 4.01 and 4.02 of
the Appendix of Rev. Proc. 2002–9. Some
comments requested that certain provi-
sions of these sections be clarified; other
comments suggested that the sections be
modified to include additional accounting
method changes. After consideration of
these comments, the Service is revising sec-
tions 4.01(1) through (4) and 4.02 of the
Appendix of Rev. Proc. 2002–9 to clarify
the scope of these provisions and to add cer-
tain accounting method changes.
In addition, this revenue procedure clari-
fies the intended operation of the transi-
tion rules contained in section 13.02 of Rev.
Proc. 2002–9.
SECTION 2. CERTAIN PENDING
APPLICATIONS UNDER REV. PROC.
97–27
.01Rollover of Year of Change. The Ser-
vice has determined that it is appropriate
to allow taxpayers with applications or rul-
ing requests (“applications”) filed under
Rev. Proc. 97–27 for a year of change end-
ing before December 31, 2001, and pend-
ing with the national office on March 14,
2002, to modify the application (or, if the
ruling letter has been issued since March
14, 2002, to request a new ruling letter) to
September 3, 20024322002–35 I.R.B.

defer the year of change to the first tax-
able year ending on or after December 31,
2001, in order to take advantage of the
1-year§481(a) adjustment period. To do so,
the taxpayer must notify the national of-
fice, prior to the later of December 13,
2002, or the issuance of the letter ruling
granting or denying the requested change,
of its intent to defer the year of change. The
taxpayer must submit any additional infor-
mation requested by the national office.
.02Modifications to Pending Applica-
tions.Section 4.04(2) of Rev. Proc. 2002–19
provides in part that the national office will
require taxpayers with method change ap-
plications under Rev. Proc. 97–27 for a year
of change ending on or after December 31,
2001, that are pending with the national of-
fice on March 14, 2002, to make“appro-
priate modifications”to the application to
comply with the provisions of Rev. Proc.
2002–19 (namely, the 1-year§481(a) ad-
justment period). The national office will
notify taxpayers if and when such adjust-
ments are required. Absent such notifica-
tion, no further submissions are required.
SECTION 3. CERTAIN RECENTLY
ISSUED CONSENT AGREEMENTS
.01In General.If a taxpayer has re-
ceived a consent agreement for a change in
method of accounting for a year of change
ending on or after December 31, 2001, and
the agreement does not reflect a 1-year
§481(a) adjustment period for a net nega-
tive§481(a) adjustment for the change, the
taxpayer may elect to apply the 1-year
§481(a) adjustment period of Rev. Proc.
2002–19 by complying with the require-
ments of this section. If a taxpayer does not
want to apply the 1-year§481(a) adjust-
ment period, or does not comply with the
requirements of this section, then the ad-
justment period reflected in the consent
agreement will apply.
.02Signed and Returned Consent Agree-
ments.If the taxpayer has signed and re-
turned the consent agreement, the taxpayer
must write“Election to Apply 1-Year Ad-
justment Period”at the top of the first page
of a copy of the consent agreement and at-
tach the copy to either its timely filed origi-
nal federal income tax return or an amended
federal income tax return, which should re-
flect the 1-year adjustment period.
.03Unsigned Consent Agreements.If the
taxpayer has not yet signed and returned the
consent agreement, the taxpayer should con-
tact the national office to request the issu-
ance of a consent agreement that reflects
a 1-year§481(a) adjustment period for its
net negative§481(a) adjustment for the
change.
SECTION 4. CERTAIN
APPLICATIONS FILED UNDER
PREDECESSORS OF REV. PROC.
2002–9
An original application and/or a copy of
an application to change a method of ac-
counting under Rev. Proc. 99–49, 1999–2
C.B. 725,supersededby Rev. Proc. 2002–9,
or any other predecessor of Rev. Proc.
2002–9, for a taxable year ending on or af-
ter December 31, 2001 will be treated as
an application and/or copy filed under Rev.
Proc. 2002–9 for purposes of the transi-
tion rules set forth in section 4.04(1) of Rev.
Proc. 2002–19.
SECTION 5. ADDITIONAL TIME TO
REQUEST A 4-YEAR§481(a)
ADJUSTMENT PERIOD FOR
AUTOMATIC CONSENT.
The Service has determined that it is ap-
propriate to allow taxpayers filing appli-
cations to change a method of accounting
under Rev. Proc. 2002–9 (or any prede-
cessor) additional time to request the ap-
plication of a 4-year§481(a) adjustment
period for net negative§481(a) adjust-
ments for taxable years ending on or af-
ter December 31, 2001, and on or before
April 30, 2002. Accordingly, taxpayers that
qualify for, and comply with, the provi-
sions of this section may request the ap-
plication of the 4-year adjustment period for
net negative§481(a) adjustments for tax-
able years to which the 1-year§481(a) ad-
justment period would otherwise be
applicable under Rev. Proc. 2002–19.
A taxpayer requesting consent to change
its method of accounting under Rev. Proc.
2002–9 (or any predecessor) for a taxable
year ending on or after December 31, 2001,
and on or before April 30, 2002, that de-
sires a 4-year§481(a) adjustment period for
a net negative§481(a) adjustment for the
change may request such adjustment pe-
riod by preparing an application (or
amended application) in duplicate under
Rev. Proc. 2002–9 that clearly indicates that
the taxpayer elects the application of the
4-year§481(a) adjustment period under this
section 5.
The original and copy of the applica-
tion must be filed in accordance with the
timely duplicate filing requirements of sec-
tion 6.02(3) of Rev. Proc. 2002–9.
The original of an amended applica-
tion must be attached to an original re-
turn (or if an original return has already
been filed, to an amended return), which
should reflect the 4-year adjustment pe-
riod. An amended return must be filed on
or before December 13, 2002. The copy of
an amended application must be labeled
“Substitute Application under Rev. Proc.
2002–54,”and must be filed with the na-
tional office no later than when the origi-
nal return (or, if applicable, the amended
return) is filed.
SECTION 6. UNIFORM
CAPITALIZATION (UNICAP)
CHANGES UNDER REV. PROC.
2002–9
.01 This section 6 modifies sections
4.01(1) through 4.01(4) and 4.02 of the Ap-
pendix of Rev. Proc. 2002–9, as modified
and clarified by Announcement 2002–17.
The entire text of these provisions are set
forth as a convenience. However, changes
to the existing text of these provisions are
limited to sections 4.01(1)(a)(vi), 4.01(1)(b),
4.01(1)(c), the heading of 4.02, 4.02(1), and
4.02(2).
.02 Sections 4.01(1) through 4.01(4) of
the Appendix of Rev. Proc. 2002–9 are
modified to read as follows:
“.01Certain uniform capitalization
(UNICAP) methods used by small resell-
ers, formerly small resellers, and reseller-
producers.
“(1)Description of change and scope.
“(a)Applicability.This change ap-
plies to:
“(i) a small reseller of personal
property changing from a permissible
UNICAP method to a permissible non-
UNICAP inventory capitalization method
in any taxable year that it qualifies as a
small reseller;
“(ii) a formerly small reseller
changing from a permissible non-UNICAP
inventory capitalization method to a per-
missible UNICAP method in the first tax-
able year that it does not qualify as a small
reseller;
“(iii) a reseller-producer chang-
ing from a permissible UNICAP method for
both its production and resale activities to
a permissible simplified resale method de-
2002–35 I.R.B.433September 3, 2002

scribed in§1.263A–3(d)(3) in any tax-
able year that it qualifies to use a simplified
resale method for both its production and
resale activities under§1.263A–3(a)(4) (re-
sellers withde minimisproduction activi-
ties);
“(iv) a reseller-producer chang-
ing from a permissible simplified resale
method described in§1.263A–3(d)(3) for
both its production and resale activities to
a permissible UNICAP method for both its
production and resale activities in the first
taxable year that it does not qualify to use
a simplified resale method for both its pro-
duction and resale activities under
§1.263A–3(a)(4);
“(v) a reseller that wants to
change its permissible UNICAP method to
include a special reseller cost allocation rule;
or
“(vi) a reseller changing to a
UNICAP method (or methods) specifi-
cally described in the regulations (and mak-
ing any attendant changes in the
identification of costs subject to§263A and
including any special reseller cost alloca-
tion rules) in any taxable year, other than
the first taxable year, that it does not qualify
as a small reseller. However, this does not
include a change for purposes of rechar-
acterizing“section 471 costs”as“addi-
tional§263A costs”(or vice versa) under
the simplified resale method.
“(b)Scope limitations inappli-
cable.A taxpayer that wants to make a
change described in sections 4.01(1)(a)(i)
through 4.01(1)(a)(v) of this APPENDIX is
not subject to the scope limitations in sec-
tion 4.02 of this revenue procedure.
“(c)Inapplicability.This change
does not apply to a taxpayer making an his-
toric absorption ratio election under
§§1.263A–2(b)(4) or 1.263A–3(d)(4), or
to a taxpayer that wants to revoke an elec-
tion to use the historic absorption ratio with
the simplified resale method (see§1.263A–
3(d)(4)(iii)(B)), including a taxpayer us-
ing the simplified resale method with an
historic absorption ratio changing to a
UNICAP method specifically described in
the regulations that does not include the his-
toric absorption ratio.
“(2)Definitions.
“(a)“Reseller”means a taxpayer
that acquires real or personal property de-
scribed in§1221(1) for resale.
“(b)“Small reseller”means a re-
seller whose average annual gross receipts
for the three immediately preceding tax-
able years (or fewer, if the taxpayer has not
been in existence during the three preced-
ing taxable years) do not exceed
$10,000,000.See§263A(b)(2)(B).
“(c)“Formerly small reseller”
means a reseller that no longer qualifies as
a small reseller.
“(d)“Producer”means a taxpayer
that produces real or tangible personal prop-
erty.
“(e)“Reseller-producer”means a
taxpayer that is both a producer and a re-
seller.
“(f)“PermissibleUNICAP
method”means a method of capitalizing
costs that is permissible under§263A.
“(g)“UNICAP method specifi-
cally described in the regulations”includes
the simplified service cost method using a
labor-based allocation ratio (§1.263A–
1(h)) and the simplified resale method with-
out an historic absorption ratio election
(§1.263A–3(d)), but does not include any
other reasonable allocation method within
the meaning of§1.263A–1(f)(4).
“(h)“Special reseller cost alloca-
tion rule”means the 90–10de minimisrule
to allocate a mixed service department’s
costs to property acquired for resale
(§1.263A–1(g)(4)(ii)), the 1/3–2/3 rule to
allocate labor costs of personnel to pur-
chasing activities (§1.263A–3(c)(3)(ii)(A)),
and the 90–10de minimisrule to allocate
a dual-function storage facility’s costs to
property acquired for resale (§1.263A–
3(c)(5)(iii)(C)).
“(i)“Permissible non-UNICAP
inventory capitalization method”means a
method of capitalizing inventory costs that
is permissible under§471.
“(3)Section 481(a) adjustment. Be-
ginning with the year of change, a tax-
payer changing its method of accounting for
costs pursuant to sections 4.01(1)(a)(i),
4.01(1)(a)(iii), or 4.01(1)(a)(iv) of this AP-
PENDIX generally must take any appli-
cable net positive§481(a) adjustment into
account ratably over the same number of
taxable years, not to exceed four, that the
taxpayer used its former method of ac-
counting. A taxpayer changing its method
of accounting for costs pursuant to sec-
tions 4.01(1)(a)(ii), 4.01(1)(a)(v) or
4.01(1)(a)(vi) of this APPENDIX gener-
ally must take any applicable net positive
§481(a) adjustment into account ratably
over four taxable years. See section 5.04(3)
of this revenue procedure for exceptions to
this general rule.
“(4)Multiple changes.Taxpayers
making both this change and another change
in method of accounting in the same year
of change must comply with the ordering
rules of§1.263A–7(b)(2).”
.03 Section 4.02 of the Appendix of Rev.
Proc. 2002–9 is modified to read as follows:
“.02Certain uniform capitalization
(UNICAP) methods used by producers and
reseller-producers.
“(1)Applicability.This change ap-
plies to a producer (as defined in section
4.01(2)(d) of the APPENDIX of this rev-
enue procedure) or a reseller-producer (as
defined in section 4.01(2)(e) of the AP-
PENDIX of this revenue procedure) that
wants to change to a UNICAP method (or
methods) specifically described in the regu-
lations and includes any changes in the
identification of costs subject to§263A
made in connection therewith. However, this
does not include a change for purposes of
recharacterizing“section 471 costs”as“ad-
ditional§263A costs”(or vice versa) un-
der the simplified production method.
“(2)Inapplicability.This change does
not apply to a producer or reseller-producer
that wants to revoke an election to use the
historic absorption ratio with the simpli-
fied production method (see§1.263A–
2(b)(4)(iii)(B)), including a taxpayer using
the simplified production method with an
historic absorption ratio changing to a
UNICAP method specifically described in
the regulations that does not include the his-
toric absorption ratio.
“(3)Definition.A“UNICAP method
specifically described in the regulations”in-
cludes the 90–10de minimisrule to allo-
cate a mixed service department’s costs to
production or resale activities (§1.263A–
1(g)(4)(ii)), the 1/3–2/3 rule to allocate la-
bor costs of personnel to purchasing
activities (§1.263A–3(c)(3)(ii)(A)), the 90
–10de minimisrule to allocate a dual-
function storage facility’s costs to prop-
erty acquired for resale (§1.263A–
3(c)(5)(iii)(C)), the specific identification
method (§1.263A–1(f)(2)), the burden rate
method (§1.263A–1(f)(3)), the standard cost
method (§1.263A–1(f)(3)), the direct re-
allocation method (§1.263A–1(g)(4)
(iii)(A)), the step-allocation method
(§1.263A–1(g)(4)(iii)(B)), the simplified
service-cost method (with either a labor-
September 3, 20024342002–35 I.R.B.

based allocation ratio or a production cost
allocation ratio) (§1.263A–1(h)), and the
simplified production method without the
historic absorption ratio election (§1.263A–
2(b)), but does not include any other rea-
sonable allocation method within the
meaning of§1.263A–1(f)(4).
“(4)Multiple changes.Taxpayers
making both this change and another change
in method of accounting in the same year
of change must comply with the ordering
rules of§1.263A–7(b)(2).”
SECTION 7. TRANSITION RULES OF
REV. PROC. 2002–9.
Section 13.02 of Rev. Proc. 2002–9 pro-
vides that if a taxpayer filed an applica-
tion with the national office for change in
method of accounting described in the AP-
PENDIX of Rev. Proc. 2002–9 for a year
of change for which Rev. Proc. 2002–9is
effective, and the application is pending
with the national office on January 7, 2002,
the taxpayer may instead make the change
under Rev. Proc. 2002–9, provided that the
taxpayer notifies the national office of its
intent to do so prior to the later of Febru-
ary 15, 2002, or the issuance of the letter
ruling granting or denying consent to the
change. If such a taxpayer chooses to make
the change under Rev. Proc. 2002–9, sec-
tion 13.02 requires the taxpayer to make any
appropriate modifications to the applica-
tion to comply with the applicable provi-
sions of Rev. Proc. 2002–9. In some cases,
the national office retains the application,
and the taxpayer makes the necessary modi-
fications by submitting supplementary rep-
resentations to the national office. In other
cases, the national office returns the appli-
cation to the taxpayer, and the taxpayer
makes the necessary modifications to the
application before resubmitting it to the na-
tional office.
Applications that are retained by the na-
tional office are considered to be converted
to applications under Rev. Proc. 2002–9if
the taxpayer submits the necessary supple-
mentary representations to the national of-
fice within 30 days of the Service’s first
request for such representations. Applica-
tions that are returned to the taxpayer for
necessary modifications are considered to
be converted to applications under Rev.
Proc. 2002–9 if the taxpayer resubmits to
the national office the application with the
appropriate modifications within 30 days af-
ter the Service returns the application to the
taxpayer. Whether the national office re-
tains or returns the application, the date on
which the taxpayer originally filed the ap-
plication with the national office is treated
as the date on which the application un-
der Rev. Proc. 2002–9 is filed with the na-
tional office for purposes of that revenue
procedure. Taxpayers using the transition
rule are reminded to attach a copy of the
modified application to their federal in-
come tax return for the year of change. See
section 6.02(3) of Rev. Proc. 2002–9.
EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2002–9 is amplified, clari-
fied and modified. Rev. Proc. 2002–19 is
amplified and clarified.
EFFECTIVE DATE
This revenue procedure is effective for
taxable years ending on or after Decem-
ber 31, 2001.
FURTHER INFORMATION
For further information regarding this
revenue procedure, contact Grant D.
Anderson of the Office of Associate Chief
Counsel (Income Tax and Accounting) at
(202) 622–4970 (not a toll-free call).
Audit Guidance for External
Auditors of Qualified
Intermediaries
Rev. Proc. 2002–55
SECTION 1. PURPOSE AND SCOPE
This Revenue Procedure contains final
Audit Guidance for an external auditor en-
gaged by a qualified intermediary (QI) to
verify the QI’s compliance with the with-
holding agreement entered into with the In-
ternal Revenue Service (IRS) pursuant to
Rev. Proc. 2000–12, 2000–1 C.B. 387 and
Treasury Regulation§1.1441–1(e)(5) (QI
Agreement). Under its QI Agreement, the
QI generally must report annually certain
aggregate information concerning the ben-
eficial owners of U.S. source payments and
make any necessary tax payments to the
IRS. In lieu of an IRS audit, the QI may
engage an external auditor to conduct an au-
dit to determine whether it is complying
with the withholding and reporting obli-
gations covered by the QI Agreement. The
external auditor must conduct its audit in
accordance with the procedures described
in section 10 of the QI Agreement. This
Revenue Procedure is intended to assist the
external auditor in understanding and ap-
plying those procedures. This Revenue Pro-
cedure does not amend, modify, or interpret
the QI Agreement.
SECTION 2. BACKGROUND
.01Comments on Proposed Guidance.
The IRS issued proposed audit procedures
for external auditors in Notice 2001–66,
2001–44 I.R.B. 396. Because the IRS and
Treasury recognize that the audit process
must be implemented in a manner that
maintains the cooperative nature and ef-
fectiveness of the QI system, the IRS en-
gaged in a lengthy dialogue with the
financial community following the issu-
ance of Notice 2001–66 to consider ways
to implement the audit procedures so as to
minimize cost to the QI while preserving
the compliance goals of the withholding
regulations.
.02IRS Response to Five Areas of Con-
cern. The majority of the comments on No-
tice 2001–66 reflected concerns about cost
in the context of one or more of the fol-
lowing areas: availability of waivers, scope
of audit coverage, statistical sampling, pro-
jection of underwithholding over the QI’s
account population based on the statisti-
cal sample, and use of an internal audit. The
following is a brief overview of the modi-
fications reflected in the attached Audit
Guidance in response to these comments.
A more complete discussion is set forth in
Section 4 of this Revenue Procedure.
(i)Waivers.
The financial community commented
that the criteria for obtaining a waiver from
an external audit were too stringent. In re-
sponse, the following changes have been
made:
•The monetary threshold in Waiver One
has been increased in the attached Au-
dit Guidelines from $250,000 to
$1,000,000 and is based on report-
able amounts.
•Waiver Two (which in Notice 2001–66
was based on number of accounts)
now is based on whether the QI re-
ceived between $1,000,000 and
$4,000,000 in reportable amounts.
•With respect to the reconciliation of
Forms 1042–S and 1099 issued to and
by the QI, which are required to re-
2002–35 I.R.B.435September 3, 2002

