Part III. — Internal Revenue Bulletin 2001-2

Employer-Designed Tip Reporting Program for the Food and Beverage Industry

Notice 2001–1

I. BACKGROUND

In 1993, the Internal Revenue Service introduced its Tip Rate Determination/Education Program (TRD/EP), which is designed to enhance tax compliance among tipped employees through taxpayer education and voluntary advance agreements instead of traditional audit techniques. The TRD/EP was developed as a means of enhancing tax compliance while reducing taxpayer burden. In essence, the TRD/EP envisions that the Service and taxpayers in industries in which tipping is common will work together to improve tax compliance.

The TRD/EP currently offers employers the opportunity of entering into one of two types of agreements. The Tip Rate Determination Agreement (TRDA) requires the determination of tip rates; the Tip Reporting Alternative Commitment (TRAC) agreement emphasizes education and tip reporting procedures. The agreements also set forth an understanding that both the employer and employees who comply with the terms of the agreement will not be subject to challenge by the Service. The decision to enter into either a TRDA or a TRAC agreement is entirely voluntary on the part of the employer.

TRDAs are currently in use in the food and beverage industry and the gaming industry. TRAC agreements are currently in use in the food and beverage industry and the cosmetology and barber industry. The Service expects to begin making these agreements available to other industries during 2000.

Taxpayers in the food and beverage industry have expressed interest in designing their own TRAC programs. Notice 2000–21, 2000–19 I.R.B. 967, set forth proposed requirements and procedures for obtaining approval of an employer-designed EmTRAC program. Notice 2000–21 also offered interested persons the opportunity to comment on the proposed program. The Service received no comments. Even so, several nonsubstan

tive clarifying changes have been made. They appear in this document.

II. EmTRAC PROGRAM

The EmTRAC program is available only to employers in the food and beverage industry that have employees who receive both cash and charged tips. The employer may have one place of business or many places of business. For purposes of the program, each place of business is called an establishment. If an employer has more than one establishment, it can choose which establishments to include in its EmTRAC program.

The EmTRAC program retains many of the provisions in the TRAC agreement. The employer must establish an educational program that trains employees that the law requires them to report all their cash and charged tips to their employer. Education must be furnished for newly hired employees and quarterly for existing employees.

The employer must establish tip reporting procedures, under which a written or electronic statement is prepared and processed on a regular basis (no less frequently than monthly), reflecting all tips for services attributable to each employee.

The EmTRAC program provides an employer with considerable latitude in designing its educational program and tip reporting procedures, which the employer may combine. For example, a point-ofsale tip reporting system could meet both of these requirements, because the employee is prompted of the tip reporting requirement at the end of each sale and because the reporting occurs at the end of each sale.

The employer must agree–

to comply with the requirements for filing all required federal tax returns and paying and depositing all federal taxes;
to maintain the following records for at least 4 years after the April 15 following the calendar year to which the records relate:

a. gross receipts subject to tipping, and

b. charge receipts showing charged tips; and

upon the request of the Service, to

make the following quarterly totals available, by establishment, for statistical samplings of its establishments:

a. Gross receipts subject to tipping,

b. Charge receipts showing charged tips,

c. Total charged tips, and d. Total tips reported. The Service agrees–

not to initiate any tip examinations of the employer or an establishment included in the EmTRAC for any period for which the EmTRAC program is in effect; except in relation to a tip examination of one or more employees or former employees of the employer or an establishment.
to base any section 3121(q) notice and demand issued to the employer or an establishment included in the EmTRAC and relating to any period during which the EmTRAC program is in effect solely on amounts reflected on–

a. Form 4137, Social Security and Medicare Tax on Unreported Tip Income, filed by an Employee with his or her Form 1040, or

b. Form 885-T, Adjustment of So- cial Security Tax on Tip Income Not Re- ported to Employer, prepared at the conclusion of an employee tip examination; and

not to evaluate the employer for compliance with the provisions of its EmTRAC program for the first two calendar quarters for which the EmTRAC program is effective.

Both parties agree that, for purposes of the EmTRAC program, a compliance review is not treated as an examination or an inspection of books of account or records, and an inspection of books of account or records pursuant to a tip examination is not an inspection of books or records for purposes of section 7605(b) of the Code, and is not a prior audit for purposes of section 530 of the Revenue Act of 1978.

The effective date of an EmTRAC program is the first day of the quarter beginning on or after the date the Service signs an approval letter.

