SECTION 12. EXTERNALAUDIT PROCEDURES.

Sec. 12.01. In General. The IRS shall not conduct an on-site audit of QI, or any PAI with which QI has an agreement, provided that the external auditor designated in Appendix B of this Agreement conducts an audit of QI, and any PAI, in accordance with this section 12. QI shall permit the external auditor to have access to all relevant records of QI for purposes of performing the external audit. QI shall permit the IRS to communicate directly with the external auditor in regard to the audit and to review the audit procedures followed by the external auditor. QI shall permit the IRS to examine the external auditor’s work papers and reports prepared by the external auditor. However, the external auditor is not required to divulge the identity of QI’s account holders to the IRS.

Sec. 12.02. Designation of External Auditor. QI’s external auditor must be approved by the IRS before this Agreement is executed. The IRS and QI agree that the auditor designated in Appendix B of this Agreement shall be the external auditor, unless QI and the IRS agree to substitute another auditor. QI shall not propose an external auditor to the IRS unless the auditor is subject to regulatory supervision under the laws of the country, or countries, designated in Appendix A of this Agreement.

Sec. 12.03. Timing and Scope of External Audits. QI shall have the external auditor conduct an audit of the second calendar year and the fifth calendar year that this Agreement is in effect, subject to section 12.05 of this Agreement. The external auditor shall verify whether QI is in compliance with this Agreement by conducting an audit that meets the requirements of this section 12.03. The external auditor shall verify whether QI has complied with its obligations under all provisions of sections 4 through 11 of this Agreement by:

(A) Verifying that QI has in place adequate procedures to comply with QI’s obligations under sections 5 through 11 of this Agreement;

(B) Interviewing employees responsible for complying with QI’s obligations under sections 5 through 11 of this Agreement to determine if they are knowledgeable and adequately trained with regard to such obligations; and

(C) Reviewing account holder information using valid sampling techniques (including, if appropriate, a statistical sampling) to determine if QI has complied with its obligations under sections 5, 6, 7, 8, 10, and 11 of this Agreement; and

February 1, 1999 46 1999–5 I.R.B.

(D) With respect to QI’s obligations under sections 9, 10, and 11, obtaining copies of original and amended Forms 1042, 945, 1042S, 1096, and 1099, and any schedules or statements required to be filed with those returns, and reviewing those forms for accuracy.

(E) Reviewing QI’s agreements with PAIs, if any, to verify that PAI has agreed to perform all of the obligations of QI under this Agreement, except as provided in section 4.02 of this Agreement.

Sec. 12.04. 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 14.06 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 each provision of section 5 through 11 of this Agreement, and the result of each such determination.

Sec. 12.05. 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 must permit, that the external auditor perform an audit for one or more calendar years not scheduled for audit pursuant to section 12.03 of this Agreement.