quest Waivers One and Two, vari-
ances are permitted within reasonable
limits based on the facts and circum-
stances.
•Waiver Three (which is available to
QIs with a substantial and indepen-
dent audit staff) is clarified to reflect
that the annual internal reviews re-
quired for eligibility are not the com-
prehensive audit described in this
Audit Guidance but, rather, those tests
and checks that the internal staff
deems appropriate.
(ii)Scope of Audit Coverage.
Comments from the financial commu-
nity stated that the scope of audit cover-
age required by the proposed audit guidance
was overly broad and would prove to be
prohibitively expensive for QIs. In response,
to those comments, the following changes
have been made:
•The accounts subject to audit are
changed from those that receive re-
portablepayments(generally, report-
able amounts plus certain broker
proceeds and certain foreign source in-
come) to those that receive report-
ableamounts(generally U.S. source
fixed or determinable annual or peri-
odical income). However, for accounts
of U.S. non-exempt recipients that re-
ceive reportable amounts, the exter-
nal auditor must take reportable
payments into account when perform-
ing certain procedures.
•Certain procedures and reports are de-
ferred to Phase 2 of the audit.
•In Phase 1 of the audit, the review of
withholding rate pools, underwith-
holding, and reporting in Audit Guid-
ance (“AG”)10.03(B), (C), and (D)
may be performed on a“spot check”
rather than full sample basis.
•Consolidated audits are allowed for
certain related groups.
(iii)Sampling.
Some commentators asserted that the
proposed audit guidance required exami-
nation of an excessively large number of ac-
counts, which would greatly increase the
cost of the audit. In response to these com-
ments, the following changes have been
made:
•The maximum number of accounts
sampled has been reduced from 1368
accounts to 321 accounts. This reduc-
tion results from (1) reducing the num-
ber of required samples from three to
one with the one sample including all
account holders (i.e., direct account
holders that are not U.S. non-exempt
recipients, direct account holders that
are U.S. non-exempt recipients, and in-
direct account holders), and (2) re-
ducing the maximum sample size from
456 to 321.
•With respect to accounts reviewed for
purposes of withholding rate pools,
withholding, and reporting under Phase
1 of the audit, described above, the
number of accounts reviewed will be
limited to a“spot check.”
(iv)Projection.
Some commentators expressed concern
that the proposed audit procedures appeared
to require“automatic”projection of under-
withholding in a sample across the QI’s ac-
count population, which they believed could
result in very large, and potentially un-
fair, tax assessments being imposed on the
QI. In response to these comments, the fol-
lowing changes were made:
•The issue of projection is deferred to
Phase 2 of the audit, but in Phase 1
the QI must pay any underwithhold-
ing that is discovered in the spot check
for underwithholding (AG10.03(C)).
(v)Use of Internal Audit.
Some commentators asserted that re-
quiring the external auditor to certify that
the use of internal audit staff did not af-
fect the accuracy of its report would se-
verely limit the use of internal audit staff,
thereby increasing the cost of the audit for
the QI. In response to these comments, the
following change was made:
•AQI’s external auditor that uses the
QI’s internal audit staff and internal
audit reports will not be required to
certify that such use has not affected
the accuracy of its report, but the ex-
ternal auditor will remain responsible
for the conduct of the entire audit.
SECTION 3. OVERVIEW OF AUDIT
GUIDANCE—THREE PHASE
AUDIT PROCESS
The Audit Guidance included in this
Revenue Procedure reflects a three phase
audit process. As described further be-
low, whether a particular QI’s audit will
progress through all three phases gener-
ally will depend upon the IRS analysis of
the facts reported in each phase. For ex-
ample, the IRS expects that, if the facts re-
ported in each preceding phase of the audit
process do not raise significant concerns for
the IRS, the QI will not be required to com-
plete any further phase of the process dur-
ing that audit cycle.
.01PHASE 1: Basic Fact Finding. Phase
1 consists of basic fact finding. The exter-
nal auditor performs those tasks detailed in
the attached Audit Guidance for Phase 1 of
the Audit. Generally, this consists of—
•documentation review for all accounts
(or the sample), under AG10.03(A)(4)
through (A)(7), and (A)(10);
•a spot check review of withholding
rate pools, underwithholding, and re-
porting, under AG10.03(B)(4) through
(B)(6), (C)(1), (C)(3), and (D)(2); and
•the completion of the procedures in
AG10.03(A)(8) and (A)(9), (C)(2),
(C)(4) through (C)(7), (D)(1) and (E).
From these fact finding activities, the au-
ditor will develop a report of numerical re-
sults. The attached Audit Guidance contains
precise directions on what numerical in-
formation must be included in the audi-
tor’s report. The auditor will send a hard
copy of this initial report to the IRS. The
IRS intends to develop a standard report
form.
Based on the IRS analysis of the nu-
merical report for Phase 1 of the QI’s au-
dit, the IRS will notify the QI whether the
audit is complete or whether additional fact
finding must be undertaken to resolve con-
cerns. If the audit is complete after Phase
1, the QI must pay any underwithholding
that is discovered as a result of the spot
check for underwithholding (AG10.03(C)).
If the numerical reports suggest that the QI
has experienced difficulties in meeting its
obligations under its QI Agreement, the IRS
will notify the QI that it is proceeding to
Phase 2 of the audit process.
.02PHASE 2: Follow Up Fact Find-
ing. In Phase 2 of the audit process, the IRS
will contact the auditor to ask about facts
and circumstances associated with certain
numerical results in the auditor’sreport.If
additional information is needed, the IRS
will direct the auditor to perform addi-
tional procedures and to report on the re-
sults. Phase 2 of the audit process may
include some or all of the procedures in
AG10.03 that were not performed in Phase
1 of the audit process, including a full
sample review for those procedures for
which a spot check review was performed
in Phase 1. If, after completion of the full
sample review, the external auditor deter-
September 3, 20024362002–35 I.R.B.

mines that underwithholding under
AG10.03(C)(1), (2), (3), (4) or (5) oc-
curred with respect to the sample, the IRS
will determine the total amount of under-
withheld tax by projecting the underwith-
holding as provided in AG10.04.12.
The goal of this step of the audit pro-
cess is to identify the cause for the nu-
merical results and to determine whether
corrective action readily can be devised. For
example, the audit report may show that the
auditor was unable to associate beneficial
owner information with a specified per-
centage of the QI’s accounts. Through dis-
cussion of facts with the auditor, the IRS
then determines that the problem was at-
tributable to deficient account opening pro-
cedures in one of the QI’s branches. If the
IRS were satisfied that the QI had taken
steps to ensure that the branch had appro-
priately corrected procedures for opening
new accounts, and if the QI had other-
wise shown a high level of compliance with
the QI Agreement, the IRS generally would
not proceed to Phase 3 of the audit pro-
cess.
.03PHASE 3: Audit Meeting with QI.
If the concerns arising from the numeri-
cal results reported in Phase 1 of the au-
dit process cannot be resolved by directed
fact finding in Phase 2, the IRS will pro-
pose to meet with the QI to attempt to
clarify and resolve those concerns. This
phase is designed specifically to provide a
forum where a productive dialogue be-
tween the IRS and the QI can occur. Trea-
sury and the IRS continue to believe that
the QI system, which is intended to allow
the IRS’s compliance goals to be met while
minimizing the administrative burdens on
financial institutions, is a critical compo-
nent of the withholding regulations. Ac-
cordingly, the IRS will seek to develop
mutually acceptable solutions to the is-
sues that arise in the course of administer-
ing the QI Agreements so that it will not
become necessary to terminate a QI Agree-
ment.
SECTION 4. MODIFICATIONS TO
THE PROPOSED AUDIT
GUIDANCE
As mentioned in Section 1, above, the
concerns arising from the proposed Audit
Guidance published in Notice 2001–66 gen-
erally related to the following five areas—
waivers, scope of audit coverage, sampling,
projection, and use of internal audit staff and
reports. This section discusses, in greater
detail, the modifications the IRS made to
the Audit Guidance in response to those
comments.
.01Discretionary Waivers of External
Audit. The Audit Guidance allows QIs to
request that the IRS waive the performance
of an audit by an external auditor in three
cases. As a result of the dialogue with the
financial community, and continued analy-
sis of the information available to the IRS,
the waiver provisions have been revised to
increase the availability of waivers while
allowing the IRS to continue to manage ef-
fectively its compliance objectives. In gen-
eral, the waiver provisions have been
liberalized and simplified. For instance, the
waiver based on a threshold number of ac-
counts has been replaced with a waiver
based on a dollar threshold, the waiver
based on a dollar threshold has been modi-
fied to raise the dollar threshold, the dol-
lar thresholds are based upon reportable
amounts rather than reportable payments,
and with respect to the reconciliation in-
formation that must be included in the
waiver request, variances are permitted
within reasonable limits based on the facts
and circumstances. Whether the IRS will
waive the external audit in any case is dis-
cretionary. The IRS will not agree to waive
the performance of an audit for a Private
Arrangement Intermediary (“PA I”)orfor
a group of QIs for which the IRS permits
a consolidated audit. The revised waiver
provisions are outlined below.
(i)Waiver One—$1,000,000 Thresh-
old. A QI may request a waiver of the ex-
ternal audit if it has received not more than
$1,000,000 in reportable amounts during the
audit year. A QI requesting Waiver One
must submit a reconciliation (for the au-
dit year) of the Forms 1042–S and 1099 is-
sued to the QI and issued by the QI and
information about the number of its ac-
count holders in various classes.
(ii)Waiver Two—$1,000,000 to
$4,000,000 Threshold. A QI may request a
waiver of the external audit if it has re-
ceived reportable amounts exceeding
$1,000,000 but not exceeding $4,000,000
during the audit year, and the QI has been
audited by an external auditor under the QI
Agreement for the immediately preced-
ing required audit. Thus, the IRS will not
agree to waive the external audit, under
Waiver Two, for the first audit year of the
first term or any renewal term of the QI
Agreement. Waiver Two will be available
only for the second audit year of any term
of the QI Agreement. As under Waiver One,
a QI requesting Waiver Two must submit
a reconciliation (for the audit year) of the
Forms 1042–S and 1099 issued to the QI
and issued by the QI and information about
the number of its account holders in vari-
ous classes.
(iii)Waiver Three—Annual Internal
Review Program. A QI may request a
waiver of the audit by an external auditor
if it has a substantial and independent in-
ternal audit department that has reviewed
the QI’s compliance under the QI Agree-
ment for each of the three years preced-
ing the year to be audited. The internal audit
department is not required to perform the
annual reviews according to the proce-
dures in this Audit Guidance. Instead, it may
perform any tests, checks or other proce-
dures that it determines to be appropriate.
The internal audit department may request
IRS clearance of any proposed program of
tests, checks or other procedures by sub-
mitting a written description of the pro-
posed program. If this waiver is granted,
instead of the required audit by an exter-
nal auditor, the QI’s internal audit depart-
ment may perform the audit and report to
the IRS in accordance with the attached Au-
dit Guidance. The IRS will not agree to
grant this waiver for the first audit year of
the first term of the QI Agreement. Waiver
Three will be available for any subsequent
audit year of any term of the QI Agree-
ment.
02.Scope of Audit. In response to com-
ments from the financial community, the
IRS has revised the scope of the audit and,
in particular, the procedures required for
Phase 1 of the audit process. The revised
procedures accommodate mutual concerns
relating to cost, efficiency and compli-
ance by (i) limiting the accounts initially
selected for examination to accounts that
have received reportable amounts, (ii) de-
ferring certain tasks to Phase 2 of the au-
dit process, (iii) adopting exploratory“spot
check”techniques for certain tasks; (iv) al-
lowing explanatory footnotes or addenda;
and (v) allowing consolidated audits for cer-
tain groups of related QIs. Set forth be-
low is a discussion of the changes to each
of these five areas of the audit.
(i)Reportable Amounts. The revised pro-
cedures included in the attached Audit Guid-
ance limit the accounts initially selected for
2002–35 I.R.B.437September 3, 2002

examination to those accounts that have re-
ceived reportableamounts. Under the pro-
posed Audit Guidance, the accounts initially
selected for examination would have in-
cluded accounts that had received report-
ablepayments. Under the QI Agreement,
“reportable amounts,”generally consist of
U.S. source fixed or determinable, annual
or periodical income.“Reportable pay-
ments”generally consist of reportable
amounts plus certain broker proceeds and
certain foreign source income. The finan-
cial community expressed concern about the
difficulty of making an initial selection of
accounts based on reportable payments. The
IRS agrees that efficiency may be served
by the initial selection of accounts based on
receipt of reportable amounts, provided that
reportable payments received in those ac-
counts may be examined when required un-
der the Audit Guidance. Accordingly, the
revised procedures under this Audit Guid-
ance require the external auditor initially to
select for examination only those accounts
that have received reportable amounts, and
then to examine reportable payments made
to accounts within that group when re-
quired in Phase 1 of the audit.
(ii)Deferral of Certain Tasks to Phase
2 of the Audit Process. During the audit, the
external auditor must perform tasks de-
signed to gather certain basic facts about
the QI’s compliance with the QI Agree-
ment. The revised procedures included in
the attached Audit Guidance defer certain
of these tasks to Phase 2 of the audit pro-
cess. The revised procedures reflect the view
that the most accurate facts relating to a
QI’s compliance may be obtained by ex-
amining how a QI has (a) documented, (b)
pooled, (c) withheld on and (d) reported on
particular accounts. Accordingly, tasks that
require the examination of particular ac-
counts have been retained in Phase 1 of the
audit and tasks that do not relate to exami-
nation of particular accounts, generally, have
been deferred to Phase 2. For example,
tasks requiring interviews of QI employ-
ees have been deferred to Phase 2.
(iii)SpotCheckReviewunder
AG10.03(B), (C), and (D). The IRS rec-
ognizes that the withholding system is based
on information drawn from account holder
documentation and that account holders
open and close accounts periodically. It also
recognizes that pooling, withholding and re-
porting depend in large part on the proce-
dures and systems the QI uses to process
the information obtained from account
holder documentation. The revised proce-
dures reflect the view that a thorough ex-
amination of how a QI has documented all,
or a representative sample of, its account
holders may provide a reliable indication
of the QI’s overall compliance, and that its
reliability may then be tested by explor-
atory examination of how the QI has
pooled, withheld, and reported based on in-
formation drawn from the documentation
of a smaller number of account holders.
Accordingly, the revised procedures in
this Audit Guidance generally require that
in Phase 1 of the audit, the external audi-
tor must use all accounts covered by the QI
Agreement, or a statistical sample repre-
senting all such accounts, in performing the
account based tasks that relate to how the
QI has documented its account holders. In
performing the account based tasks that re-
late to how the QI has pooled, withheld, and
reported, the revised procedures provide the
external auditor with the option of using a
smaller number of accounts. The number
of accounts to be reviewed for a spot check
must include all accounts required to be re-
ported as undocumented or as not satisfy-
ingdocumentationcriteriaunder
AG10.03(A), and must in any case include
at least 20 accounts from each of the fol-
lowing categories of account holders (as-
suming there are 20 or more accounts in
each such category): QI’s direct account
holders that are not U.S. non-exempt re-
cipients; QI’s direct account holders that are
U.S. non-exempt recipients; and QI’s in-
direct account holders.
(iv)Explanatory footnotes or addenda.
This Audit Guidance has been modified to
include a provision permitting the exter-
nal auditor to perform or to propose addi-
tional procedures or other fact finding and
report the results by way of footnotes or ad-
denda to its report for Phase 1 of the au-
dit. This provision offers the opportunity to
clarify problematic results reported for Phase
1 of the audit, which may obviate the ne-
cessity for follow up in Phase 2.
(v)Consolidated Audits for Certain Re-
lated QIs. The financial community has also
suggested that cost and efficiency con-
cerns could be mitigated by consolidating
the audits of related QIs. In response, the
IRS has modified the Audit Guidance to
permit a consolidated audit of two or more
QIs in circumstances when the consoli-
dated audit may achieve the objectives of
separate audits of those QIs. Specifically,
the Audit Guidance provides that the IRS,
in its discretion, may permit a consoli-
dated audit of two or more QIs when (1)
the QIs are members of a group under com-
mon ownership, (2) they operate with uni-
form practices and procedures and shared
systems for performing the functions au-
dited, (3) those practices and procedures and
shared systems are subject to uniform moni-
toring and control, and (4) under the terms
of the QI Agreement for each QI, the year
to be audited for each QI is the same cal-
endar year. The external auditor must sub-
mit an audit plan requesting IRS approval
of any proposed consolidated audit.
.03Sampling. The Audit Guidance per-
mits an external auditor to use a statisti-
cal sample of the QI’s accounts in
performing the Phase 1 account based tasks.
If the external auditor constructs the sample
in accordance with the Audit Guidance, it
need not submit an audit plan to obtain IRS
approval for use of the sample. A sample
constructed under the proposed Audit Guid-
ance would have consisted of a maximum
of 456 accounts for each of three popula-
tions (direct account holders that are not
U.S. non-exempt recipients, direct account
holders that are U.S. non-exempt recipi-
ents, and indirect account holders), or a to-
tal of 1368 accounts.
Commentators stated that the cost bur-
dens could be significantly reduced by lim-
iting the overall number of accounts to be
selected for statistical sampling. The final
Audit Guidance reduces the overall num-
ber of accounts to be selected for statisti-
cal sampling by allowing a single sample
that represents the three groups of account
holders. Also, the revised procedures per-
mit the use of a one-sided confidence level
in the sample formula. The single sample
constructed under the revised procedures of
this Audit Guidance will consist of a maxi-
mum of 321 accounts.
.04Projection of Underwithholding. The
QI Agreement provides that if statistical
sampling has been used and the auditor de-
termines that underwithholding has oc-
curred with respect to the sampled accounts,
the IRS will determine the total amount of
underwithheld tax by projecting the under-
withholding over the entire population of
similar accounts.
The proposed audit procedures would
have provided that if the auditor used a
sample and found that underwithholding had
September 3, 20024382002–35 I.R.B.

occurred with respect to an account in the
sample, the auditor was required to re-
port the underwithholding in the report for
Phase 1 of the audit. In Phase 2 of the au-
dit, the IRS would direct the external au-
ditor to perform any additional procedures
necessary to collect the information re-
quired to determine whether it was appro-
priate to project the underwithholding and
any information required to make a pro-
jection. Finally, in Phase 3 of the audit, the
QI could address whether projection was
appropriate and could propose a projec-
tion using another amount of underwith-
holding based on a more accurate
population, a more accurate projection tech-
nique, or an examination of all similar ac-
counts.
The financial community expressed con-
cern that the projection of underwithhold-
ing under the proposed guidance appeared
to be automatic. Although the revised pro-
cedures under the attached Audit Guid-
ance continue to follow the pattern adopted
in the proposed Audit Guidance, they make
clear that the issue of projection is de-
ferred to Phase 2 of the audit. Under Phase
1 of the audit, the QI will be liable for any
underwithholding discovered for the par-
ticular accounts examined in Phase 1.
Whether an entire sample has been exam-
ined or the exploratory spot check option
has been used, no projection of underwith-
holding will be required based on the ex-
ternal auditor’s report for Phase 1 of the
audit. If, after review of the external au-
ditor’s report for Phase 1, the IRS has con-
cerns about underwithholding, the audit will
proceed to Phase 2. Based on the follow up
fact finding in Phase 2, the IRS will de-
termine whether projection is appropriate
and how to make a projection under the
facts and circumstances of the particular
case. An external auditor may use the foot-
note or addendum procedure explained pre-
viously to report facts relevant to a potential
issue of projection of underwithholding as
part of its report for Phase 1 of the audit
to help the IRS to review the issue as ef-
ficiently as possible.
.05External Auditor’s Reliance on In-
ternal Auditors. The final Audit Guidance,
like the proposed guidance, allows the ex-
ternal auditor to use a QI’s internal audit
staff and internal audit reports to any ex-
tent the external auditor chooses. Never-
theless, the external auditor remains
responsible for the conduct of the audit. The
external auditor must disclose in the au-
dit report specifically how and when it has
used the QI’s internal audit staff and re-
ports.
The proposed Audit Guidance would
have required the external auditor to cer-
tify that the use of a QI’s internal audit per-
sonnel and reports has not affected the
accuracy of the external auditor’s report.
Auditing firms have claimed that such a cer-
tification cannot be made without dupli-
cating the efforts of the QI’s internal
auditors. To accommodate this concern, this
final Audit Guidance has dropped the cer-
tification requirement. Based on the exter-
nal auditor’s disclosure in its report for
Phase I of the audit, the IRS will review
how the use of a QI’s internal audit per-
sonnel and reports may have affected the
accuracy of the external auditor’s report, and
will take that review into account in de-
termining whether any follow up in Phase
2 of the audit is appropriate.
SECTION 5. COMMENTS
The IRS and Treasury recognize that the
QI system requires an innovative approach
to the audit process and that the process will
evolve as experience is gained. The IRS and
Treasury will consider further modifica-
tion of the Audit Guidance in light of ex-
perience and encourage further dialogue
with the financial community.
SECTION 6. CONTACT
INFORMATION
For further information regarding this
Revenue Procedure, contact Carl Cooper or
Laurie Hatten-Boyd of the Office of the As-
sociate Chief Counsel (International), In-
ternal Revenue Service,1111Constitution
Avenue, N.W., Washington, D.C. 20224.
Mr. Cooper and Ms. Hatten-Boyd may be
contacted by telephone at 202–622–3840
(not a toll-free call). For general informa-
tion relevant to qualified intermediaries, see
the QI web site at:www.irs.gov/and search
the IRS site for“QI.”
APPENDIX
GUIDANCE FOR EXTERNAL AUDITORS OF QUALIFIED INTERMEDIARIES
TABLE OF CONTENTS
Audit Guidance Sec. 10.01:
10.01.1.Accounts and Account Holders Covered by the QI Agreement.
10.01.2.IRS Audit.
10.01.3.Consolidated Audit of QIs.
10.01.4.External Audit Waiver ($1,000,000 Threshold).
10.01.5.External Audit Waiver ($1,000,000 to $4,000,000 Threshold).
10.01.6.External Audit Waiver (Annual Internal Review Program).
Audit Guidance Sec. 10.02:
10.02.1.Auditor Approval.
10.02.2.Auditor Independence.
2002–35 I.R.B.439September 3, 2002

Audit Guidance Sec. 10.03:
10.03.1.Scope-In General.
10.03.2.Phase 1 of the Audit.
10.03.3.Phase 2 of the Audit.
10.03.4.Specifications of Audit Report.
10.03.5.Submission of Audit Plan.
10.03.6.Use of Internal Audit.
10.03.7.Use of Copies.
Audit Guidance 10.03(A)(1):
10.03(A)(1).1.Review of Documentation Training.
10.03(A)(1).2.Documentation Training Report.
Audit Guidance 10.03(A)(2):
10.03(A)(2).1.Review of Account Opening Procedures.
10.03(A)(2).2.Account Opening Procedures Report.
Audit Guidance 10.03(A)(3):
10.03(A)(3).1.Review of Limitation on Benefits (LOB) Procedure.
10.03(A)(3).2.LOB Procedure Report.
Audit Guidance 10.03(A)(4):
10.03(A)(4).1.Review of Treaty Statements.
10.03(A)(4).2.Treaty Statements Report.
Audit Guidance 10.03(A)(5):
10.03(A)(5).1.Review of Documentation Validity (Foreign Persons and U.S. Exempt Recipients).
10.03(A)(5).2.Documentation Validity (Foreign Persons and U.S. Exempt Recipients) Report.
Audit Guidance 10.03(A)(6):
10.03(A)(6).1.Review of Documentation Validity (Disclosed U.S. Non-exempt Recipients).
10.03(A)(6).2.Documentation Validity (U.S. Non-exempt Recipients) Report.
Audit Guidance 10.03(A)(7):
10.03(A)(7).1.Account Review of U.S. Non-exempt Recipients (Disclosure Prohibited).
10.03(A)(7).2.Account Review of U.S. Non-exempt Recipients (Disclosure Prohibited) Report.
Audit Guidance 10.03(A)(8):
10.03(A)(8).1.Review of PAI Obligations.
10.03(A)(8).2.PAI Obligations Report.
Audit Guidance 10.03(A)(9):
10.03(A)(9).1.Knowledge of KYC Investigations.
10.03(A)(9).2.KYC Investigations Report.
Audit Guidance 10.03(A)(10):
10.03(A)(10).1.Review of Removal of U.S. Non-exempt Recipients.
10.03(A)(10).2.Removal of U.S. Non-exempt Recipients Report.
Audit Guidance 10.03.(B)(1):
10.03(B)(1).1.Review of Withholding Rate Pool Training Materials.
10.03(B)(1).2.Withholding Rate Pool Training Materials Report.
September 3, 20024402002–35 I.R.B.