An employer may at any time terminate its EmTRAC program either completely

2001–2 I.R.B. 261 January 8, 2001

or with respect to one or more establishments. The Service may terminate its approval with respect to the EmTRAC program or a specific establishment or establishments, only if–

the Service determines that the employer or establishment(s) has failed to comply with the required provisions; or
the Service pursues an administrative or judicial action relating to the employer, an establishment included in the EmTRAC, or any other related party to the employer’s EmTRAC program. Generally, any termination is effective the first day of the first calendar quarter after the terminating party notifies the other party in writing.

If the employer has an existing TRAC agreement or TRDA covering one or more establishments included in the employer’s EmTRAC program, the existing TRAC agreement or TRDA will terminate with respect to that establishment or those establishments upon the approval of the employer’s EmTRAC program.

III. PROCEDURES FOR REQUESTING APPROVAL

The employer must request approval of its EmTRAC program. For this purpose, the Service has developed a pro forma letter that an employer must use to request approval of its EmTRAC program. The letter requests approval of the employer’s EmTRAC program and states that the employer will comply with the provisions set forth in the letter (and also set forth in section II above).

A copy of the approval request letter is attached to this notice. It can be obtained by mail by contacting the tip coordinator in any local IRS office or by calling (202) 622-5532 (not a toll-free call). The completed approval request letter and a copy of the employer’s EmTRAC program should be sent to:

Internal Revenue Service S:C:CP:ET Room 2404 Attn: EmTRAC Coordinator 1111 Constitution Avenue, N.W. Washington, DC 20224

IV. PROCEDURES FOR APPROVING REQUESTS

After it receives the approval request letter, the Service will review the employer’s program. If the program meets the necessary requirements, the Service will send the employer an approval letter, a copy of which is attached to this notice. The approval letter will specify the effective date of the employer’s EmTRAC program.

If the IRS determines that the employer’s EmTRAC program fails to meet all the requirements, the IRS will contact the employer and offer assistance in working out a program that will meet both the employer’s needs and the IRS’s requirements.

V. MISCELLANEOUS

Upon request to the local tip coordinator or the EmTRAC Coordinator, the Service will assist any employer in establishing, maintaining, or improving its educational program or tip reporting procedures.

The Commissioner of Internal Revenue may terminate all EmTRAC programs at any time following a significant statutory change in the FICA taxation of tips. After December 31, 2005, the Commissioner may terminate prospectively the Tip Rate Determination/Education Program and all EmTRAC programs.

VI. PAPERWORK REDUCTION ACT

The collections of information contained in this notice have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1716. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number. The collections of information in this document are in sections II and III. This information is required to comply with sections 6053(a) and 6001 of

the Internal Revenue Code and to assist the Internal Revenue Service in its compliance efforts. This information will be used to monitor the Employer’s performance under its EmTRAC program. The collections of information are required to obtain the benefits available under the EmTRAC program. The likely respondents are business or other for-profit institutions.

The estimated total annual reporting and/or recordkeeping burden is 870 hours.

The estimated annual burden per respondent/recordkeeper varies from 8 hours to 44 hours, depending on individual circumstances, with an estimated average of 13 hours. The estimated number of respondents and/or recordkeepers is 20. The estimated annual frequency of responses is on occasion.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by section 6103 of the Code.

VII. AFFECT ON OTHER DOCUMENTS

Notice 2000–21 is superseded.

DRAFTING INFORMATION

The principal author of this notice is Karin Loverud of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this announcement, contact Ida Volz of the Office of Compliance Policy at (202) 6225532 (not a toll-free call).

January 8, 2001 262 2001–2 I.R.B.

Letter — Request for EmTRAC approval

Tip Coordinator Internal Revenue Service

Dear Internal Revenue Service:

Re: Request for EmTRAC Approval

Pursuant to the Employer Tip Reporting Alternative Commitment Program (EmTRAC), I request your approval of the enclosed program for (name of business), EIN .

In accordance with Notice 2001–1, 2001–2 I.R.B. 261, if you approve this program_______________________________________ (name of business) agrees to:

(1) comply with the requirements for filing all required federal tax returns and paying and depositing all federal taxes;

(2) maintain the following records for at least 4 years after the April 15 following the calendar year to which the records relate:

a. gross receipts subject to tipping, and b. charge receipts showing charged tips;

(3) upon your request, make the following quarterly totals available, by establishment, for statistical samplings:

a. gross receipts subject to tipping, b. charge receipts showing charged tips, c. total charged tips, and d. total tips reported;

(4) operate its EmTRAC program as indicated in the program documents attached to this letter; and

(5) comply with the terms of your approval described in Notice 2001–1.