Audit Guidance 10.03(B)(2):
10.03(B)(2).1.Review of Personnel Training (Withholding Rate Pool).
10.03(B)(2).2.Personnel Training (Withholding Rate Pool) Report.
Audit Guidance 10.03(B)(3):
10.03(B)(3).1.Review of Withholding Statements.
10.03(B)(3).2.Withholding Statement Report.
Audit Guidance 10.03(B)(4):
10.03(B)(4).1.Review of Withholding Rate Pool Classification.
10.03(B)(4).2.Withholding Rate Pool Classification Report.
Audit Guidance 10.03(B)(5):
10.03(B)(5).1.Review of Withholding Rate Pool Classification (U.S. Non-exempt Recipients).
10.03(B)(5).2.Withholding Rate Pool Classification (U.S. Non-exempt Recipient) Report.
Audit Guidance 10.03(B)(6):
10.03(B)(6).1.Review of Alternative Procedure.
10.03(B)(6).2.Alternative Procedure Report.
Audit Guidance 10.03(C)(1):
10.03(C)(1).1.Review of Withholding (NRA Withholding Assumed).
10.03(C)(1).2.Withholding (NRA Withholding Assumed) Report.
Audit Guidance 10.03(C)(2):
10.03(C)(2).1.Review of Withholding (NRA Withholding Not Assumed).
10.03(C)(2).2.Withholding (NRA Withholding Not Assumed) Report.
Audit Guidance 10.03(C)(3):
10.03(C)(3).1.Review of Backup Withholding (Responsibilities Assumed).
10.03(C)(3).2.Backup Withholding (Responsibilities Assumed) Report.
Audit Guidance 10.03(C)(4):
10.03(C)(4).1.Backup Withholding Review (Responsibilities Not Assumed).
10.03(C)(4).2.Backup Withholding (Responsibilities Not Assumed) Report.
Audit Guidance 10.03(C)(5):
10.03(C)(5).1.Review of Backup Withholding on Reportable Payments (Disclosure Prohibited).
10.03(C)(5).2.Backup Withholding on Reportable Payments (Disclosure Prohibited) Report.
Audit Guidance 10.03(C)(6):
10.03(C)(6).1.Review of Assets Held by U.S. Non-exempt Recipients (Disclosure Prohibited).
10.03(C)(6).2.Assets Held by U.S. Non-exempt Recipients (Disclosure Prohibited) Report.
Audit Guidance 10.03(C)(7):
10.03(C)(7).1.Review of Timely Deposits.
10.03(C)(7).2.Timely Deposits Report.
Audit Guidance 10.03(D)(1):
10.03(D)(1).1.Review of Forms 1042 and 945.
10.03(D)(1).2.Forms 1042 and 945 Report.
2002–35 I.R.B.441September 3, 2002

Audit Guidance 10.03(D)(2):
10.03(D)(2).1.Review of Forms 1042–S and 1099.
10.03(D)(2).2.Forms 1042–S and 1099 Report.
Audit Guidance 10.03(D)(3):
10.03(D)(3).1.Review of Refunds.
10.03(D)(3).2.Refund Report.
Audit Guidance 10.03(D)(4):
10.03(D)(4).1.Review of Account Holder Repayment Prior to Refund.
10.03(D)(4).2.Account Holder Repayment Prior to Refund Report.
Audit Guidance 10.03(E):
10.03(E).1.Review of Change in Circumstance.
10.03(E).2.Change in Circumstance Report.
Audit Guidance 10.04:
10.04.1.Use of Statistical Sampling.
10.04.2.Sample Size.
10.04.3.Sample Formula.
10.04.4.Division of Accounts into Strata.
10.04.5.Allocation of Sample Size to Each Stratum.
10.04.6.Number Generator.
10.04.7.Selection of Accounts for Phase 1 Spot Checks.
10.04.8.Records of Sampling Methodology.
10.04.9.Alternative Sampling Methods.
10.04.10.Optional Substratification by Dollar Amounts.
10.04.11.Phase 1: Determination of Underwithholding.
10.04.12.Phase 2: Projection.
Audit Guidance 10.05:
10.05.1.Auditor’s Report Requirements.
10.05.2.Standard Report Form.
10.05.3.Report Due Dates.
Audit Guidance 10.06:
10.06.1IRS Review of Audit Report.
10.06.2.Audit Phase 2: IRS Directed Procedures.
10.06.3.Audit Phase 3: Audit Meeting.
GUIDANCE
FOR EXTERNAL AUDITORS OF QUALIFIED INTERMEDIARIES
The following Audit Guidance is provided for an external auditor engaged by a qualified intermediary (“QI”) to verify compli-
ance with its Qualified Intermediary Agreement (“QI Agreement”)
1
. The QI Agreement is an agreement between the QI and the In-
ternal Revenue Service (“IRS”) under which, generally, the QI 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. In section 10 of the QI Agree-
ment, the IRS agrees not to conduct an on-site audit of the QI provided the QI engages an external auditor to conduct an audit to
determine whether the QI is in compliance with the QI Agreement and to make a report to the IRS. The external auditor must con-
duct its audit and provide its report in accordance with the procedures detailed in section 10 of the QI Agreement.
1
For the text of the QI Agreement, see Section 4 of Rev. Proc. 2000–12, 2000–1 C.B. 387.
September 3, 20024422002–35 I.R.B.

For reference, section 10 of the QI Agreement is reproduced below in bolded text. Following each paragraph of section 10, Au-
dit Guidance is provided that is specific to, and numbered to correspond to, that paragraph. This Audit Guidance does not amend,
modify, or interpret the QI Agreement.
This Audit Guidance reflects a three-phase audit process. Phase 1 consists of basic fact finding. After examination of the facts
reported in Phase 1, the IRS will determine whether it is necessary to progress to Phase 2 of the Audit. If so, the external auditor
will be asked to conduct follow up fact finding. The audit will move to Phase 3 only if the concerns of the IRS arising from the
numerical results reported in Phase 1 cannot be resolved by the additional fact finding in Phase 2. Under Phase 3, the IRS will meet
with the QI to attempt to resolve those concerns.
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) through (E) describes 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 in Phases 1 and 2 of the audit. Section 10.04 provides guid-
ance 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 Phases 2 and 3 of the audit process.
In Phase 1 of the audit, only certain procedures in section 10.03(A) through (E) must be completed, as described in more detail
in AG10.03.2 below. The provisions that must be completed in Phase 1 are labeled either“Phase 1,”“Phase 1–All Accounts (or
Sample),”or“Phase 1–Spot Check.”The procedures labeled“Phase 1–All Accounts (or Sample)”require the external auditor
to examine all accounts identified in AG10.04.4(a) through (c) or the accounts selected as a sample from those identified accounts.
The procedures labeled“Phase 1–Spot Check”require the external auditor to examine only those accounts selected for testing, in
accordance with AG10.04.7, in performing the procedures. Those procedures that must be completed in Phase 1 but either do not
require a review of accounts or do not require a review of documentation are labeled“Phase 1.”Those procedures that are not re-
quired to be performed in Phase 1 are labeled“Phase 2 only.”
In Phase 2, the IRS will conduct follow up fact finding under which it may require the external auditor to complete and report
on some or all of the remaining procedures in section 10.03(A) through (D) or additional procedures, as it deems appropriate. Thus,
for example, in Phase 2 the IRS may direct that procedures that were performed on a spot check basis under Phase 1 must be per-
formed based on an examination of all accounts identified or selected as a sample.
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 of QI’s account holders to the IRS.
Audit Guidance Sec. 10.01:
10.01.1.Accounts and Account Holders Covered by the QI Agreement. For purposes of this Audit Guidance, the following defi-
nitions shall apply.“Accounts covered by the QI Agreement”means accounts maintained by the QI for its direct account holders
(which include intermediaries and flow-through entities) to which the QI has made payments of reportable amounts during the au-
dit year from the QI’s accounts with withholding agents that the QI has designated as QI accounts.“Indirect account holders cov-
ered by the QI Agreement”means indirect account holders for which recipient specific reporting by the QI is required under section
8.02(B) or (C) or section 8.04 of the QI Agreement.
10.01.2.IRS Audit. A QI that is not prohibited by law from disclosing account holder information may request an IRS onsite au-
dit instead of an external audit. To request an IRS audit, the QI must submit a written request to the IRS before September 30 of
the year to be audited (“audit year”). The QI must send the request to the following address:
Internal Revenue Service
LMSB:FS:QI
290 Broadway–12th Floor
New York, NY 10007–1867
USA
2002–35 I.R.B.443September 3, 2002

The IRS will send the QI written confirmation that it has 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 payments of reportable amounts to no more than 50 accounts cov-
ered by the QI Agreement, the IRS may decide to conduct an audit by correspondence.
10.01.3.Consolidated Audit of QIs. The IRS, in its discretion, may permit a consolidated audit of two or more QIs when (i) the
QIs are members of a group under common ownership, (ii) they operate with uniform practices and procedures and shared sys-
tems for performing the functions audited under AG10.03, (iii) those practices and procedures and shared systems are subject to uni-
form monitoring and control, and (iv) under the terms of the QI Agreement for each QI, the audit year for each QI is the same calendar
year. To request a consolidated audit, the external auditor must submit an audit plan in accordance with AG10.03.5. The external
auditor must make a separate request for a consolidated audit for each audit year. The request must explain (i) the ownership of all
related entities (including those that are not QIs), (ii) which QIs are proposed to be included in the consolidated audit, (iii) how their
practices and procedures are uniform and how their systems are shared and (iv) how their practices, procedures and systems are moni-
tored and controlled. The IRS, in its discretion, may also require that the consolidated audit include or exclude certain QIs. The IRS
will not permit a Private Arrangement Intermediary (“PA I”) to be included in a consolidated audit.
10.01.4.External Audit Waiver ($1,000,000 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 amounts during that year that do not exceed $1,000,000. To
calculate the $1,000,000 threshold, the QI must aggregate all reportable amounts (including (i) payments of reportable amounts ben-
eficially owned by the QI and (ii) payments of reportable amounts received by all branches of the QI that use the same QI-EIN)
made to its accounts with withholding agents that the QI has designated as QI accounts. A QI succeeding to the responsibilities of
another QI must aggregate all reportable amounts received by its predecessor for the audit year. The QI must submit its request for
a waiver to the IRS before June 30 of the year following the audit year at the address in AG10.01.2.
The QI should include in its request:
(a)A reconciliation for the audit year of the Forms 1042–S and 1099 issued to the QI and the Forms 1042–S and 1099
issued by the QI, which identifies the reasons for any variances and shows the amount of any unreconciled vari-
ances (unreconciled variances are permitted within reasonable limits based on the facts and circumstances); and
(b)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;
(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 recipi-
ents, U.S. non-exempt recipients, intermediaries, flow-through entities, and undocu-
mented account holders;
(2)States the total amount of any underwithholding or collective refunds for the three years (or, if the
QI Agreement has not been in effect for three years, for all preceding years during which the QI Agree-
ment has been in effect) preceding 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 did not refer account holders to an affiliated entity with the effect of circumvent-
ing the $1,000,000 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. At its sole discretion, the IRS may agree to waive or refuse to
waive performance of the external audit. In determining whether to waive performance of the external audit, the IRS may take into
account the information provided, all other information available to the IRS, and also other compliance objectives. For example, to
monitor compliance, the IRS may require an external audit for some QIs (chosen on a random basis) that would otherwise qualify
for a waiver. The IRS will send the QI a written response to the waiver request indicating whether the IRS agrees to waive the per-
formance of the audit for the audit year. The IRS will not agree to waive the performance of an audit for a PAI, for a group of QIs
for which the IRS permits a consolidated audit under AG10.01.3, or for any QI that is included in such a group.
10.01.5.External Audit Waiver ($1,000,000 to $4,000,000 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 received reportable amounts exceeding $1,000,000
but not exceeding $4,000,000, and the QI has been audited by an external auditor under the QI Agreement for the immediately pre-
ceding audit year. To calculate the $1,000,000 to $4,000,000 threshold, the QI must aggregate all reportable amounts (including (i)
payments of reportable amounts beneficially owned by the QI and (ii) payments of reportable amounts received by all branches of
the QI that use the same QI-EIN) received in its accounts with withholding agents that the QI has designated as QI accounts. A QI
September 3, 20024442002–35 I.R.B.

succeeding to the responsibilities of another QI must aggregate all reportable amounts received by its predecessor for the audit year.
The QI must submit its request for a waiver to the IRS before June 30 of the year following the audit year at the address in AG10.01.2.
The QI should include in its request:
(a)A reconciliation for the audit year of the Forms 1042–S and 1099 issued to the QI and the Forms 1042–S and 1099
issued by the QI, which identifies the reasons for any variances and shows the amount of any unreconciled vari-
ances (unreconciled variances are permitted within reasonable limits based on the facts and circumstances); and
(b)A statement made under penalties of perjury by the Responsible Party, as defined in AG10.01.4(b), that:
(1)States
(i)The number of the QI’s direct account holders during the audit year;
(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 recipi-
ents, U.S. non-exempt recipients, intermediaries, flow-through entities, and undocu-
mented account holders;
(2)States the total amount of any underwithholding or collective refunds for the three years (or, if the
QI Agreement has not been in effect for three years, for all preceding years during which the QI Agree-
ment has been in effect) preceding 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 did not refer account holders to an affiliated entity with the effect of circumvent-
ing the $1,000,000 to $4,000,000 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. At its sole discretion, the IRS may agree to waive or refuse to
waive performance of the external audit. In determining whether to waive performance of the external audit, the IRS may take into
account the information provided, all other information available to the IRS, and also other compliance objectives. For example, to
monitor compliance, the IRS may require an external audit for some QIs (chosen on a random basis) that would otherwise qualify
for a waiver. The IRS will send the QI a written response to the waiver request indicating whether the IRS agrees to waive the per-
formance of the audit for the audit year. The IRS will not agree to waive the performance of an audit for a PAI, for a group of QIs
for which the IRS permits a consolidated audit under AG10.01.3, or for any QI that is included in such a group.
10.01.6.External Audit Waiver (Annual Internal Review Program).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 in-
ternal auditors have conducted a review of the QI’s compliance with the QI Agreement each year for the three years preceding the
audit year. If this waiver is granted, instead of the required audit by an external auditor, the QI’s internal audit department must per-
form the audit and report to the IRS in accordance with the attached Audit Guidance.
The internal auditors need not have conducted the three preceding annual reviews in accordance with this Audit Guidance. In-
stead, the internal auditors may perform any tests, checks or other procedures that the internal auditors may determine are appro-
priate. The internal auditors may request IRS clearance of any proposed program of tests, checks or other procedures by submitting
a written description of the proposed program to the address provided in AG10.01.2. The IRS will send a written response to this
request.
The QI must submit its request for a waiver to the IRS before June 30 of the year following the audit year at the address in AG10.01.2.
The QI must include in its request a statement, made under penalties of perjury by the Responsible Party, as defined in AG10.01.4(b),
that states:
(a)The number of direct account holders and the number of indirect account holders to which the QI has made pay-
ments of reportable amounts;
(b)The aggregate amount of payments of reportable amounts (including payments of reportable amounts beneficially
owned by the QI) made to its accounts with withholding agents that the QI has designated as QI accounts;
(c)The audit charter or similar document explaining the internal audit department’s position within the organization,
its powers and responsibilities, how the internal audit staff is organized, including position descriptions, the num-
ber of individuals in each position, the names of the individual or individuals with overall responsibility for inter-
nal audit, the routine functions of the internal auditors, and the persons to whom the internal auditors report;
2002–35 I.R.B.445September 3, 2002

(d)Brief summaries (which, like all other documents submitted to the IRS, must be translated into English, if neces-
sary), of the procedures performed, the findings, and the conclusions or recommendations of each annual review
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 Agree-
ment 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 gov-
erned 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. At its sole discretion, the IRS may agree to waive or refuse to waive performance of the external audit. In deter-
mining whether to waive performance of the external audit, the IRS may take into account the information provided, all other in-
formation available to the IRS, and also other compliance objectives. For example, to monitor compliance, the IRS may require an
external audit for some QIs (chosen on a random basis) that would otherwise qualify for a waiver. The IRS will send the QI a writ-
ten response to the waiver request indicating whether the IRS agrees to waive the performance of the audit for the audit year. The
IRS will not agree to waive the external audit for the first audit year of the first term of the QI Agreement. The IRS will not agree
to waive the performance of an audit for a PAI, for a group of QIs for which the IRS permits a consolidated audit under AG10.01.3,
or for any QI that is included in such a group.
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 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 au-
ditor may submit a written request explaining the qualifications of the external auditor to the IRS at any time. The QI or the ex-
ternal auditor should send the request to the address provided in AG10.01.2. The IRS will send the QI or the external auditor a written
response to the request.
10.02.2.Auditor Independence. A QI and its external auditor must disclose to the IRS any circumstances that compromise or rea-
sonably 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 AG10.01.2. If the IRS deter-
mines that the external auditor is not acceptable, it will send the QI and the external auditor a written notice to that effect.
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 Agree-
ment. The external auditor shall verify whether QI is in compliance with this Agreement by conducting an audit that meets the re-
quirements 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(oraPAI’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.Scope-In General. AG10.03(A), (B), (C), (D) and (E) corresponds to section 10.03(A), (B), (C), (D) and (E) of the QI
Agreement. Each section and subsection of AG10.03(A), (B), (C), (D) and (E) describe procedures that an external auditor should
follow and the information to be included in the external auditor’s report to the IRS under each corresponding section and subsec-
tion of the QI Agreement. For Phase 1 of the audit, the IRS requires the external auditor to complete only certain procedures and
to report only certain information generated by those procedures. The IRS may require the external auditor to complete and report
on the remaining procedures as part of the follow up fact finding in Phase 2 of the audit process. For convenience, a chart is in-
cluded at the end of this Audit Guidance that provides an overview of the procedures to be completed in Phase 1.
September 3, 20024462002–35 I.R.B.

10.03.2.Phase 1 of the Audit.
(a)
Scope of Phase 1 of the Audit.Those provisions of AG10.03(A) through (E) that must be completed in Phase 1 of
the audit are labeled as either“Phase 1–All Accounts (or Sample),”“Phase 1–Spot Check,”or“Phase 1”in bold
preceding the text of the subparagraph. The remaining provisions are deferred to Phase 2 and are labeled“Phase
2 only”
(1)
Phase1–All Accounts (or Sample).The provisions labeled“Phase 1–All Accounts (or Sample)”re-
late to procedures that must be performed for all applicable accounts covered by the QI Agreement
(e.g.,accounts held by either direct foreign account holders, U.S. non-exempt recipients, or indirect
account holders, as indicated under the subsection), or all such accounts contained in a valid sample
selected under AG10.04.
(2)
Phase 1–Spot Check.The provisions labeled“Phase 1–Spot Check”relate to procedures that the ex-
ternal auditor may perform on a“spot check”basis by selecting accounts for testing in accordance
with AG10.04.7 instead of examining all applicable accounts covered by the QI Agreement or all such
accounts contained in the sample.
(3)
Phase 1.The provisions labeled“Phase 1”relate to procedures that either do not require the exter-
nal auditor to examine accounts or do not require a documentation review. Accordingly, these pro-
cedures are performed in accordance with the instructions in these subsections.
(b)
Additional Procedures.As a part of Phase 1 of the audit, the external auditor may perform any additional proce-
dures or other additional fact finding that it deems appropriate.
(c)
Use of explanatory footnotes or addenda.The external auditor may include in its audit report for Phase 1 expla-
nations of information reported, additional information produced by any additional procedures or fact finding, or
any proposals to perform additional procedures or fact finding, in the form of footnotes to information required to
be included in its audit report or in the form of addenda to its audit report.
10.03.3.Phase 2 of the Audit. After reviewing the external auditor’s report for Phase 1, the IRS may determine that additional
fact finding is necessary. In that case, the IRS may direct the external auditor to perform and report on certain specific procedures.
These procedures may include directing the external auditor to complete a review of all applicable accounts covered by the QI Agree-
ment, or all such accounts contained in the sample, for some or all of the provisions of AG10.03(B), (C), and (D). See AG10.06.2.
10.03.4.Specifications of Audit Report. For guidance on the form and content of the external auditor’s report, submitting the re-
port to the IRS, the due date of the report and extensions of the due date, see AG10.05.
10.03.5.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 AG10.03 and 10.04. In such circumstances, the ex-
ternal 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 AG10.01.2.
The IRS will send the external auditor a written response to the submission.
10.03.6.Use of Internal Audit. 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 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.
10.03.7.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)[Phase 2 only]:
10.03(A)(1).1.Review of Documentation Training. In Phase 2 of the audit, if the IRS directs, 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.
2002–35 I.R.B.447September 3, 2002

Step 3:Inspect the written training materials, manuals, and directives to determine whether they contain instructions spe-
cific 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:
Report 1:Whether the QI has written training materials, manuals, and directives that contain instructions specific to ac-
counts 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 Guidance 10.03(A)(2)[Phase 2 only]:
10.03(A)(2).1.Review of Account Opening Procedures. In Phase 2 of the audit, if the IRS directs, the external auditor must:
Step 1:Identify the QI employees responsible for opening and maintaining customer accounts and select representative em-
ployees for interview.
Step 2:Ask the selected employees how accounts covered by the QI Agreement are opened, what documentation is re-
quested, 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 main-
tained 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)[Phase 2 only]:
10.03(A)(3).1.Review of Limitation on Benefits (LOB) Procedure. In Phase 2 of the audit, if the IRS directs, the external audi-
tor must:
Step 1:Ask the QI employees selected for interview under AG10.03(A)(2) Step 1 how account holders that are not indi-
viduals 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:
Report 1:The number of employee responses that indicate that such customers are not informed about any applicable limi-
tation 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)[Phase 1 – All Accounts (or Sample)]:
10.03(A)(4).1.Review of Treaty Statements.In Phase 1 of the audit, 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. recipi-
ents, or all such accounts contained in a valid sample selected in accordance with AG10.04.
Step 2:From the accounts identified 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.
September 3, 20024482002–35 I.R.B.

Step 5:Foreach account segregated in Step 4, determine whether there is a valid treaty statement described in section 5.03(B)
of the QI Agreement. A valid treaty statement must be signed and dated by the beneficial owner. A treaty state-
ment 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 whose ac-
count holders 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 each intermediary that is a direct account holder;
and
(e)The number of indirect account holders holding through each flow through entity that is a direct account
holder.
Step 7:(a)Identify all indirect account holders covered by the QI Agreement or all such account holders contained in
the sample selected in accordance with AG10.04. From the indirect account holders identified, 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 docu-
mentary evidence has been obtained.
(c)From the indirect account holders segregated in (b), segregate indirect account holders that are not indi-
viduals or governments.
(d)For each indirect account holder segregated in (c), determine whether there is a valid treaty statement de-
scribed 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:Thenumber 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 account holders determined under Step 6(a) through (e).
Report 4:The number of indirect account holders identified and segregated under Step 7 (a) through (c).
Report 5:The number of indirect account holders segregated in Step 7(c) 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)[Phase 1–All Accounts (or Sample)]:
10.03(A)(5).1.Review of Documentation Validity (Foreign Persons and U.S. Exempt Recipients). In Phase 1 of the audit, the ex-
ternal 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 all such accounts contained in the sample selected under AG10.04.
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.
2002–35 I.R.B.449September 3, 2002

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:
(1)Line 1 (name of individual or organization that is the beneficial owner);
(2)Line 2 (country of incorporation or organization), for non-individuals;
(3)Line 3 (type of beneficial owner);
(4)Line 4 (permanent residence address, including country) A permanent residence ad-
dress cannot be a P.O. Box, in-care-of address or an address at a financial institution,
including a hold mail instruction (except when the beneficial owner is a financial in-
stitution); and
(5)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.
(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:
(1)Line 9a (residence certification, including name of country); and
(2)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 fol-
lowing 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 instruc-
tion (except when the beneficial owner is a financial institution);
(e)Either:
(1)Line 9a, and 9b or 9c; or
(2)Line 10 (and organization is designated by executive order under 22 U.S.C. 288 through
288(f)); or
(3)Line 11; or
(4)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
(5)Line 13;
(f)Signature and date:
(1)Determine that the certifications attested under penalties of perjury have not been modi-
fied.
Step 5:FORM W–8ECI. For accounts documented with Form W–8ECI, inspect the Form W–8ECI. Determine that the fol-
lowing 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 instruc-
tion (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);
(h)Signature and date:
(1)Determine that December 31 of the audit year was within three full calendar years fol-
lowing the year of signature; and
September 3, 20024502002–35 I.R.B.

(2)Determine that the certifications attested under penalties of perjury have not been modi-
fied.
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;
(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 instruc-
tion (except when the beneficial owner is a financial institution).
(e)Either:
(1)Line 9a and Line 6 (QI-EIN); or
(2)Line 10a and , if applicable, Line 10b; or
(3)Line 11 and Line 6 (EIN), and Line 12 or Line 13; or
(4)Line 14 and Line 6; or
(5)Line 15 (and Line 6 (EIN) if Line 3 is checked as a nonwithholding foreign grantor trust
and there are 5 or fewer grantors).
(f)Signature and date:
(1)Determine that the certifications attested under penalties of perjury have not been modi-
fied.
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);
(d)Signature and date.
(1)Determine that the certifications attested under penalties of perjury have not been modi-
fied.
Step 8:DOCUMENTARY EVIDENCE. For accounts documented only with documentary evidence, inspect the documen-
tary evidence. Determine whether:
(a)The documentary evidence is one of the types listed in the applicable Attachment to the QI Agree-
ment,
(b)The documentary evidence appears to be in proper form when compared to documents of the same
type listed in the Attachment,
(c)The documentary evidence:
(1)Supports the account holder’s foreign status and, for an account holder that claims treaty
benefits, the country of issuance is the same country for which the treaty benefits are
claimed and the documentation supports the account holder’s residence in the treaty coun-
try, or
(2)Supports the account holder’s status as a U.S. exempt recipient.
(d)In the case of an international organization, 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, the documentary evidence sup-
ports the account holder’s status as such.
(f)In the case of a person that has provided documentary evidence indicating it is a bank, broker, cus-
todian, intermediary, or other agent, included with the documentary evidence is a written represen-
tation that the person is acting on its own behalf.
Step 9:For each account determined to be documented under Steps 3 through 8, examine the most recently updated in-
formation for the audit year drawn from the account opening statement, any other account documents or memo-
randa and any correspondence associated with the account (for purposes of this section,“the account holder’s file”).
Determine whether:
(a)The identifying information in the documentation matches the most current identifying information
in the account holder’s file (taking into account any information that links the identifying informa-
tion in the documentation to the identifying information in the account holder’s file),
2002–35 I.R.B.451September 3, 2002

(b)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 instruc-
tion (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)The documentation or the account holder’s file shows a U.S. mailing or residence address for the ac-
count holder or standing instructions to pay from the account to a U.S. address or to an account main-
tained in the United States, and if so, whether:
(1)The account holder is a U.S. person, or
(2)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 regu-
lations.
(d)For accounts where the beneficial owner has claimed treaty benefits, the documentation or the ac-
count 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 instruc-
tions 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:
(1)In the case of documentary evidence, the QI has satisfied the additional requirements
of section 5.10(B)(3) of the QI Agreement; or
(2)In the case of Forms W–8, the QI has satisfied the additional requirements of section
1.1441–7(b)(6) of the regulations.
Step 10:Include in the category of accounts with no documentation (AG10.03(A)(5).1 Step 2(g)) all accounts:
(a)That are not documented with Forms W–8BEN, W–8EXP, W–8IMY, W–8ECI, W–9 or documen-
tary evidence that is listed in the applicable Attachment to the QI Agreement, and
(b)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(a)–(d).
Step 11:(a)Identify all indirect account holders covered by the QI Agreement, or all such account holders con-
tained in the sample selected under AG10.04.
(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 11(b) to determine whether
the documentation validity standards of section 5.10(C) of the QI Agreement are satisfied by per-
forming the procedures under AG10.03(A)(5).1 Steps 1 through 9 with the following modifications:
(1)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.
(2)Documentary evidence establishing entitlement to treaty benefits must be documen-
tary 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.
(3)Documentary evidence for purposes other than establishing entitlement to treaty ben-
efits must be documentary evidence described in Treas. Reg.§1.6049–5(c)(1).
10.03(A)(5).2.Documentation Validity (Foreign Persons and U.S. Exempt Recipients) Report. The external auditor must specifi-
cally report:
Report 1:The number of accounts identified or selected under Step 1.
Report 2:The number of accounts in each of the categories in Step 2(a) through (g).
Report 3:The number of Forms W–8BEN inspected under Step 3(a) and the number of Forms W–8BEN that did not sat-
isfy 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 sat-
isfy 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.
September 3, 20024522002–35 I.R.B.

Report 7:The number of Forms W–8IMY inspected under Step 6 and the number of 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)(1) or (2);
(d)Reviewed under Step 8 that did not satisfy the criteria of either (c)(1) or (2); and
(e)Described in each of (d), (e), and (f) of Step 8 and the number of accounts that did not satisfy the criteria
of (d), (e), and (f) 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)(1) of that step, and the number of ac-
counts that did not satisfy (c)(2) of that step; and
(d)Described in Step 9(d) and the number of accounts that did not satisfy the criteria of (d)(1) or (2) of that
step.
Report 11:The number of accounts described in each of (a) and (b) of Step 10.
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)[Phase 1- All Accounts (or Sample)]:
10.03(A)(6).1.Review of Documentation Validity (Disclosed U.S. Non-exempt Recipients). In Phase 1 of the audit, 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 all such accounts contained in the sample selected in accordance with AG10.04.
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–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 not assumed primary Form 1099 reporting and backup withholding re-
sponsibility.
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 (i) are not documented with Form W–9 and
(ii) 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 associated with the last payment made to each corre-
sponding account for the audit year.
Step 8:Foreach 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 associated with the last payment made
to the account for the audit year.
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(i) and (ii).
Report 2:The number of accounts that did not satisfy the criteria of Steps 7 and 8.
2002–35 I.R.B.453September 3, 2002

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 cir-
cumstances); and
(ii) The procedures of section 6.04 have been, and are being, followed.
Audit Guidance 10.03(A)(7)[Phase 1–All Accounts (or Sample)]:
10.03(A)(7).1.Account Review of U.S. Non-exempt Recipients (Disclosure Prohibited). In Phase 1 of the audit, the external au-
ditor 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 all such accounts contained in the sample selected under AG10.04.
Step 2:From those accounts, segregate the accounts of those U.S. non-exempt recipients whose identity is prohibited by
law from disclosure, and that have not waived the prohibitions against disclosure.
Step 3:Divide the accounts segregated in Step 2, into those accounts opened prior to January 1, 2001, and those ac-
counts opened on or after January 1, 2001.
Step 4:Obtain a letter from the Responsible Party, as defined in AG10.01.4(b), explaining why the accounts in Step 2 ex-
ist and how the procedures of both section 6.04(A) (for those accounts opened prior to January 1, 2001) and sec-
tion 6.04(B) (for those accounts opened on or after January 1, 2001) 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.
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)[Phase 1]:
10.03(A)(8).1.Review of PAI Obligations.In Phase 1 of the audit, 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 Agree-
ment;
(b)The PAI agreement provides that the QI include all reportable payments made by the PAI in the QI’s Forms
945, 1099, 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 any provisions limiting the PAI’s liability for underwithholding or reporting due to the PAI’s fail-
ure to perform its obligations under the PAI agreement;
(e)The PAI agreement requires the PAI to disclose U.S. non-exempt recipients and indirect account holders
to the same extent as the QI Agreement;
(f)The PAI agreement prohibits the PAI from assuming 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 Agree-
ment and 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 (described in section 4.01(B) of the QI Agreement) identifying each PAI filed by the
QI with the IRS and determine that the date of filing for each notice precedes the date of the first payment re-
ceived by the PAI from the QI pursuant to the PAI agreement.
Step 4:Obtain a copy of each PAI’sW–8IMY provided to the QI and determine that it satisfies the criteria of AG10.03(A)(5).1
Step 6.
September 3, 20024542002–35 I.R.B.

10.03(A)(8).2.PAI Obligations Report.The external auditor must specifically report:
Report 1:The number of PAI agreements and the name of each PAI;
Report 2:The number of PAI agreements that did not satisfy the criteria of each of 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–8IMY obtained in Step 4 and the number of Forms W–8IMY that did not satisfy the cri-
teria of AG10.03(A)(5).1 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)[Phase 1]:
10.03(A)(9).1.Knowledge of KYC Investigations.In Phase 1 of the audit, the external auditor must:
Step 1:Obtain a letter signed by the Responsible Party, as defined in AG10.01.4(b), 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 any 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 1:Report whether, based on the information in the letter described in Step 1 and on its own information, the exter-
nal auditor is aware of any such material violations or investigations and, if so, identify them.
Report 2:Include in its report a summary 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)[Phase 1–All Accounts (or Sample)]:
10.03(A)(10).1.Review of Removal of U.S. Non-exempt Recipients.In Phase 1 of the audit, 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 all such accounts contained in the sample selected under AG10.04.
Step 2:Inspect account closing records to determine whether the account was closed during the audit year.
Step 3:If the account was closed during the audit year, 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 dur-
ing 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 de-
termine withholding rate pools based on documentation and the presumption rules;
Audit Guidance 10.03.(B)(1)[Phase 2 Only]:
10.03(B)(1).1.Review of Withholding Rate Pool Training Materials.In Phase 2 of the audit, if the IRS directs, the external au-
ditor must:
2002–35 I.R.B.455September 3, 2002

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.
Step 3:Inspect the written training materials, manuals, and directives to determine whether they contain specific instruc-
tions 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)[Phase 2 Only]:
10.03(B)(2).1.Review of Personnel Training (Withholding Rate Pool). In Phase 2 of the audit, if the IRS directs, 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 withhold-
ing 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 rou-
tinely referring to documentation, presumptions, the type of income earned, and the withholding rate applied.
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)[Phase 2 Only]:
10.03(B)(3).1.Review of Withholding Statements.In Phase 2 of the audit, if the IRS directs, the external auditor must:
Step 1:Identify the QI’s employees that are responsible for preparing withholding statements and providing them to with-
holding 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:Determine the last day of the audit year on which the QI received reportable amounts.
Step 4:For that day, identify the withholding agent from which the QI received the highest reportable amounts in the ag-
gregate.
Step 5:Obtain copies of the QI’s withholding statement(s) associated with all reportable amounts received from the with-
holding agent identified in step 4 for the day identified in step 3.
Step 6:Obtain the QI’s records of payments for the reportable amounts received from the withholding agent identified in
step 4 for the day identified in step 3.
Step 7:Reconcile the withholding statements with the corresponding records of payment.
Step 8:Inspect the withholding statements and records of payment to determine whether the withholding statement infor-
mation was provided to the withholding agent before the withholding agent made payments.
10.03(B)(3).2.Withholding Statement Report.The external auditor must report:
September 3, 20024562002–35 I.R.B.

Report 1:The number of employees interviewed.
Report 2:The number of employee responses that indicate that withholding statement information was not routinely re-
viewed, updated and provided to the withholding agent before the withholding agent made payments.
Report 3:Whether records of payment and the withholding statements were inconsistent.
Report 4:Whether the withholding statement information was 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;
Audit Guidance 10.03(B)(4)[Phase 1–Spot check]:
10.03(B)(4).1.Review of Withholding Rate Pool Classification.In Phase 1 of the audit and, if the IRS directs, in Phase 2 of the
audit, 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 all such accounts contained in the sample selected under AG10.04, or, for purposes of the
spot check in Phase 1 of the audit, all such accounts selected under AG10.04.7.
Step 2:Identify the last payment of each income type required to be reported on Form 1042–S that was made to each ac-
count.
Step 3:Obtain copies of the QI’s Forms W–8IMY associated with each of the payments identified in Step 2 and 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 pro-
cedures described in Steps 4 through 6 below.
Step 4:For the payments identified in Step 2, 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 pur-
poses of its withholding rate pools.
Step 5:Based on the documentation for the account (after the determinations under AG10.03(A)(4) and (5) and appli-
cable presumptions under section 5.13 of the QI Agreement have been made), determine the withholding rate and
further classify the accounts within a Form 1042–S income classification according to withholding rate. An ac-
count within an income classification to which more than one withholding rate has been applied must be placed
into multiple withholding rate classifications. The applicable presumption rules under section 5.13 of the QI Agree-
ment may be made on the basis of the most current account information.
Step 6:Determine whether the classifications under Step 5 match the QI’s classifications described in Step 4(b).
Step 7:(a)Identify all indirect account holders covered by the QI Agreement, or use the same sample selected under
AG10.04, or, for purposes of the spot check in Phase 1 of the audit, use the account holders selected un-
der AG10.04.7.
(b)Segregate the indirect account holders that are not U.S. non-exempt recipients.
(c)Apply Steps 2 through 6 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 in Step 1.
Report 2:The number of accounts in Report 1 classified under Step 5.
Report 3:The number of accounts in Report 1 for which the QI’s classifications do not match the account records under Step
6.
Report 4:For indirect account holders,
(a)The number of indirect account holders under Step 7(a) and (b);
(b)The number of indirect account holders classified under Step 5; and
(c)The number of indirect account holders for which the QI’s classifications do not match the account records
under Step 6.
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
2002–35 I.R.B.457September 3, 2002

Audit Guidance 10.03(B)(5)[Phase 1–Spot check]:
10.03(B)(5).1.Review of Withholding Rate Pool Classification (U.S. Non-exempt Recipients). In Phase 1 of the audit and, if the
IRS directs, in Phase 2 of the audit, 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 all such accounts contained in the same sample selected under AG10.04, or, for purposes of
the spot check in Phase 1 of the audit, all such accounts selected under AG10.04.7.
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:Identify the last payment of each income type required to be reported on Form 1099 that was made to each ac-
count identified in Step 2. Obtain copies of the QI’s Forms W–8IMY associated with each of the payments and
inspect them to determine whether the QI has assumed primary Form 1099 and backup withholding responsibil-
ity. For accounts covered by the QI Agreement for which the QI has not assumed such responsibility, the external
auditor must perform the procedures described in Steps 4 through 7 below.
Step 4:For the payments identified in Step 3, 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
(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 re-
portable amount paid to each account. The external auditor must apply this Step 5 and Step 7 whether or not the
QI is using the alternative procedure contained in section 6.03(B) of the QI Agreement.
Step 6:Based on the records described in Step 4(a), for each account, determine whether reportable payments (other than
reportable amounts) were made to the account. If so, classify the pools within each account according to the type
of reportable payment made to each account. For example, for non-U.S. payors, such reportable payments would
include foreign source income paid within the United States and broker proceeds from the sale of assets if the sale
is effected within the United States. See section 2.44 of the QI Agreement. For purposes of this Step 6, the exter-
nal auditor shall treat foreign source income as paid within the United States only if the account statements and
records include a written instruction from the account holder concerning the foreign source income that, on its face,
indicates that the written statement was sent from within the United States. For purposes of this Step 6, the exter-
nal auditor shall treat broker proceeds as broker proceeds from the sale of an asset effected within the United States
only if the account statements and records include (i) a written instruction from the account holder to sell the as-
set that on its face indicates that the written statement was sent from within the United States, or (ii) confirmation
or payment transmitted to the account holder in the United States. The external auditor must apply this Step 6 and
Step 7 whether or not the QI is using the alternative procedure contained in section 6.03(B) of the QI Agreement.
Step 7:Determine whether the classifications and amounts of income and amounts backup withheld (if any) under Steps
5 and 6 match classifications and amounts in the withholding statements described in Step 4(b).
Step 8:(a)Identify all indirect account holders covered by the QI Agreement, or all such account holders contained
in the same sample selected under AG10.04, or for purposes of the spot check in Phase 1 of the audit, all
such account holders selected under AG10.04.7.
(b)From the indirect account holders identified in (a), segregate the indirect account holders that are U.S. non-
exempt recipients.
(c)Apply Steps 2 through 7 to the indirect account holders segregated in (b).
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 and 2.
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 Steps 8(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 clas-
sifications and amounts in the QI’s withholding statements.
September 3, 20024582002–35 I.R.B.

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 reportable payments to U.S. non-exempt recipients.
Audit Guidance 10.03(B)(6)[Phase 1–Spot Check]:
10.03(B)(6).1.Review of Alternative Procedure.In Phase 1 of the audit and, if the IRS directs, in Phase 2 of the audit, the ex-
ternal 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 all such accounts contained in the same sample selected under AG10.04, or, for purposes of
the spot check in Phase 1 of the audit, all such accounts selected under AG10.04.7.
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:Inspect the withholding statements associated with the Forms W–8IMY to determine whether the allocation infor-
mation for each such account was provided to the withholding agent no later than January 15 of the year follow-
ing 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)[Phase 1–Spot check]:
10.03(C)(1).1.Review of Withholding (NRA Withholding Assumed). In Phase 1 of the audit, and, if the IRS directs, in Phase 2
of the audit, 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 all such accounts contained in the sample selected under AG10.04, or, for pur-
poses of the spot check in Phase 1 of the audit, all such accounts selected under AG10.04.7.
Step 2:Obtain copies of the QI’s Forms W–8IMY and inspect them to determine whether the QI has assumed pri-
mary NRA withholding responsibility. For accounts covered by the QI Agreement for which the QI has as-
sumed such responsibility, the external auditor must perform the procedures described in Steps 3 through 6
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 multiple income classifications.
(b)Based on the documentation for the account (after the determinations under AG10.03(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 classifica-
tions.
Step 5:For each account, determine the amount (if any) by which the amount of withholding based on the classifi-
cations under Step 4(a) and Step 4(b) exceeds the amount withheld by the QI as of December 31 of the au-
dit year.
Step 6:For each account, make adjustments to the underwithholding (if any) determined under Step 5 to the extent
necessary to reflect the correct amount of underwithholding (e.g., an adjustment to reflect documentation re-
ceived after December 31 of the audit year or amounts of tax reported and paid on the QI’s Form 1042 or
amended 1042 for the audit year).
2002–35 I.R.B.459September 3, 2002

Step 7:(a)Identify all indirect account holders covered by the QI Agreement, or all such account holders con-
tained in the sample selected under AG10.04, or, for purposes of the spot check in Phase 1 of the au-
dit, all such accounts selected under AG10.04.7.
(b)From the indirect account holders identified in (a), segregate the indirect account holders that are not
U.S. non-exempt recipients.
(c)Obtain copies of the QI’s Forms W–8IMY and inspect them to determine whether the QI has as-
sumed primary NRA withholding.
(d)For indirect account holders covered by the QI Agreement for which the QI has assumed such re-
sponsibility, obtain the withholding statements associated with the payments to the indirect account hold-
ers.
(e)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.
(f)Based on the documentation for the account (after the determinations under AG10.03(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 classifica-
tions.
(g)For each account, determine the amount (if any) by which the amount of withholding based on the
classifications under (e) and (f) exceeds the amount withheld by the QI as of December 31 of the au-
dit year.
(h)For each account, make adjustments to the underwithholding (if any) determined under (g) to the ex-
tent necessary to reflect the correct amount of underwithholding (e.g., an adjustment to reflect docu-
mentation received after December 31 of the audit year or amounts of tax reported and paid on the
QI’s Form 1042 or amended 1042 for the audit year).
10.03(C)(1).2.Withholding (NRA Withholding Assumed) Report.The external auditor must report:
Report 1:The amount of underwithholding for each account examined within each withholding rate classification in Step 4(a).
Report 2:Each adjustment made under Step 6 to the amount of underwithholding for each account, with an explanation of
such adjustment.
Report 3:The amount of underwithholding for each indirect account holder examined within each withholding rate classi-
fication in Step 7(e).
Report 4:Each adjustment made under Step 7(h) to the amount of underwithholding for each account, with an explanation
of such adjustment.
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)[Phase 1]:
10.03(C)(2).1.Review of Withholding (NRA Withholding Not Assumed). In Phase 1 of the audit and, if the IRS directs, in Phase
2 of the audit, the external auditor must:
Step 1:For each account required to be reported under AG10.03(B)(4).2 Report 3 and each indirect account holder re-
quired to be reported under AG10.03(B)(4).2 Report 4(c), determine the amount (if any) by which the amount of
withholding based on the classifications under AG10.03(B)(4).1 Step 5 exceeds the amount withheld as of Decem-
ber 31 of the audit year.
Step 2:For each account identified in Step 1, make adjustments to the underwithholding (if any) determined under Step
1 to the extent necessary to reflect the correct amount of underwithholding (e.g., an adjustment to reflect docu-
mentation received after December 31 of the audit year or amounts of tax reported and paid on the QI’s Form 1042
or amended 1042 for the audit year).
10.03(C)(2).2.Withholding (NRA Withholding Not Assumed) Report.The external must report:
Report 1:The amount of under withholding for each account and each indirect account holder within each withholding clas-
sification.
Report 2:Each adjustment made under Step 2 to the amount of underwithholding for each account, with an explanation of
such adjustment.
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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)[Phase 1–Spot check]:
10.03(C)(3).1.Review of Backup Withholding (Responsibilities Assumed). In Phase 1 of the audit and, if the IRS directs, in Phase
2 of the audit, 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 all such accounts contained in the sample under AG10.04, or, for purposes of the spot check
in Phase 1 of the audit, all such accounts selected under AG10.04.7.
Step 2:From the accounts identified 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 re-
sponsibility. For these accounts, perform the procedures described in Steps 4 through 6 below.
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.
Step 7:(a)Identify all indirect account holders covered by the QI Agreement or all such account holders contained in
the sample selected under AG10.04, or, for purposes of the spot check in Phase 1 of the audit, all such ac-
count holders selected under AG10.04.7.
(b)From the indirect account holders in (a), segregate the indirect account holders that are U.S. non-exempt
recipients.
(c)Apply Steps 2 through 6 to those indirect account holders.
10.03(C)(3).2.Backup Withholding (Responsibilities Assumed) Report.The external auditor must specifically report:
Report 1:The amount of underwithholding for each account and each indirect account holder for which there is no 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)[Phase 1]:
10.03(C)(4).1Backup Withholding Review (Responsibilities Not Assumed).In Phase 1 of the audit and, if the IRS directs, in Phase
2 of the audit, the external auditor must:
Step 1:For each account required to be reported under AG10.03(B)(5).2 Report 2 determine whether backup withholding
was imposed at the correct amount.
10.03(C)(4).2.Backup Withholding (Responsibilities Not Assumed) Report.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)[Phase 1]:
10.03(C)(5).1.Review of Backup Withholding on Reportable Payments (Disclosure Prohibited).In Phase 1 of the audit and, if
the IRS directs, in Phase 2 of the audit, the external auditor must:
2002–35 I.R.B.461September 3, 2002

Step 1:For each account identified in AG10.03(A)(7) Step 2, and required to be reported under AG10.03(A)(7).2 Report
1, 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)[Phase 1]:
10.03(C)(6).1.Review of Assets Held by U.S. Non-exempt Recipients (Disclosure Prohibited).In Phase 1 of the audit and, if the
IRS directs, in Phase 2 of the audit, the external auditor must:
Step 1:For each account identified in AG10.03(A)(7) Step 2, and required to be reported under AG10.03(A)(7).2 Report
1, where the assets that generate or could generate reportable payments have not been disposed of or the account
holder disclosed, obtain a letter from the Responsible Party, as defined in AG10.01.4(b), explaining the reason why
assets that generate or could generate reportable payments have not been disposed of or the account holder dis-
closed.
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)[Phase 1]:
10.03(C)(7).1.Review of Timely Deposits. In Phase 1 of the audit 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.
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 re-
quired 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 withhold-
ing 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.
September 3, 20024622002–35 I.R.B.

Audit Guidance 10.03(D)(1)[Phase 1]:
10.03(D)(1).1.Review of Forms 1042 and 945.In Phase 1 of the audit, the external auditor must:
Step 1:Obtain copies of:
(a)The QI’s Forms 1042 and 945, and the Forms 1042–S and 1099 issued to the QI (the Forms 1099 will be
in the name of an unknown recipient) and the Forms 1042–S and 1099 filed by the QI (for PAI’s, obtain
the reporting pool information provided to its QI); and
(b)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 report-
ing is required under section 8.02 of the QI Agreement, U.S. non-exempt recipients, and U.S. exempt re-
cipients as a class.
Step 2:Reconcile (i) the amounts reported paid to and withheld from the QI on the Forms 1042–S and 1099 issued to the
QI, (ii) the amounts reported paid by and withheld by the QI on the Forms 1042–S and 1099 filed by the QI, the
amounts shown paid by and withheld 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 and withheld by the QI to U.S. exempt recipi-
ents as a class in the QI’s records of payments, and (iii) the amounts reported and withheld on the QI’s Forms 1042
and 945. For this reconciliation, unreconciled variances are permitted within reasonable limits based on the facts
and circumstances. The reconciliation should show the amount of any unreconciled variances.
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 to QI on the Forms 1099 issued to QI (unknown recipient);
(c)The aggregate amount reported paid by the QI on Forms 1042–S to each reporting pool;
(d)The aggregate amount reported paid by the QI on Forms 1042–S to other QI’s as a class;
(e)The aggregate amount reported paid by the QI on Forms 1042–S to indirect account holders;
(f)The aggregate amount shown paid by the QI to U.S. non-exempt recipients as a class;
(g)The aggregate amount shown paid by the QI to U.S. exempt recipients as a class;
(h)The total amounts withheld by the QI; and
(i)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 Re-
port 1.
Report 3:The amount of any unreconciled variances.
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.
Audit Guidance 10.03(D)(2)[Phase 1–Spot check]:
10.03(D)(2).1.Review of Forms 1042–S and 1099. In Phase 1 of the audit and, if the IRS directs, in Phase 2 of the audit, the
external auditor must:
Step 1:Identify all indirect account holders covered by the QI Agreement or all such account holders contained in the sample
selected under AG10.04, or, for purposes of the spot check in Phase 1 of the audit, all such account holders se-
lected under AG10.04.7.
Step 2:Obtain copies of:
(a)The Forms 1042–S and Forms 1099 filed by the QI for each account holder identified in Step 1 above;
(b)The Forms W–8IMY and summary of associated withholding statements applicable to each such account
provided to the QI;
(c)The QI’s records of payments to each such account.
2002–35 I.R.B.463September 3, 2002

Step 3:Reconcile the QI’s records of payments and the withholding statements provided to the QI with the amounts re-
ported for each such account holder on the QI’s Forms 1042–S and 1099. For this reconciliation, unreconciled vari-
ances are permitted within reasonable limits based on the facts and circumstances. The reconciliation should show
the amount of any unreconciled variances.
10.03(D)(2).2.Forms 1042–S and 1099 Report.The external auditor must report:
Report 1:The number of accounts identified or selected in Step 1 above.
Report 2:The number of accounts for which the payments cannot be reconciled with the payments reported on Forms 1042–S
and on Forms 1099 and, for those accounts, the amounts reported on each form and the amounts of any unrecon-
ciled variances.
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)[Phase 2]:
10.03(D)(3).1.Review of Refunds.If the IRS directs in Phase 2 of the audit, 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 re-
porting 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 over-
withholding.
Step 3:Reconcile 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 attributable and the amount of overwithhold-
ing 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)[Phase 2]:
10.03(D)(4).1.Review of Account Holder Repayment Prior to Refund.If the IRS directs in Phase 2 of the audit, the external au-
ditor 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 refund claim.
September 3, 20024642002–35 I.R.B.

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 occurred after the date of filing the refund claim.
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)[Phase 1]:
10.03(E).1.Review of Change in Circumstance.In Phase 1 of the audit, the external auditor must:
Step 1:Obtain a letter signed by the Responsible Party, as defined in AG10.01.4(b) 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 un-
der the QI Agreement.
10.03(E).2.Change in Circumstance Report.The external auditor must report a change in circumstances by:
Report 1:Including a summary 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 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.Use of Statistical Sampling.Except as provided in AG10.04.2, the external auditor is permitted to use statistical sam-
pling to perform the procedures in AG10.03. The external auditor may select one statistical sample consisting of accounts from each
of the three strata described in AG10.04.4, in the proportions determined under AG10.04.5. The external auditor may conduct a 100
percent review instead of selecting a statistical sample. The statistical sampling methodology used in this Audit Guidance 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 covered by
the QI Agreement. The sample size is the lesser of (i) the number of accounts determined using the sample formula (see AG10.04.3),
or (ii) 25 percent of the total number of accounts covered by the QI Agreement. Under the sample formula, the maximum sample
size will not exceed 321. The minimum sample size shall not be less than 50.
2002–35 I.R.B.465September 3, 2002

10.04.3.Sample Formula.The number of accounts determined using the sample formula is as follows:
10.04.4Division of Accounts into Strata.The external auditor must divide all of the accounts covered by the QI Agreement into
the following strata:
(a)A stratum of all accounts covered by the QI Agreement that are held by direct account holders that are not U.S. non-
exempt recipients;
(b)A stratum of all accounts covered by the QI Agreement that are held by direct account holders that are U.S. non-exempt
recipients; and
(c)A stratum of all indirect account holders covered by the QI Agreement.
10.04.5.Allocation of Sample Size to Each Stratum.The external auditor must allocate the number of accounts in the sample de-
termined under AG10.04.2 to each stratum described in AG10.04.4 by multiplying the number of accounts in the sample, as deter-
mined under AG10.04.2, by a fraction, the numerator of which is the total number of accounts in the stratum and the denominator
of which is the total number of accounts covered by the QI Agreement. The minimum allocation to each stratum is the lesser of
(1) 50 accounts or (2) the total number of accounts in the stratum. If there are fewer than 50 accounts in any stratum, all accounts
in that stratum must be examined, and the difference between 50 and the number of accounts in the stratum must be reallocated to
the remaining strata on apro ratabasis. If there are 50 or more accounts in the stratum, but the allocation, as determined under
the fraction above, is less than 50 accounts, the number of accounts in the sample from that stratum is 50 accounts. In that case,
the difference between 50 and the number of accounts allocated to that stratum, as originally determined, must reduce the number
of accounts allocated to all other strata that exceed 50 accounts, on apro ratabasis.
10.04.6.Number Generator.The external auditor must select the accounts from each stratum by using a random number gen-
erator. Information regarding the random number generator used must be included in the records required in AG10.04.8 below. This
information must be sufficient to allow the IRS to replicate the random numbers. This information must include the name and ver-
sion of the random number generator, the seed numbers used or generated, specification of any options selected and the computer
equipment on which it was run.
10.04.7.Selection of Accounts for Phase 1 Spot Checks.Under AG10.03.2(a)(2), in Phase 1 of the audit process, the external au-
ditor is required to conduct spot checks. The external auditor must select for spot check (from each strata in the sample, taking into
account any reclassification after applying the presumption rules where documentation is missing or invalid) all accounts listed below:
(a)All accounts reported as not satisfying applicable criteria under AG10.03(A)(4).2 Reports 2 and 5;
(b)All accounts reported as not satisfying applicable criteria under AG10.03(A)(5).2 Reports 3 through 8, Reports 9(b) through
(e), Reports 10(a) through (d) and, for indirect account holders, Reports 11 and Reports 3 through 8, Reports 9(b) through
(e), Reports 10(a) through (d), as required in Report 12;
(c)All accounts reported as not satisfying applicable criteria under AG10.03(A)(6).2 Report 2; and
(d)All accounts reported under AG10.03(A)(7).2 Report 1 as segregated under Steps 2 and 3 of AG10.03(A)(7).1.
To the extent the number of accounts listed above from the sample (or in the population, if the external auditor has not used sta-
tistical sampling) in any stratum is less than 20, the external auditor must also select for spot check (in the order selected by the
random number generator under 10.04.6 or, if the external auditor has not used statistical sampling, in the order used by the QI for
its record keeping) an additional number of accounts drawn from that stratum that equal the difference between 20 and the number
of accounts listed above from the sample in that stratum.
10.04.8.Records of Sampling Methodology.The external auditor is required to record its statistical sampling procedures and to
maintain the ability to reconstruct the sample.
September 3, 20024662002–35 I.R.B.

10.04.9.Alternative Sampling Methods.The external auditor may select more than one sample, or may use multistage, cluster,
or other sampling methodology including additional stratifications with the approval of the IRS. To obtain IRS approval, submit an
audit plan in accordance with AG10.03.5.
10.04.10.Optional Substratification by Dollar Amounts.The external auditor may substratify by reportable amounts without sub-
mitting an audit plan under AG10.03.5 when the external auditor is otherwise selecting the sample in accordance with AG10.04.1
through AG10.04.6. If the external auditor chooses to substratify under this AG10.04.10, the external auditor must comply with the
following rules:
(a)The substrata consisting of accounts that have received payments of the highest reportable amounts during the audit year
shall not consist of more than 25 accounts.
(b)The remaining substrata shall be randomly selected to contain approximately equal amounts in each substrata.
(c)The minimum substrata size shall not be less than 25 accounts.
10.04.11.Phase 1: Determination of Underwithholding.The IRS will not make a determination of underwithheld tax by projec-
tion based solely on the external auditor’s report in Phase 1 of the audit process. If, after review of the report, the IRS determines
that no further action is necessary pursuant to AG10.06.1, the IRS will determine the amount of underwithholding for the accounts
that were examined by the external auditor.
10.04.12.Phase 2: Projection.If, after review of the external auditor’s report in Phase 1 of the audit process, the IRS deter-
mines that further action is necessary with respect to underwithholding, the IRS may direct the auditor to conduct a full review of
the entire sample. If, after completion of the full review, the external auditor has determined that underwithholding under AG10.03(C)(1),
(2), (3), (4) or (5) has occurred with respect to the sample, then the IRS will determine the total amount of underwithheld tax by
projecting the underwithholding over the entire stratum of similar accounts using a projection method that is consistent with the sam-
pling method used. For example, if a stratified random sampling method as provided in this Audit Guidance has been used, the IRS
may determine the total amount of underwithheld tax by projecting the underwitholding over the entire stratum as follows:
(a)Divide the amount of underwithholding for the stratum by the number of accounts in the sample; and
(b)Multiply the result in (a) by the total number of accounts in the stratum.
(c)If the external auditor has determined that overwithholding has occurred for a stratum, the QI may not project the amount
of overwithholding in order to claim a refund. The IRS will offset any underwithholding in a stratum against any over-
withholding in that stratum, 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:
(1)The amount is the consequence of an identified error; and
(2)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 of underwithholding when the QI shows that:
(1)The underwithholding was the consequence of an identified error,
(2)The QI has corrected the error in the stratum in which it was discovered,
(3)The QI has corrected the error throughout the population,
(4)The QI has established safeguards to prevent repetition of the error in the future, and
(5)As a consequence of the correction, the facts as corrected show that there was actually no underwithholding dur-
ing 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 AG10.06.3 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.
2002–35 I.R.B.467September 3, 2002

(b)List the QI’s name, address, QI-EIN, Responsible Party and Responsible Party’s telephone number.
(c)List each procedure required under this Audit Guidance in the order listed in the Audit Guidance 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 this Audit Guidance in the order listed in the Audit
Guidance.
(f)Include any items required to be attached to the report as Appendix 1. These items should be cross-referenced in the re-
port with 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.Standard Report Form.The IRS intends to develop a standard report form, initially in paper and later in electronic form.
For audit reports due after the publication date of the standard form, the external auditor must complete that form and send it to
the IRS in the manner required by the form. When the standard report form has been developed, it will be posted on the QI web-
site atwww.irs.gov(search IRS site for“QI”).
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 sec-
tion 12.06 of the QI Agreement by June 30 of the year following the audit year. The IRS will grant an automatic extension of the
due date of the report until December 31 of the year following the audit year if the external auditor submits a request for exten-
sion in writing that identifies the QI to be audited to the IRS at the address in AG10.01.2 by June 30 of the year following the au-
dit year. A QI that timely submits a request for waiver of the external audit under AG10.01.4, 10.01.5, or 10.01.6 that is denied by
the IRS will be considered to have been granted an automatic extension of the due date of the external auditor’s report until De-
cember 31 of the year following the audit year. The external auditor may request further extensions of the due date of the report
by submitting a request for extension in writing signed by the external auditor or by the QI’s Responsible Party, as defined in AG10.01.4(b),
to the IRS at the address in AG10.01.2 before the due date under any previous extension. 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 per-
son and the QI’s Responsible Party. The IRS will send the external auditor or the QI a written response 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.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, the IRS will send a written notice to the QI and the external auditor inform-
ing them of this determination.
10.06.2.Audit Phase 2: IRS Directed Procedures.After the IRS reviews the external auditor’s report, 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.
The IRS will direct the external auditor to perform specific audit procedures and to report in writing the results of those proce-
dures. The IRS directed procedures may include instructing the external auditor to forward to the IRS certain of the external audi-
tor’s work papers and reports or instructing the external auditor to perform specific procedures (or perform an audit in accordance
with this Audit Guidance) for the audit year or for years other than the audit year. The IRS will stipulate a due date not more than
120 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 AG10.05 at any time before the due
date. After receiving the external auditor’s report on the results of the initial IRS directed procedures, the IRS will contact the ex-
ternal auditor and the QI. If the IRS determines that additional fact finding is necessary, 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 Phase 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, as defined in AG10.01.4(b), by telephone or in writing, and
September 3, 20024682002–35 I.R.B.

the QI may contact the IRS by telephone or in writing at the address in AG10.01.2. After the IRS receives the request, the IRS will
meet with the QI at such 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 meet-
ing, 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.
SUMMARY OF PROCEDURES
As described in more detail in section 10.03 above, only certain procedures in section 10.03(A), (B), (C) and (D) must be com-
pleted in Phase 1 of the Audit. Those provisions of AG10.03 that require a review of accounts in Phase 1 are labeled either“Phase
1–All Accounts (or Sample)”or“Phase 1–Spot Check.”The procedures labeled“Phase 1–All Accounts (or Sample)”require
the external auditor to examine all accounts identified in AG10.04.4(a) through (c) or selected as a sample from those identified ac-
counts. The procedures labeled“Phase 1–Spot Check”require the external auditor to examine only those accounts selected for test-
ing in accordance with AG10.04.7. Those procedures that must be completed in Phase 1 but do not require a review of accounts
are labeled“Phase 1.”Those procedures that are not required to be performed in Phase 1 are labeled“Phase 2 only.”
Audit Guidance 10.03(A)(1)
10.03(A)(1).1. Review of Documentation Training
10.03(A)(1).2. Documentation Training Report.
Phase 2 Only
Audit Guidance 10.03(A)(2)
10.03(A)(2).1. Review of Account Opening Procedures.
10.03(A)(2).2. Account Opening Procedures Report.
Phase 2 Only
Audit Guidance 10.03(A)(3)
10.03(A)(3).1. Review Limitation on Benefits (LOB) Procedure.
10.03(A)(3).2. LOB Procedure Report.
Phase 2 Only
Audit Guidance 10.03(A)(4)
10.03(A)(4).1. Review of Treaty Statements.
10.03(A)(4).2. Treaty Statements Report.
Phase 1–All Accounts (or
Sample)
Audit Guidance 10.03(A)(5)
10.03(A)(5).1. Review of Documentation Validity (Foreign Persons and U.S. Exempt Recipi-
ents).
10.03(A)(5).2. Documentation Validity Report (Foreign Persons and U.S. Exempt Recipients).
Phase 1–All Accounts (or
Sample)
Audit Guidance 10.03(A)(6)
10.03(A)(6).1. Review of Documentation Validity (Disclosed U.S. Non-exempt Recipients)
10.03(A)(6).2. Documentation Validity (U.S. Non-exempt Recipients) Report.
Phase 1–All Accounts (or
Sample)
Audit Guidance 10.03(A)(7)
10.03(A)(7).1. Account Review of U.S. Non-exempt Recipients (Disclosure Prohibited).
10.03(A)(7).2. Account Review of U.S. Non-exempt Recipients (Disclosure Prohibited) Re-
port.
Phase 1–All Accounts (or
Sample)
Audit Guidance 10.03(A)(8)
10.03(A)(8).1. Review PAI Obligations.
10.03(A)(8).2. PAI Obligations Report.
Phase 1
Audit Guidance 10.03(A)(9)
10.03(A)(9).1. Knowledge of KYC Investigations.
10.03(A)(9).2. KYC Investigations Report.
Phase 1
Audit Guidance 10.03(A)(10)
10.03(A)(10).1. Review for Removal of U.S. Non-exempt Recipients.
10.03(A)(10).2. Removal of U.S. Non-exempt Recipients Report
Phase 1–All Accounts (or
Sample)
Audit Guidance 10.03(B)(1)
10.03(B)(1).1. Review of Withholding Rate Pool Training Materials.
10.03(B)(1).2. Withholding Rate Pool Training Materials Report.
Phase 2 Only
Audit Guidance 10.03(B)(2)
10.03(B)(2).1. Review of Personnel Training (Withholding Rate Pool).
10.03(B)(2).2. Personnel Training (Withholding Rate Pool) Report.
Phase 2 Only
2002–35 I.R.B.469September 3, 2002

Audit Guidance 10.03(B)(3)
10.03(B)(3).1. Review of Withholding Statements.
10.03(B)(3).2. Withholding Statement Report.
Phase 2 Only
Audit Guidance 10.03(B)(4)
10.03(B)(4).1. Review Withholding Rate Pool Classification.
10.03(B)(4).2. Withholding Rate Pool Classification Report.
Phase 1–Spot Check
Audit Guidance 10.03(B)(5)
10.03(B)(5).1. Review of Withholding Rate Pool Classification (U.S. Non-exempt Recipients).
10.03(B)(5).2. Withholding Rate Pool Classification (U.S. Non-exempt Recipient) Report.
Phase 1–Spot Check
Audit Guidance 10.03(B)(6)
10.03(B)(6).1. Review of Alternative Procedure.
10.03(B)(6).2. Alternative Procedure Report.
Phase 1–Spot Check
Audit Guidance 10.03(C)(1)
10.03(C)(1).1. Review of Withholding (NRA Withholding Assumed).
10.03(C)(1).2. Withholding (NRA Withholding Assumed) Report.
Phase 1–Spot Check
Audit Guidance 10.03(C)(2)
10.03(C)(2).1. Review of Withholding (NRA Withholding Not Assumed).
10.03(C)(2).2. Withholding (NRA Withholding Not Assumed) Report.
Phase 1
Audit Guidance 10.03(C)(3)
10.03(C)(3).1. Review of Backup Withholding (Responsibilities Assumed).
10.03(C)(3).2. Backup Withholding Report (Responsibilities Assumed).
Phase 1–Spot Check
Audit Guidance 10.03(C)(4)
10.03(C)(4).1 Backup Withholding Review (Responsibilities Not Assumed).
10.03(C)(4).2. Backup Withholding Report (Responsibilities Not Assumed)
Phase 1
Audit Guidance 10.03(C)(5)
10.03(C)(5).1. Review of Backup Withholding on Reportable Payments (Disclosure Prohib-
ited).
10.03(C)(5).2. Backup Withholding on Reportable Payments (Disclosure Prohibited) Report.
Phase 1
Audit Guidance 10.03(C)(6)
10.03(C)(6).1. Review of Assets Held by U.S. Non-exempt Recipients (Disclosure Prohibited).
10.03(C)(6).2. Assets Held by U.S. Non-exempt Recipients (Disclosure Prohibited) Report.
Phase 1
Audit Guidance 10.03(C)(7)
10.03(C)(7).1. Review of Timely Deposits.
10.03(C)(7).2. Timely Deposits Report.
Phase 1
Audit Guidance 10.03(D)(1)
10.03(D)(1).1. Review of Forms 1042 and 945.
10.03(D)(1).2. Forms 1042 and 945 Report.
Phase 1
Audit Guidance 10.03(D)(2)
10.03(D)(2).1. Review of Forms 1042-S and 1099.
10.03(D)(2).2. Forms 1042-S and 1099 Report.
Phase 1–Spot Check
Audit Guidance 10.03(D)(3)
10.03(D)(3).1. Review of Refunds.
10.03(D)(3).2. Refund Report.
Phase 2 Only
Audit Guidance 10.03(D)(4)
10.03(D)(4).1. Review of Account Holder Repayment Prior to Refund.
10.03(D)(4).2. Account Holder Repayment Prior to Refund Report.
Phase 2 Only
Audit Guidance 10.03(E)
10.03(E).1. Review of Change in Circumstance.
10.03(E).2. Change in Circumstance Report.
Phase 1
September 3, 20024702002–35 I.R.B.

Part IV. Items of General Interest
Changes and Clarifications to
Rev. Proc. 2002–34, Revised
July 2002, Publication 1220,
Specifications for Filing
Forms 1098, 1099, 5498 and
W–2G Electronically or
Magnetically
Announcement 2002–76
This document contains changes and
clarifications to the Rev. Proc. 2002–34,
2002–25 I.R.B. 1205, revised July 2002,
Publication 1220,Specifications for Fil-
ing Forms 1098, 1099, 5498 and W–2G
Electronically or Magnetically.
For Form 1098–T,Tuition Payments
Statement,the payer should use the Spe-
cial Data Entries field in positions 663–
722 of the Payee‘B’Record for information
reported in Boxes 2, 3, and 5 of the pa-
per form. The electronic/magnetic specifi-
cations do not always correspond to paper
Form 1098–T. When reporting electroni-
cally or magnetically, the guidelines in Pub-
lication 1220 must be followed. Box 6 on
the paper form does not need to be re-
ported if the payer is filing electronically
or magnetically.
For Form 1099–Q,Qualified Tuition
Program Payments(Under Section 529), in
the Payee‘B’Record, Payment Amount
Field 2, Earnings, may contain negative
amounts. If a negative amount is reported,
follow the reporting guidelines in the gen-
eral information for Payment Amount Fields
in the Payee‘B’Record.
For Form 5498–IRA and Coverdell ESA
Contribution Information, ESA contribu-
tions and rollover amounts should be re-
ported in Payment Amount Field B of the
Payee‘B’Record.
In Part E, Sec. 4 .03 Extension of Time
for Recipient Copies of Information Re-
turns, has been clarified. IRS/MCC will not
require a copy of a power of attorney from
each filer. However, you must have a con-
tractual agreement with the filers to sub-
mit extension requests on their behalf. This
should be stated in your letter of request for
recipient copy extensions. If you are re-
questing an extension for multiple payers
and wish to submit the request electroni-
cally or magnetically, you must use the for-
mat specifications in Section 4. The
Transmitter Control Code (TCC) is not re-
quired for recipient requests.
Foundations Status of Certain
Organizations
Announcement 2002–77
The following organizations have failed
to establish or have been unable to main-
tain their status as public charities or as op-
erating foundations. Accordingly, grantors
and contributors may not, after this date,
rely on previous rulings or designations in
the Cumulative List of Organizations (Pub-
lication 78), or on the presumption aris-
ing from the filing of notices under section
508(b) of the Code. This listing doesnot
indicate that the organizations have lost their
status as organizations described in sec-
tion 501(c)(3), eligible to receive deduct-
ible contributions.
Former Public Charities.The follow-
ing organizations (which have been treated
as organizations that are not private foun-
dations described in section 509(a) of the
Code) are now classified as private
foundations:
100 Black Men of the Philadelphia
Region, Inc., Philadelphia, PA
Accessible Home for Disabled Americans,
Pittsburgh, PA
Adopt a High Rise, Inc., Pittsburgh, PA
Aging Grace Community Center, Inc.,
Philadelphia, PA
Aim for Education, Cranbury, NJ
American Friends of SPNI, Inc.,
Valley Stream, NY
American Society of Musculoskeletal
Radiology, Philadelphia, PA
Apollo Team, Inc., Morris Plains, NJ
Aroostook Partners in the Arts,
Presque Isle, ME
Asca, Inc., Ithaca, NY
Athletics for Juvenile Development, Inc.,
Princeton, NJ
Atlantic Korean Association of Southern
New Jersey, Inc., Northfield, NJ
Avivamiento Amazonico S A,
Churchville, PA
Bayonne Baseball Developmental &
Instructional Organization, Inc.,
Bayonne, NJ
Becker Foundation, Albany, NY
Bethel Nurturing Care Center, Inc.,
Branchburg, NJ
Blackwood Lake Advisory Committee, Inc.,
Blackwood, NJ
Bracken Cavaliers Junior Drum and Bugle
Corps, Bristol, PA
Brain Injury Association of Western
Pennsylvania, Pittsburgh, PA
Buffalo Eastsiders Standing Together
Community Association, Buffalo, NY
Burton C. Shirley B. Cathie Family Life
Development Center, Inc., Plainfield, NJ
Capital Area Convention of N.A., Inc.,
Trenton, NJ
Catalan Arts Council, Inc., Buffalo, NY
C A U S E-Creating Action in Urban
Settings Efficiently, Trenton, NJ
Center for the Recovery of
Internationally Abducted Children,
Carlisle, PA
Center for Urban Law & Community
Development Advocacy at Newark,
Newark, NJ
Central American Outreach Program, Inc.,
Philadelphia, PA
Central Jersey Community Health
Center, Inc., Somerset, NJ
Central Regional Community Council, Inc.,
Forked River, NJ
Centro Cultural Rosacruz Amorc
Elizabeth, Inc., Roseelle, NJ
Champions for Charity, Inc., Nyack, NY
Chester Dionna Habitat for Children,
Philadelphia, PA
Childrens Cancer Foundation,
Pittsburgh, PA
Circle of Light Foundation, Moosic, PA
Clear Foundation, Ithaca, NY
Clergy Partnership on Domestic
Violence, Inc., Madison, NJ
Cocalico Midget Football Association,
Denver, PA
Co-Mans Supported Housing, Inc.,
Penndel, PA
Common Ground Charity, Inc.,
Huntingdon Valley, PA
Community Baseball League, Lancaster, PA
Community Oriented Firefighters for
Eminent Equality, Inc., Plainfield, NJ
Community Youth Project, Windham, ME
Concerned Citizens Action Program, Inc.,
Syracuse, NY
Concerts of Worship & Praise,
S. Montrose, PA
2002–35 I.R.B.471September 3, 2002

Concord Career & Educational
Services, Inc., Springville, NY
Creativity Unlimited, Inc., Rochester, NY
Cumberland County Association of School
Administrators, Inc., Bridgeton, NJ
David Neuman Free Loan Foundation, Inc.,
Monroe, NY
Deaf Aids Core, Inc., Rochester, NY
Delaware District Scout Unit Support
Organization, Inc., Philadelphia, PA
Deleware Valley Voter Rigistration
Education Project, Philadelphia, PA
Downtown Albany Restoration
Program, Inc., Albany, NY
Dunkirk Local Development Corporation,
Dunkirk, NY
Eagles Nest Recreational &
Environmental Association, Slatedale, PA
Elizabeth & Michel Sorel Charitable
Organization, New York, NY
ENS Cachan Foundation for Global
Management Studies, Inc., New York,
NY
Environmental Funding Resources, Inc.,
Rochester, NY
Family Respite, Inc., Troy, NY
Fayette Civic Forum, Uniontown, PA
Finger Lakes Interpretive Center, Inc.,
Penn Yan, NY
Fire, Inc., Searsport, ME
FMI Scholarship Foundation, Inc.,
Branchville, NJ
Fola, Inc., New York, NY
Friends of Childrens Court Care,
Schwenksville, PA
Friends of Philipse Manor Hall, Inc.,
Yonkers, NY
Friends of the Massachusetts National
Guard Museum, Inc., Worcester, MA
Friends of the Pleasant Plains School
House, Inc., Somerset, NJ
Garden Square North Development
Company, Pittsburgh, PA
Gods Christian Women, Inc., Yeadon, PA
Golden Tomorrow, Berwick, PA
Gordy Colletti Sr. Memorial Fund, Inc.,
Westfield, NJ
Grace Care Community, Inc.,
Quakertown, PA
Grace Congregate Housing Corporation,
Waterbury, CT
Group Research Institute, Inc., Bronx, NY
Grrowls-NY, Inc., Syracuse, NY
G.T.Y.F.A. Lions, Inc., Sicklerville, NJ
Gyre Theatre Company, Inc., Boston, MA
Haddington-Cobbs Creek Community
Development Corporation,
Philadelphia, PA
Handicapped Riding Center at West
Orange, Inc., West Orange, NJ
Harambee Community Development
Corporation, Harrisburg, PA
Hawthorne Education Foundation,
Hawthorne, NJ
Healthy Choices-N-City Kids, Inc.,
Harrisburg, PA
Heartsong Ministries, Inc., Albany, NY
Helping Hands Mission, Inc.,
Manahawkin, NJ
Hnet of New Jersey, Inc., Lakewood, NJ
Home Fare, Inc., Cortland, NY
Home Front, Inc., Yarmouth, ME
Home Residential, Inc., Mays Landing, NJ
Hospice Regatta of Maine, Ellsworth, ME
Hudson Valley Trust, Inc., Carmel, NY
Huntingdon Valley Grange, Inc.,
Huntingdon Valley, PA
In-Tyme Programs, Herman, ME
Indigenous Resistance Against Tribal
Extinction, Old Town, ME
Information Lifeline, Sebago Lake, ME
Institute for Learning Centered
Education, Inc., Yorkshire, NY
International Transitions Development, Inc.,
Madison, NJ
Italian American Writers Association,
New York, NY
Janet Perez Memorial Scholarship Fund,
Inc., Colts Neck, NJ
Jazz Music Association, Inc., Boston, MA
Jersey Shore Irish Festival, Inc.,
Roseland, NJ
Jobstart Learning Center, Inc.,
Hackensack, NJ
John D. Mears Home, Inc.,
East Aurora, NY
Joseph J. Barrett Sr. Memorial All-Star
Game and Scholarship Fund, Upland, PA
Just Publications, Inc., Philadelphia, PA
Katie Foundation for Leukemia Research,
Margate, NJ
Keystone Kids Wrestling Club,
State College, PA
Kidspeace National Centers for Kids in
Crisis of Pennsylvania, Inc., Orefield, PA
Labrys Foundation, Hallam, PA
Lansdale 125 Committee, Lansdale, PA
Laser Foundation, New York, NY
Lasting Inclusion for Freedom of
Education, Inc., Watertown, NY
Latin American Coalition Corp.,
Plainfield, NJ
Leading Ladies Just for Teens, Inc.,
New York, NY
Legal Assistance Program, Roselle, NJ
Liberian Refugee Relief Organization,
Philidelphia, PA
Lifeskills Center, Glen Ridge, NJ
Lin-Mid Corporation, Lincroft, NJ
Livonia Community Players, Livonia, NY
Lock Haven Court Corp., Barnesboro, PA
Lycoming County Drug Task Force,
Williamsport, PA
M & C Computer Learning, Inc.,
Philadelphia, PA
Mac Farren Field Project, Inc., Ramsey, NJ
Magyar Alap Hungarian Foundation, Inc.,
Somerset, NJ
Maine Community Reinvestment
Corporation, Portland, ME
Malden Housing Associates, Inc.,
Malden, MA
Manalapan High School Theatre Boosters
Association, Manalapan, NJ
McWard Management Company, Inc.,
Johnstown, PA
Men in Motion, Inc., Philadelphia, PA
Men of God, Inc., Philadelphia, PA
Mettowee Coalition, Inc.,
Upper Saddle River, NJ
Milennium Dance Company, Inc.,
Bronx, NY
Millenium Stage, Inc., New York, NY
Million Man March Booster Club 3MBC
Urban Development, Syracuse, NY
Montgomery County Korean American
Association, Gwynedd Valley, PA
Nat Education Center, Ltd., New York, NY
National Association of Adoption
Counselors, Inc., New York, NY
National Urban Exposition USA, Inc.,
Newark, NJ
Navy Club of Black Diamond Ship 257,
Minersville, PA
Neighborhood Watch Response
Organization, Inc., Asbury Park, NJ
New Galilee Emergency Medical
Services, Inc., New Galilee, PA
New Israel Community Development, Inc.,
Philadelphia, PA
New Jersey Community Focus,
Princeton, NJ
New Jersey Rehabilitation Association,
South Orange, NJ
New Jersey Tenants Preservation
Project, Inc., Camden, NJ
New Rochelle Cares, Inc.,
New Rochelle, NY
New Vision Community Development
Corp., East Orange, NJ
New York Raptors Special Hockey Club,
Inc., Larchmont, NY
September 3, 20024722002–35 I.R.B.

New York Veterans Museum, Inc.,
Mongaup Valley, NY
Northeast Neighborhood Association, Inc.,
York, PA
Northern Frontier Project, Inc., Rome, NY
Ogwashi-Uku Association New York,
Incorporated, Bronx, NY
Original Tenerlines Reunion Committee,
Philadelphia, PA
Orleans County Child Advocacy Center,
Newport, VT
Panoramic Programs, Inc., Philadelphia, PA
Park Hill Community Corporation,
Boston, MA
Partnership for Success, Asbury Park, NJ
Pennsylvania Association of Native
Americans, Pittsburgh, PA
Pennsylvania Multi-Services, Inc.,
Bronx, NY
Peoples Credit Counselors, Inc.,
New York, NY
Philadelphia Health Consortium, Inc.,
Philadelphia, PA
Philadelphia Jazz Institute, Philadelphia, PA
Philadelphia Physicians for Social
Responsibility, Inc., Philadelphia, PA
Philly Project, Downingtown, PA
Pike County Center for the Performing
Arts, Inc., Milford, PA
Pilgrimage Outreach, Inc., Paterson, NJ
Pittsburgh Coalition Against Substance
Abuse, Pittsburgh, PA
Plattsburgh Babe Ruth League, Inc.,
Plattsburgh, NY
Pluc, Inc., New York, NY
Potsdam Youth Basketball Association,
Potsdam, NY
Prince of Wales Alumni Association, Inc.,
Monmouth Junction, NJ
Princeton Baseball Association, Inc.,
Princeton, NJ
Project Ceriba, Philadelphia, PA
Puerto-Rican-Latin Association of
Reading and Berks County, Reading, PA
Puffton Tenants Association, Inc.,
Springfield, MA
Quirina Pineda Women and Girls
Fund, Inc., Bronx, NY
Radio Alerta, Greenacres, FL
Renaissance Project at Central High
School, Inc., Morristown, NJ
Research Group for Taiwanese History and
Culture, Inc., Madison, WI
Riverhead Development Corp.,
New York, NY
Riverside Beautification Committee,
Riverside, NJ
Rose of Sharon Center, Ranch, and
Foundation, Inc., Newark, NJ
Rychard-Ryan Foundation, Alexandria, VA
Salem 250 Anniversary Committe, Inc.,
Salem, NH
Save a Cop USA, Inc., Lake Carmel, NY
School 71 PTO, Buffalo, NY
Second Chance Animal Shelter, Inc.,
Orono, ME
Self Help for Hard of Hearing People New
Jersey, Inc., Voorhees, NJ
Sergeant Kirklands Museum and
Historical Society, Inc., Fredericksburgh,
VA
Sexual Minority Youth Center of Greater
Philadelphia, Philadelphia, PA
Sheila D. Brown Womens Center,
Philadelphia, PA
Sherbekow Scholarship Foundation, Inc.,
Voorhees, NJ
Somar Care, Inc., Hammonton, NJ
South Buffalo Soccer Club, Ltd.,
Buffalo, NY
Southern Maine Animal Shelter,
Biddeford, ME
Southhampton Row Charitable Trust,
New York, NY
Standing Together Aiding in Recovery Inc.,
Star, Deptford, NJ
Steel Renaissance, Inc., Monroeville, PA
Summer Garden Conservatory, Inc.,
Kinderhook, NY
Susquentia Education Foundation,
Harrisburg, PA
Take Heart America, Inc., Pittsburgh, PA
T.E.A.M.C, Inc., New York, NY
Theatricks by Starlight, Inc., Deposit, NY
Theodore Roethke Memorial Sculpture
Foundation, Boston, MA
Thompson Street Neighborhood Crime
Watch, Mifflinburg, PA
Tora Kage Shotokan Karate Club,
Oreland, PA
T R E A T Y Total Immersion Educational
Endowment Fund, Inc., San Jose, NM
Troy United Ink Corporation Troy United
Ink Newsletter, Troy, NY
True Vine Restoration Network, Inc.,
Camden, NJ
Tu Amigo Community Center, Inc.,
Camden, NJ
United States Volunteers, Inc., Lebanon, PA
Universal Support Associates, Inc.,
Pottstown, PA
Urban Computer Club, Philadelphia, PA
Vernon Marks Learning Center, Inc.,
Philadelphia, PA
Verona Park Conservancy, Inc., Verona, NJ
Vietnamese Community Cultural
Center, Inc., Utica, NY
Vineland Mini Wrestlers Booster
Association, Vineland, NJ
Volunteer Firemans Relief for the
Philadelphia Steam Engine Co. No. 1,
Pottstown, PA
Wayne Central Football, Inc., Walworth, NY
West Philadelphia Community Access
Center, Inc., Philadelphia, PA
Windsor Historical Society, Windsor, ME
Winterport Union Meeting House,
Winterport, ME
Yann Chiao Fan Memorial Foundation, Inc.,
Robbinsville, NJ
Young Billionaires Club, Inc., Kittery, ME
YW-WNY Housing Development Fund
Company, Inc., Buffalo, NY
Zoroastrian Education & Research
Society, Reading, PA
If an organization listed above submits
information that warrants the renewal of its
classification as a public charity or as a pri-
vate operating foundation, the Internal Rev-
enue Service will issue a ruling or
determination letter with the revised clas-
sification as to foundation status. Grant-
ors and contributors may thereafter rely
upon such ruling or determination letter as
provided in section 1.509(a)–7 of the In-
come tax Regulations. It is not the prac-
tice of the Service to announce such revised
classification of foundation status in the In-
ternal Revenue Bulletin.
2002–35 I.R.B.473September 3, 2002

Announcement of Disciplinary Actions Involving Attorneys,
Certified Public Accountants, Enrolled Agents, and Enrolled
Actuaries—Suspensions, Disbarments, and Resignations
Under Title 31, Code of Federal Regu-
lations, Part 10, attorneys, certified pub-
lic accountants, enrolled agents, and enrolled
actuaries may not accept assistance from,
or assist, any person who is under disbar-
ment or suspension from practice before the
Internal Revenue Service if the assistance
relates to a matter constituting practice be-
fore the Internal Revenue Service and may
not knowingly aid or abet another person
to practice before the Internal Revenue Ser-
vice during a period of suspension, disbar-
ment, or ineligibility of such other person.
To enable attorneys, certified public ac-
countants, enrolled agents, and enrolled ac-
tuaries to identify persons to whom these
restrictions apply, the Director of Practice
will announce in the Internal Revenue Bul-
letin their names, their city and state, their
professional designation, the effective date
of disciplinary action, and the period of sus-
pension. This announcement will appear in
the weekly Bulletin at the earliest practi-
cable date after such action and will con-
tinue to appear in the weekly Bulletins for
five successive weeks.
Suspensions From Practice Before the Internal Revenue
Service After Notice and an Opportunity for a Proceeding
Under Title 31, Code of Federal Regu-
lations, Part 10, after notice and an oppor-
tunity for a proceeding before an
administrative law judge, the following in-
dividuals have been placed under suspen-
sion from practice before the Internal
Revenue Service:
NameAddressDesignationEffective Date
McKnight, James A.Tequesta, FLEnrolled AgentApril 12, 2001
to
October 11, 2002
Donnelly, EdwardMelville, NYCPAApril 17, 2002
to
July 16, 2003
Disbarments From Practice Before the Internal Revenue
Service After Notice and an Opportunity for a Proceeding
Under Title 31, Code of Federal Regu-
lations, Part 10, after notice and an oppor-
tunity for a proceeding before an
administrative law judge, the following in-
dividuals have been disbarred from prac-
tice before the Internal Revenue Service:
NameAddressDesignationEffective Date
Schmeiser, Larry W.Limon, COAttorneySeptember 1, 2000
Sayre, Charles L.Ann Arbor, MIAttorneyJanuary 2, 2001
Young, DennisLewiston, IDCPAJanuary 2, 2001
Buckley, Francis M.Marlborough, CTAttorneyJanuary 18, 2001
Dugovich, Frank A.Middleburg Heights, OHCPAJanuary 29, 2001
Kiss, Philip M.Liberyville, ILEnrolled AgentMarch 1, 2001
Mellner, MichaelScranton, PACPAJune 11, 2001
Davis, Jerry A.Leonard, TXCPAJune 13, 2001
Thornton, John L.Fayetteville, ARCPAJune 21, 2001
September 3, 20024742002–35 I.R.B.

NameAddressDesignationEffective Date
Campbell, David G.Reading, PAAttorneyJuly 10, 2001
Schlabach, John J.Colbert, WACPAJuly 16, 2001
Belin, LeonSouthfield, MICPAAugust 7, 2001
Simpson, JamesElmhurst, ILAttorneySeptember 24, 2001
Berg, Richard L.Vadnais Heights, MNCPAOctober 3, 2001
Riesenmy, DavidJoplin, MOAttorneyOctober 15, 2001
Andrade, RodrigoEl Paso, TXEnrolled AgentNovember 20, 2001
Miller, Larry CharlesPhiladelphia, PAAttorneyJanuary 10, 2002
Melton, Andrew I.Detroit, MICPAFebruary 13, 2002
Daily, J. MichaelClearwater, FLCPAMarch 29, 2002
Klimkowski, Joseph R.Florham, NJCPAMarch 29, 2002
Greene, William M.Center Sandwich, NHAttorneyMarch 29, 2002
Bart, AdrianTulsa, OKCPAApril 17, 2002
Consent Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, an attorney, certified pub-
lic accountant, enrolled agent, or enrolled
actuary, in order to avoid the institution or
conclusion of a proceeding for his or her
disbarment or suspension from practice be-
fore the Internal Revenue Service, may of-
fer his or her consent to suspension from
such practice. The Director of Practice, in
his discretion, may suspend an attorney, cer-
tified public accountant, enrolled agent or
enrolled actuary in accordance with the con-
sent offered.
The following individuals have been
placed under consent suspension from prac-
tice before the Internal Revenue Service:
NameAddressDesignationDate of Suspension
McDaniel III, Troy J.Atlanta, GACPAIndefinite
from
June 6, 2000
Levine, PaulLos Angeles, CACPAFebruary 1, 2001
to
January 31, 2003
Hammons, Patrick B.Mesa, AZEnrolled
Agent
February 1, 2001
to
January 31, 2004
Price, Russell S.Washington, DCCPAFebruary 17, 2001
to
August 16, 2003
Donohue, Robert M.Ellicott City, MDCPAMay 15, 2001
to
May 14, 2005
Havranek, Ronald J.Deerfield, ILCPAJuly 30, 2001
to
July 29, 2003
2002–35 I.R.B.475September 3, 2002

NameAddressDesignationDate of Suspension
Harding III, Leon H.Roanoke, VACPAIndefinite
from
August 7, 2001
Noone, PatrickOrland Park, ILCPAAugust 23, 2001
to
February 22, 2004
Sefton, David L.Austin, TXCPAAugust 31, 2001
to
February 27, 2003
Zuccarelli, SilvioCoconut Creek, FLEnrolled
Agent
September 18, 2001
to
December 17, 2004
DeFazio, James P.Sacramento, CACPAOctober 1, 2001
to
March 31, 2003
Levenson, Martin J.New York, NYCPAOctober 15, 2001
to
April 14, 2004
Donchatz, CharlesColumbia, SCCPAOctober 25, 2001
to
October 24, 2004
Smith, Virga A.Rochester, INCPANovember 1, 2001
to
October 31, 2003
Fuller, Don B.Minneapolis, MNAttorneyNovember 15, 2001
to
November 14, 2004
Retzlaff, Gene A.Hortonville, WIEnrolled AgentIndefinite
from
December 27, 2001
Kime, Robert L.Collinsville, ILCPADecember 6, 2001
to
December 5, 2003
King, John C.Wichita, KSAttorneyJanuary 1, 2002
to
June 30, 2003
Carter, Lloyd C.St. George, UTCPAJanuary 15, 2002
to
October 14, 2002
Dennis, Paul J.Milwaukee, WIEnrolled AgentJanuary 28, 2002
to
January 27, 2005
Jones, Ricky A.Greenfield, OHCPAMarch 15, 2002
to
March 14, 2003
Price, Richard A.Novato, CACPAMay 1, 2002
to
April 30, 2005
Burnett, Bradley P.Wheat Ridge, COAttorneyMay 1, 2002
to
April 30, 2004
Leone, AnthonyDes Plaines, ILCPAApril 1, 2002
to
September 30, 2003
September 3, 20024762002–35 I.R.B.

NameAddressDesignationDate of Suspension
Groskin, Lawrence J.Tuxedo Park, NYAttorneyMay 1, 2002
to
April 30, 2003
Homnick, CorySan Diego, CACPAJune 1, 2002
to
May 31, 2003
Herring, Chester L.University Park, ILCPAJune 1, 2002
to
November 30, 2003
Cutcher, Edward W.Clinton, OHCPAJune 1, 2002
to
February 28, 2003
Gisser, Arthur S.Glenwood Landing, NYCPAJuly 1, 2002
to
December 31, 2002
Garlikov, Mark B.Dayton, OHAttorneyJuly 1, 2002
to
October 30, 2005
Foust, John FranklinDes Moines, IACPAJuly 1, 2002
to
June 30, 2003
Byock, Matthew I.Red Bank, NJCPAAugust 1, 2002
to
March 31, 2003
Expedited Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, the Director of Practice is
authorized to immediately suspend from
practice before the Internal Revenue Ser-
vice any practitioner who, within five years
from the date the expedited proceeding is
instituted (1) has had a license to practice
as an attorney, certified public accoun-
tant, or actuary suspended or revoked for
cause or (2) has been convicted of cer-
tain crimes.
The following individuals have been
placed under suspension from practice be-
fore the Internal Revenue Service by vir-
tue of the expedited proceeding provisions:
NameAddressDesignationDate of Suspension
Brenner, William A.Grahamsville, NYAttorneyIndefinite
from
February 2, 2001
Pope, Ray P.Pensacola, FLAttorneyIndefinite
from
February 23, 2001
Dudnick, Howard A.Princeton, NYCPAIndefinite
from
June 25, 2001
Griffiths, Brian D.North Andover, MACPAIndefinite
from
June 25, 2001
Yerardi, Michael J.East Walpole, MAAttorneyIndefinite
from
June 25, 2001
2002–35 I.R.B.477September 3, 2002

NameAddressDesignationDate of Suspension
Cheesman, Michael S.Mill Creek, WACPAIndefinite
from
July 20, 2001
Devereaux, RossJackson, MICPAIndefinite
from
July 20, 2001
Gaskill, ToddLompoc, CAAttorneyIndefinite
from
July 20, 2001
Gross, Peter SamKerrville, TXAttorneyIndefinite
from
July 20, 2001
Hausman, StanleyLivingston, NJAttorneyIndefinite
from
July 20, 2001
Jones, Peter C.Seattle, WACPAIndefinite
from
July 20, 2001
Koss, Lewis M.Calabasas, CAAttorneyIndefinite
from
July 20, 2001
Maxey, MichaelMishawaka, INCPAIndefinite
from
July 20, 2001
Meaney, Richard A.Harwich Port, MAAttorneyIndefinite
from
July 20, 2001
Shaver, Howard D.Leawood, KSAttorneyIndefinite
from
July 20, 2001
Sims, ThomasTonka Bay, MNCPAIndefinite
from
July 20, 2001
Wallin, HansArthur, NDAttorneyIndefinite
from
July 20, 2001
Freeman, Dale L.North Royalton, OHCPAIndefinite
from
August 6, 2001
Huffman, Richard E.Riverside, CACPAIndefinite
from
August 6, 2001
Lawrence, William E.Salinas, CACPAIndefinite
from
August 6, 2001
Marks, William J.New York, NYCPAIndefinite
from
August 6, 2001
Parker, GeorgeHonolulu, HIAttorneyIndefinite
from
August 6, 2001
Pham, Van LuongHouston, TXEnrolled AgentIndefinite
from
August 6, 2001
September 3, 20024782002–35 I.R.B.

NameAddressDesignationDate of Suspension
Pirro, Jr., Albert J.Rye, NYAttorneyIndefinite
from
August 6, 2001
Pollacheck, Mark E.Califon, NJEnrolled AgentIndefinite
from
August 6, 2001
Price, Padget C.Corona, CAAttorneyIndefinite
from
August 6, 2001
Ragusa, SebastianHicksville, NYAttorneyIndefinite
from
August 6, 2001
Ranum, Karl M.Stillwater, MNAttorneyIndefinite
from
August 6, 2001
Ross, Daniel P.Ashtabula, OHCPAIndefinite
from
August 6, 2001
Shea, Michael P.Myrtle Beach, SCCPAIndefinite
from
August 6, 2001
Tatman, Elizabeth A.Mission Viejo, CACPAIndefinite
from
August 6, 2001
Taylor, Murray E.Houston, TXCPAIndefinite
from
August 6, 2001
Truex, Anthony J.Port Hueneme, CACPAIndefinite
from
August 6, 2001
Utterback, Thomas M.Gerald, MOAttorneyIndefinite
from
August 6, 2001
Zauft, Steven J.San Antonio, TXAttorneyIndefinite
from
August 6, 2001
Hancock, George B.New Bern, NCCPAIndefinite
from
June 24, 2002
Nadale, Richard D.Petaluma, CACPAIndefinite
from
June 24, 2002
2002–35 I.R.B.479September 3, 2002

Resignations of Enrolled Agents
Under Title 31, Code of Federal Regu-
lations, Part 10, an enrolled agent, in or-
der to avoid the institution or conclusion of
a proceeding for his or her disbarment or
suspension from practice before the Inter-
nal Revenue Service, may offer his or her
resignation as an enrolled agent. The Di-
rector of Practice, in his discretion, may ac-
cept the offered resignation.
The Director of Practice has accepted of-
fers of resignation as an enrolled agent from
the following individuals:
NameAddressDate of Resignation
Fuener, Donald C.Springfield, ILEffective December 31, 2001
Clark, Robert A.Chico, CAEffective January 1, 2002
Sarmiento, Romulo B.San Francisco, CAEffective March 31, 2002
Goetz, Roger H.Waseca, MNEffective June 24, 2002
September 3, 20024802002–35 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as“rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
withmodified, below).
Clarifiedis used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modifiedis used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it
applies to both A and B, the prior ruling
is modified because it corrects a pub-
lished position. (Compare withamplified
andclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revokeddescribes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Supersededdescribes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example,modified
andsupersededdescribes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case,
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current
use and formerly used will appear in
material published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
2002–35 I.R.B.iSeptember 3, 2002

Numerical Finding List
1
Bulletin 2002–26 through 2002–34
Announcements:
2002–59, 2002–26 I.R.B.28
2002–60, 2002–26 I.R.B.28
2002–61, 2002–27 I.R.B.72
2002–62, 2002–27 I.R.B.72
2002–63, 2002–27 I.R.B.72
2002–64, 2002–27 I.R.B.72
2002–65, 2002–29 I.R.B.182
2002–66, 2002–29 I.R.B.183
2002–67, 2002–30 I.R.B.237
2002–68, 2002–31 I.R.B.283
2002–69, 2002–31 I.R.B.283
2002–70, 2002–31 I.R.B.284
2002–71, 2002–32 I.R.B.323
2002–72, 2002–32 I.R.B.323
2002–73, 2002–33 I.R.B.387
2002–74, 2000–33 I.R.B.387
2002–75, 2002–34 I.R.B.416
Notices:
2002–42, 2002–27 I.R.B.36
2002–43, 2002–27 I.R.B.38
2002–44, 2002–27 I.R.B.39
2002–45, 2002–28, I.R.B.93
2002–46, 2002–28 I.R.B.96
2002–47, 2002–28 I.R.B.97
2002–48, 2002–29 I.R.B.130
2002–49, 2002–29 I.R.B.130
2002–50, 2002–28 I.R.B.98
2002–51, 2002–29 I.R.B.131
2002–52, 2002–30 I.R.B.187
2002–53, 2002–30 I.R.B.187
2002–54, 2002–30 I.R.B.189
2002–56, 2002–32 I.R.B.319
2002–57, 2002–33 I.R.B.379
Proposed Regulations:
REG–248110–96, 2002–26 I.R.B.19
REG–110311–98, 2002–28 I.R.B.109
REG–103823–99, 2002–27 I.R.B.44
REG–103829–99, 2002–27 I.R.B.59
REG–103735–00, 2002–28 I.R.B.109
REG–106457–00, 2002–26 I.R.B.23
REG–106871–00, 2002–30 I.R.B.190
REG–106876–00, 2002–34 I.R.B.392
REG–106879–00, 2002–34 I.R.B.402
REG–107524–00, 2002–28 I.R.B.110
REG–115285–01, 2002–27 I.R.B.62
REG–115781–01, 2002–33 I.R.B.380
REG–116644–01, 2002–31 I.R.B.268
REG–123345–01, 2002–32 I.R.B.321
REG–126024–01, 2002–27 I.R.B.64
REG–164754–01, 2002–30 I.R.B.212
REG–165868–01, 2002–31 I.R.B.270
REG–106359–02, 2002–34 I.R.B.405
REG–122564–02, 2002–26 I.R.B.25
REG–123305–02, 2002–26 I.R.B.26
REG–124256–02, 2002–33 I.R.B.383
REG–133254–02, 2002–34 I.R.B.412
Revenue Procedures:
2002–43, 2002–28 I.R.B.99
2002–44, 2002–26 I.R.B.10
2002–45, 2002–27 I.R.B.40
2002–46, 2002–28 I.R.B.105
2002–47, 2002–29 I.R.B.133
2002–49, 2002–29 I.R.B.172
2002–50, 2002–29 I.R.B.173
2002–51, 2002–29 I.R.B.175
2002–52, 2002–31 I.R.B.242
2002–53, 2002–31 I.R.B.253
Revenue Rulings:
2002–38, 2002–26 I.R.B.4
2002–39, 2002–27 I.R.B.33
2002–40, 2002–27 I.R.B.30
2002–41, 2002–28 I.R.B.75
2002–42, 2002–28 I.R.B.76
2002–43, 2002–28 I.R.B.85
2002–44, 2002–28 I.R.B.84
2002–45, 2002–29 I.R.B.116
2002–46, 2002–29 I.R.B.117
2002–47, 2002–29 I.R.B.119
2002–48, 2002–31 I.R.B.239
2002–49, 2002–32 I.R.B.288
2002–50, 2002–32 I.R.B.292
2002–51, 2002–33 I.R.B.327
2002–52, 2002–34 I.R.B.388
Treasury Decisions:
8997, 2002–26 I.R.B.6
8998, 2002–26 I.R.B.1
8999, 2002–28 I.R.B.78
9000, 2002–28 I.R.B.87
9001, 2002–29 I.R.B.128
9002, 2002–29 I.R.B.120
9003, 2002–32 I.R.B.294
9004, 2002–33 I.R.B.331
9005, 2002–32 I.R.B.290
9006, 2002–32 I.R.B.315
9007, 2002–33 I.R.B.349
9008, 2002–33 I.R.B.335
9009, 2002–33 I.R.B.328
9010, 2002–33 I.R.B.341
9011, 2002–33 I.R.B.356
9012, 2002–34 I.R.B.389
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2002–1 through 2002–25 is
in Internal Revenue Bulletin 2002–26, dated July 1, 2002.
September 3, 2002ii2002–35 I.R.B.

Finding List of Current Actions
on Previously Published Items
1
Bulletin 2002–26 through 2002–34
Announcements:
98–99
Superseded by
Rev. Proc. 2002–44, 2002–26 I.R.B.10
2000–4
Modified by
Ann. 2002–60, 2002–26 I.R.B.28
2001–9
Superseded by
Rev. Proc. 2002–44, 2002–26 I.R.B.10
Proposed Regulations:
REG–209114–90
Corrected by
Ann. 2002–65, 2002–29 I.R.B.182
REG–209813–96
Withdrawn by
REG–106871–00, 2002–30 I.R.B.190
REG–103823–99
Corrected by
Ann. 2002–67, 2002–30 I.R.B.237
REG–105885–99
Corrected by
Ann. 2002–67, 2002–30 I.R.B.237
REG–105369–00
Clarified by
Notice 2002–52, 2002–30 I.R.B.187
Corrected by
Ann. 2002–67, 2002–30 I.R.B.237
REG–118861–00
Corrected by
Ann. 2002–67, 2002–30 I.R.B.237
REG–126100–00
Withdrawn by
REG–133254–02, 2002–34 I.R.B.412
REG–136193–01
Corrected by
Ann. 2002–67, 2002–30 I.R.B.237
REG–161424–01
Corrected by
Ann. 2002–67, 2002–30 I.R.B.237
REG–165706–01
Corrected by
Ann. 2002–67, 2002–30 I.R.B.237
REG–102740–02
Corrected by
Ann. 2002–67, 2002–30 I.R.B.237
REG–123305–02
Corrected by
Ann. 2002–69, 2002–31 I.R.B.283
Revenue Procedures:
91–23
Modified and superseded by
Rev. Proc. 2002–52, 2002–31 I.R.B.242
91–26
Modified and superseded by
Rev. Proc. 2002–52, 2002–31 I.R.B.242
95–18
Superseded by
Rev. Proc. 2002–51, 2002–29 I.R.B.175
96–13
Modified and superseded by
Rev. Proc. 2002–52, 2002–31 I.R.B.242
96–14
Modified and superseded by
Rev. Proc. 2002–52, 2002–31 I.R.B.242
96–53
Amplified by
Rev. Proc. 2002–52, 2002–31 I.R.B.242
2001–12
Obsoleted by
T.D. 9004, 2002–33 I.R.B.331
2001–17
Modified and superseded by
Rev. Proc. 2002–47, 2002–29 I.R.B.133
2001–26
Superseded by
Rev. Proc. 2002–53, 2002–31 I.R.B.253
2002–9
Modified and amplified by
Rev. Proc. 2002–46, 2002–28 I.R.B.105
2002–13
Modified by
Rev. Proc. 2002–45, 2002–27 I.R.B.40
Revenue Rulings:
54–571
Obsoleted by
T.D. 9010, 2002–33 I.R.B.341
55–606
Obsoleted by
T.D. 9010, 2002–33 I.R.B.341
59–328
Obsoleted by
T.D. 9010, 2002–33 I.R.B.341
64–36
Obsoleted by
T.D. 9010, 2002–33 I.R.B.341
65–129
Obsoleted by
T.D. 9010, 2002–33 I.R.B.341
Revenue Rulings—Continued:
67–197
Obsoleted by
T.D. 9010, 2002–33 I.R.B.341
69–259
Modified and superseded by
Rev. Rul. 2002–50, 2002–32 I.R.B.292
69–595
Obsoleted in part by
T.D. 9010, 2002–33 I.R.B.341
70–608
Obsoleted in part by
T.D. 9010, 2002–33 I.R.B.341
73–232
Obsoleted by
T.D. 9010, 2002–33 I.R.B.341
76–225
Revoked by
REG–115781–01, 2002–33 I.R.B.380
77–53
Obsoleted by
T.D. 9010, 2002–33 I.R.B.341
85–50
Obsoleted by
T.D. 2002–33 I.R.B.341
92–17
Amplified by
Rev. Rul. 2002–49, 2002–32 I.R.B.288
92–75
Clarified by
Rev. Proc. 2002–52, 2002–31 I.R.B.242
93–70
Obsoleted by
T.D. 9010, 2002–33 I.R.B.341
94–76
Amplified by
Rev. Rul. 2002–42, 2002–28 I.R.B.76
Treasury Decisions:
8997
Corrected by
Ann. 2002–68, 2002–31 I.R.B.283
8999
Corrected by
Ann. 2002–71, 2002–32 I.R.B.323
1
A cumulative list of current actions on previously published
items in Internal Revenue Bulletins 2002–1 through 2002–25 is
in Internal Revenue Bulletin 2002–26, dated July 1, 2002.
2002–35 I.R.B.iiiSeptember 3, 2002

INDEX
Internal Revenue Bulletins
2002–26 through 2002–34
The abbreviation and number in paren-
thesis following the index entry refer to
the specific item; numbers in roman and
italic type following the parenthesis refer
to the Internal Revenue Bulletin in which
the item may be found and the page num-
ber on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction
Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural
Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
Defined benefit plans, elimination of
optional forms of benefit (Notice 46)
28,96
Employee Plans Compliance Resolution
System (EPCRS) update (RP 47) 29,
133
Full funding limitations:
Weighted average interest rate for:
July 2002 (Notice 49) 29,130
August 2002 (Notice 57) 33,379
Health reimbursement arrangements
(HRAs) (RR 41) 28,75; (Notice 45)
28,93
Individual retirement arrangements, earn-
ings calculation for returned or rechar-
acterized IRA contributions (REG–
124256–02) 33,383
Practice before the Internal Revenue Ser-
vice (TD 9011) 33,356
EMPLOYEE PLANS—
Cont.
Proposed Regulations:
26 CFR 1.408–4, amended; 1.408–11,
added; 1.408A–5, revised; earnings
calculation for returned or recharac-
terized IRA contributions (REG–
124256–02) 33,383
26 CFR 1.419A(f)(6)–1, added; 10-or-
more employer plans (REG–
165868–01) 31,270
Publications:
590, Individual Retirement Arrange-
ments (IRAs), Supplement to (Ann
73) 33,387
Qualified retirement plans:
Deductions:
Contributions (Notice 48) 29,130
Timing (RR 46) 29,117
Defined benefit plan, phased retire-
ment (Notice 43) 27,38
Money purchase pension plan, partial
termination (RR 42) 28,76
Notice to interested parties require-
ment (TD 9006) 32,315
Restorative payments (RR 45) 29,116
Refund of mistaken contributions and
withdrawal liability payments (TD
9005) 32,290
Regulations:
26 CFR 1.401(a)(2)–1, added; refund
of mistaken contributions and with-
drawal liability payments (TD 9005)
32,290
26 CFR 1.7476–1,–2, amended;
601.201, amended; notice to inter-
ested parties (TD 9006) 32,315
31 CFR Part 10, amended; regulations
governing practice before the Inter-
nal Revenue Service (TD 9011)
33,356
Ten-or-more employer plans (REG–
165868–01) 31,270
EMPLOYMENT TAX
Compromise of tax liabilities (TD 9007)
33,349
Information reporting, payments made on
behalf of another person, to joint pay-
ees, and of gross proceeds from sales
involving investment advisors (TD
9010) 33,341
Practice before the Internal Revenue Ser-
vice (TD 9011) 33,356
EMPLOYMENT TAX—
Cont.
Proposed Regulations:
26 CFR 1.61–2, amended; 1.61–22,
added; 1.83–1,–3,–6, amended;
1.301–1(q), added; 1.1402(a)–18,
added;1.7872–15,added;
31.3121(a), 31.3231(e), 31.3306(b),
31.3401(a), amended; split-dollar
life insurance arrangements (REG–
164754–01) 30,212
26 CFR 31.3406(d)–5, revised;
301.6724–1, amended; receipt of
multiple notices with respect to
incorrect taxpayer identification
numbers (REG–116644–01) 31,268
Publications:
1141, General Rules and Specifica-
tions for Substitute Forms W–2 and
W–3, revised (RP 53) 31,253
1223, General Rules and Specifica-
tions for Substitute Forms W–2c and
W–3c, revised (RP 51) 29,175
Regulations:
26 CFR 1.6041–1,–3, amended;
1.6045–1,–2, amended; 1.6049–4,
revised; 5f.6045–1, removed;
31.3406, amended; 602.101,
amended; information reporting
requirements for certain payments
made on behalf of another person,
payments to joint payees, and pay-
ments of gross proceeds from sales
involving investment advisors (TD
9010) 33,341
26 CFR 301.7122–0,–1, added;
301.7122–0T,–1T, removed; com-
promise of tax liabilities (TD 9007)
33,349
31 CFR Part 10, amended; regulations
governing practice before the Inter-
nal Revenue Service (TD 9011)
33,356
Split-dollar life insurance arrangements
(REG–164754–01) 30,212
Statutory stock options, application of
employment taxes (Notice 47) 28,97
Substitute Forms:
W–2 and W–3, general rules and
specifications (RP 53) 31,253
W–2c and W–3c, general rules and
specifications (RP 51) 29,175
Taxpayer identification numbers, backup
withholding, waiver of information
reporting penalties (REG–116644–01)
31,268
September 3, 2002iv2002–35 I.R.B.

ESTATE TAX
Annuities, death benefits (RR 39) 27,33
Compromise of tax liabilities (TD 9007)
33,349
Guaranteed annuity and lead unitrust
interests, definition (REG–115781–01)
33,380
Practice before the Internal Revenue Ser-
vice (TD 9011) 33,356
Proposed Regulations:
26 CFR 20.2055–2, amended; defini-
tion of guaranteed annuity and lead
unitrust interests (REG–115781–01)
33,380
Regulations:
26 CFR 301.7122–0,–1, added;
301.7122–0T,–1T, removed; com-
promise of tax liabilities (TD 9007)
33,349
31 CFR Part 10, amended; regulations
governing practice before the Inter-
nal Revenue Service (TD 9011)
33,356
Tax conventions, competent authority
procedures (RP 52) 31,242
EXCISE TAX
Compromise of tax liabilities (TD 9007)
33,349
Diesel fuel, blended taxable fuel (REG–
106457–00) 26,23
Golden parachute payments:
Excess payments (Ann 65) 29,181
Valuation of options (RP 45) 27,40
Highway vehicle, definition (REG–
103829–99) 27,59
Practice before the Internal Revenue Ser-
vice (TD 9011) 33,356
Prohibited transactions, excise tax com-
putation (RR 43) 28,85
Proposed Regulations:
26 CFR 1.280G–1, golden parachute
payments; correction (Ann 65) 29,
181
26 CFR 41.4482(a)–1, amended;
48.4041–8, amended; 48.4051–1,
added; 48.4072–1, amended;
48.4081–1, amended; 48.6421–4,
revised; 145.4051–1, amended; defi-
nition of highway vehicle (REG–
103829–99) 27,59
26 CFR 48.4081–1,–3, amended; die-
sel fuel, blended taxable fuel (REG–
106457–00) 26,23
EXCISE TAX—
Cont.
Regulations:
26 CFR 301.7122–0,–1, added;
301.7122–0T,–1T, removed; com-
promise of tax liabilities (TD 9007)
33,349
31 CFR Part 10, amended; regulations
governing practice before the Inter-
nal Revenue Service (TD 9011)
33,356
Tax-free sales of articles for use by pur-
chaser as supplies for vessels or aircraft
(RR 50) 32,292
EXEMPT
ORGANIZATIONS
List of organizations classified as private
foundations (Ann 64) 27,72; (Ann 66)
29,183; (Ann 70) 31,284; (Ann 72)
32,323; (Ann 75) 34,416
Practice before the Internal Revenue Ser-
vice (TD 9011) 33,356
Regulations:
31 CFR Part 10, amended; regulations
governing practice before the Inter-
nal Revenue Service (TD 9011)
33,356
GIFT TAX
Compromise of tax liabilities (TD 9007)
33,349
Guaranteed annuity and lead unitrust
interests, definition (REG–115781–01)
33,380
Net gift treatment under section 2519
(REG–123345–01) 32,321
Practice before the Internal Revenue Ser-
vice (TD 9011) 33,356
Proposed Regulations:
26 CFR 1.61–2, amended; 1.61–22,
added; 1.83–1,–3,–6, amended;
1.301–1(q), added; 1.1402(a)–18,
added;1.7872–15,added;
31.3121(a), 31.3231(e), 31.3306(b),
31.3401(a), amended; split-dollar
life insurance arrangements (REG–
164754–01) 30,212
26 CFR 25.2207A–1, amended;
25.2519–1, amended; net gift treat-
ment under section 2519 (REG–
123345–01) 32,321
GIFT TAX—
Cont.
26 CFR 25.2522(c)–3, amended; defi-
nition of guaranteed annuity and
lead unitrust interests (REG–
115781–01) 33,380
Regulations:
26 CFR 301.7122–0,–1, added;
301.7122–0T,–1T, removed; com-
promise of tax liabilities (TD 9007)
33,349
31 CFR Part 10, amended; regulations
governing practice before the Inter-
nal Revenue Service (TD 9011)
33,356
Split-dollar life insurance arrangements
(REG–164754–01) 30,212
Tax conventions, competent authority
procedures (RP 52) 31,242
INCOME TAX
Appeals:
Arbitration procedures, extension of
test (Ann 60) 26,28
Mediation procedure (RP 44) 26,10
Compromise of tax liabilities (TD 9007)
33,349
Consolidated income tax return:
Agent for the group (RP 43) 28,99
Common parent as agent for consoli-
dated group, substitute agent, tenta-
tive carryback adjustments (TD
9002) 29,120
Corporations:
Carryback of consolidated net operat-
ing losses to separate return years
(TD 8997) 26,6; correction (Ann
68) 31,283; (REG–122564–02)
26,25
Spin-offs, mergers and acquisitions
(RR 49) 32,288
Treatment of a controlled foreign cor-
poration’s distributive share of part-
nership income under subpart F (TD
9008) 33,335
Credits:
Enhanced oil recovery credit, 2002
inflation adjustment (Notice 53) 30,
187
Increasing research activities credit
(Notice 44) 27,39
2002–35 I.R.B.vSeptember 3, 2002

INCOME TAX—
Cont.
Low-income housing credit, satisfac-
tory bond,“bond factor”amounts
for the period:
July through September 2002
(RR 51) 33,327
Definition of income tax return preparer,
low-income taxpayer clinics (REG–
115285–01) 27,62
Depreciation, income forecast method
(REG–103823–99) 27,44
Disclosure of return information, Census
of Agriculture (TD 9001) 29,128
Domestic reverse hybrid entity, eligibility
for treaty benefits (TD 8999) 28,78;
correction (Ann 71) 32,323
Dual consolidated loss recapture events
(REG–106879–00) 34,402
Entity classification rules (TD 9012)
34,389
“Excepted sale”for information reporting
on Form 1099–B for certain sales of
stock (RP 50) 29,173
Forms, 1099–B, information reporting for
certain sales of stock, exception (RP
50) 29,173
Golden parachute payments:
Excess payments (Ann 65) 29,181
Valuation of options (RP 45) 27,40
Guaranteed annuity and lead unitrust
interests, definition (REG–115781–01)
33,380
Health reimbursement arrangements
(HRAs) (RR 41) 28,75; (Notice 45)
28,93
Information reporting:
Investment trusts (REG–106871–00)
30,190
Payments made on behalf of another
person, to joint payees, and of gross
proceeds from sales involving
investment advisors (TD 9010)
33,341
Information returns, discharges of indebt-
edness (REG–107524–00) 28,110
Insurance company interest rates (REG–
248110–96) 26,19
Interest:
Bank deposit interest paid to nonresi-
dent aliens (REG–133254–02)
34,412
Investment:
Federal short-term, mid-term, and
long-term rates for:
July 2002 (RR 40) 27,30
August 2002 (RR 48) 31,239
INCOME TAX—
Cont.
Inventory:
LIFO:
Price indexes used by department
stores for:
May 2002 (RR 47) 29,119
June 2002 (RR 52) 34,388
Joint return, relief from joint and several
liability (TD 9003) 32,294
Loss limitation rules (TD 8998) 26,1;
(REG–123305–02) 26,26; correction
(Ann 69) 31,283
Marginal properties, oil and gas produc-
tion, depletion, 2002 percentages
(Notice 54) 30,189
Methods of accounting, safe harbor
method for premium acquisition
expenses, non-life insurance companies
(RP 46) 28,105
New York Liberty Zone, tax benefits
(Notice 42) 27,36
Noncustomary services provided to ten-
ants of a REIT (RR 38) 26,4
Partnerships:
Straddle tax shelter (Notice 50) 28,98
Taxable year, foreign and tax-exempt
partners (TD 9009) 33,328
Practice before the Internal Revenue Ser-
vice (TD 9011) 33,356
Private foundations, organizations now
classified as (Ann 64) 27,72; (Ann 66)
29,183; (Ann 70) 31,284; (Ann 72)
32,323; (Ann 75) 34,416
Proposed Regulations:
26 CFR 1.61–2, amended; 1.61–22,
added; 1.83–1,–3,–6, amended;
1.301–1(q), added; 1.1402(a)–18,
added;1.7872–15,added;
31.3121(a), 31.3231(e), 31.3306(b),
31.3401(a), amended; split-dollar
life insurance arrangements (REG–
164754–01) 30,212
26 CFR 1.167(n)–0 through–7, added;
guidance on cost recovery under the
income forecast method (REG–
103823–99) 27,44
26 CFR 1.170A–6, amended; defini-
tion of guaranteed annuity and lead
unitrust interests (REG–115781–01)
33,380
26 CFR 1.280G–1; golden parachute
payments; correction (Ann 65)
29,181
INCOME TAX—
Cont.
26 CFR 1.337(d)–2, amended; 1.1502–
20, amended; loss limitation rules
(REG–123305–02) 26,26; correc-
tion (Ann 69) 31,283
26 CFR 1.482–0,–1,–5,–7, amended;
compensatory stock options in quali-
fied cost sharing arrangements
(REG–106359–02) 34,405
26 CFR 1.671–4, amended; 1.671–5,
added; 1.6041–9, added; 1.6042–5,
added;1.6045–1,amended;
1.6049–4,–5, amended; 1.6050N–2,
added; 301.6109–1, amended;
602.101, amended; reporting for
widely held fixed investment trusts
(REG–106871–00) 30,190
26 CFR 1.807–2, added; 1.811–3,
added; 1.812–9, added; 1.817A–0,
–1, added; guidance regarding modi-
fied guaranteed contracts (REG–
248110–96) 26,19
26 CFR 1.897–1,–2,–3,–5T,–6T,
amended; 1.897–5, added; 1.1445–1
through–6, amended; 1.1445–9T,
removed; 301.6109–1, amended; use
of taxpayer identifying numbers on
submissions under sections 897 and
1445 (REG–106876–00) 34,392
26 CFR 1.1502–21, amended; carry-
back of consolidated net operating
losses to separate return years
(REG–122564–02) 26,25
26 CFR 1.1503–2, amended; dual con-
solidated loss recapture events
(REG–106879–00) 34,402
26 CFR 1.6011–4, amended;
301.6111–2, amended; modification
of tax shelter rules III (REG–
103735–00, REG–110311–98) 28,
109
26 CFR 1.6041–1(a)(1)(ii),–3,
amended; 1.6045–5, added; report-
ing of gross proceeds payments to
attorneys (REG–126024–01) 27,64
26 CFR 1.6049–4,–6,–8, revised;
31.3406(g)–1, revised; guidance on
reporting of deposit interest paid to
nonresident aliens (REG–133254–
02) 34,412
26 CFR 1.6050P–0,–1, amended;
1.6050P–2, added; guidance regard-
ing cancellation of indebtedness
(REG–107524–00) 28,110
September 3, 2002vi2002–35 I.R.B.

INCOME TAX—
Cont.
26 CFR 31.3406(d)–5, revised;
301.6724–1, amended; receipt of
multiple notices with respect to
incorrect taxpayer identification
numbers (REG–116644–01) 31,268
26 CFR 301.7701–15, amended; low-
income taxpayer clinics--definition
of income tax return preparer (REG–
115285–01) 27,62
Public hearings, correction of dates
and/or locations (Ann 67) 30,237
Public hearings for proposed regulations,
correction of dates and locations (Ann
67) 30,237
Publications:
463, Travel, Entertainment, Gift, and
Car Expenses, Supplement to (Ann
59) 26,28
536, Net Operating Losses (NOLs) for
Individuals, Estates, and Trusts,
Supplement to (Ann 59) 26,28
551, Basis of Assets, revised (Ann 61)
27,71
583, Starting a Business and Keeping
Records, revised (Ann 62) 27,72
590, Individual Retirement Arrange-
ments (IRAs), Supplement to (Ann
73) 33,387
946, How To Depreciate Property,
Supplement to (Ann 59) 26,28
971, Innocent Spouse Relief (And
Separation of Liability and Equi-
table Relief), revised (Ann 74)
33,387
1141, General Rules and Specifica-
tions for Substitute Forms W–2 and
W–3, revised (RP 53) 31,253
1223, General Rules and Specifica-
tions for Substitute Forms W–2c and
W–3c, revised (RP 51) 29,175
3991, Highlights of the Job Creation
and Worker Assistance Act, new
(Ann 59) 26,28
Qualified cost sharing arrangements,
costs attributable to stock options
(REG–106359–02) 34,405
Real estate mortgage investment conduits
(REMICs) (TD 9004) 33,331
Regulations:
26 CFR 1.337(d)–2T, amended;
1.1502–20T, amended; loss limita-
tion rules (TD 8998) 26,1
INCOME TAX—
Cont.
26 CFR 1.338–1, amended; 1.1502–6,
amended; 1.1502–77, redesignated
as 1.1502–77A and amended;
1.1502–77, added; 1.1502–77T(a),
redesignated as 1.1502–77A(e) and
amended; 1.1502–77T, removed;
1.1502–78, amended; 602.101,
amended; agent for consolidated
group (TD 9002) 29,120
26 CFR 1.702–1, amended; 1.952–
1(g), added; 1.954–1(g),–2(a)(5),
–3(a)(6),–4(b)(2)(iii), added; 1.956–
2(a)(3), added; guidance under sub-
part F relating to partnerships (TD
9008) 33,335
26 CFR 1.706–1, revised; 1.706–3T,
removed; taxable years of partner
and partnership, foreign partners
(TD 9009) 33,328
26 CFR 1.860A–0, amended;
1.860E–1, amended; 602.101,
amended; real estate mortgage
investment conduits (TD 9004)
33,331
26 CFR 1.892–5, added; 1.892–5T,
amended; 301.7701–2, amended;
clarification of entity classification
rules (TD 9012) 34,389
26 CFR 1.894–1(d), amended; treaty
guidance regarding payments with
respect to domestic reverse hybrid
entities (TD 8999) 28,78; correc-
tion (Ann 71) 32,323
26 CFR 1.1502–21, amended; 1.1502–
21T, added; 602.101, amended; car-
ryback of consolidated net operating
losses to separate return years (TD
8997) 26,6; correction (Ann 68)
31,283
26 CFR 1.6011–4T, amended;
1.6031(a)–1, amended; 1.6037–1,
amended; 301.6111–2T, amended;
modification of tax shelter rules III
(TD 9000) 28,87
26 CFR 1.6013–4(d), added;
1.6013–5, removed; 1.6015–0
through–9, added; relief from joint
and several liability (TD 9003)
32,294
INCOME TAX—
Cont.
26 CFR 1.6041–1,–3, amended;
1.6045–1,–2, amended; 1.6049–4,
revised; 5f.6045–1, removed;
31.3406, amended; 602.101,
amended; information reporting
requirements for certain payments
made on behalf of another person,
payments to joint payees, and pay-
ments of gross proceeds from sales
involving investment advisors (TD
9010) 33,341
26 CFR 301.6103(j)(5)–1, amended;
disclosure of return information to
officers and employees of the
Department of Agriculture for cer-
tain statistical purposes and related
activities (TD 9001) 29,128
26 CFR 301.7122–0,–1, added;
301.7122–0T,–1T, removed; com-
promise of tax liabilities (TD 9007)
33,349
31 CFR Part 10, amended; regulations
governing practice before the Inter-
nal Revenue Service (TD 9011)
33,356
Reporting of gross proceeds payments to
attorneys (REG–126024–01) 27,64
Split-dollar life insurance arrangements
(REG–164754–01) 30,212
Stock gain or loss, short sale (RR 44)
28,84
Substitute Forms:
W–2 and W–3, general rules and
specifications (RP 53) 31,253
W–2c and W–3c, general rules and
specifications (RP 51) 29,175
Tax accrual and other financial audit
workpapers, request for (Ann 63)
27,72
Tax conventions, competent authority
procedures (RP 52) 31,242
Tax-exempt bonds:
Exempt facility bonds, population fig-
ures (Notice 56) 32,319
Investment-type property and private
loan (prepayments) (Notice 52)
30,187
Solid waste disposal facilities, recy-
cling facilities (Notice 51) 29,131
Tax shelters, disclosure and registration
(TD 9000) 28,87; (REG–103735–00,
REG–110311–98) 28,109
2002–35 I.R.B.viiSeptember 3, 2002

INCOME TAX—
Cont.
Taxpayer identification numbers:
Backup withholding, waiver of infor-
mation reporting penalties (REG–
116644–01) 31,268
Used on submissions under sections
897 and 1445 (REG–106876–00)
34,392
Utility companies, non-recognition treat-
ment of stranded costs (RP 49) 29,172
SELF-EMPLOYMENT
TAX
Compromise of tax liabilities (TD 9007)
33,349
Practice before the Internal Revenue Ser-
vice (TD 9011) 33,356
Regulations:
26 CFR 301.7122–0,–1, added;
301.7122–0T,–1T, removed; com-
promise of tax liabilities (TD 9007)
33,349
31 CFR Part 10, amended; regulations
governing practice before the Inter-
nal Revenue Service (TD 9011)
33,356
September 3, 2002viii2002–35 I.R.B.

This page is reserved for Christian and Jean Terranova.
2002–35 I.R.B.September 3, 2002

This page is reserved for Rasheeyda Wilson.
September 3, 20022002–35 I.R.B.