Also in accordance with Notice 2001–1, (name of business) agrees that a compliance review will not be treated as an examination or an inspection of its books of account or records and that your inspection of books of account or records pursuant to a tip examination will not be treated as an inspection of books or records for purposes of section 7605(b) of the Internal Revenue Code, and will not be treated as a prior audit for purposes of section 530 of the Revenue Act of 1978.

All correspondence pertaining to this EmTRAC program (including a notice of termination) should be sent to the address indicated below, unless we notify you in writing of a change of address. (name of business) will send correspondence to you in the manner indicated in your approval letter. All correspondence is effective on the date of the postmark stamped on the envelope or, in the case of a notice sent by certified mail, on the sender’s receipt.

I represent that I have the authority to agree to these terms on behalf of (name of business).

If you have any questions, please contact at (telephone number) or (e-mail address).

Name of Business

\s\

By:

Title:

Date:

Enclosures:

EmTRAC program documents List of establishments (name, address, and EIN) participating in the program

2001–2 I.R.B. 263 January 8, 2001

Letter – EmTRAC approval

Internal Revenue Service Department of the Treasury Service Representative

Person to Contact: Identification Number: Contact Telephone Number:

Re: EmTRAC Approval

Dear (Taxpayer):

Thank you for your letter of requesting our approval of your EmTRAC program and containing your agreements with respect to that program. We are pleased to inform you that your EmTRAC Program meets the requirements of Notice 2001–1.

Accordingly, we agree as follows:

Your EmTRAC program will be effective on [insert the first day of the quarter beginning on or after the date the Service signs the letter]. The Service agrees not to initiate any new tip examinations of you or any of the establishments included in your letter for any period during which your EmTRAC program is in effect, except in relation to a tip examination of one or more employees or former employees of you or an establishment.

Any section 3121(q) notice and demand that we issue to you (or an establishment) relating to any period during which your EmTRAC program is in effect will be based solely on amounts reflected on Form 4137, Social Security and Medicare Tax on Unreported Tip Income, filed by an employee with his or her Form 1040, or Form 885-T, Adjustment of Social Security Tax on Tip Income Not Reported to Employer, prepared at the conclusion of an employee tip examination.

The Service will not evaluate your EmTRAC program for compliance until [insert the first day of the second calendar quarter following the date on which the EmTRAC program becomes effective]. The Service may, however, review your progress in implementing your EmTRAC program before then.

Your EmTRAC program will remain in effect until you terminate it or the Service terminates its approval. If you no longer wish your EmTRAC program to apply to one or more of your establishments, you may terminate the program with respect to any establishment(s) by identifying the establishment(s) in writing to the Service Representative described below. If you want to completely terminate your EmTRAC program, please say that in your letter to the Service Representative.

The Service may terminate its approval only (1) if you fail to comply with your agreements described in your letter, (2) if the Service pursues an administrative or judicial action relating to you, an establishment, or any other related party to your EmTRAC program, (3) following a significant statutory change in the FICA taxation of tips, or (4) after December 31, 2005. If one or more establishments fail to comply with any of your agreements, the Service may choose to terminate its approval with respect to that establishment(s).

Any termination will be effective the first day of the first calendar quarter after the terminating party notifies the other party in writing, unless you (or an establishment) fail to comply with your agreements. In that case, the Service may terminate your EmTRAC program effective as of the first day of the quarter in which you ceased to comply.

Please send all correspondence relating to your EmTRAC program to (name and address), unless we notify you in writing otherwise.

If you have any questions regarding this agreement, please contact (ID ) at (telephone number) or (e-mail address).

Thank you for your participation in the program.

INTERNAL REVENUE SERVICE

By:

ID:

Date:

January 8, 2001 264 2001–2 I.R.B.

Research Credit-Suspension Period

Notice 2001–2

PURPOSE

This notice provides guidance to help taxpayers compute and report their credit for increasing research activities (research credit) under § 41 of the Internal Revenue Code for taxable years that include the research credit suspension periods described in § 502 (d)(2) of the Tax Relief Extension Act of 1999, Pub. L. No. 106170 (Dec. 17, 1999) (the Act). Further, this notice explains how to take into account any research credits attributable to a research credit suspension period.

SPECIAL RULES RELATING TO THE RESEARCH CREDIT SUSPENSION PERIODS

Section 502(d) of the Act provides that, for purposes of the Code, any research credit attributable to the period beginning on July 1, 1999, and ending on September 30, 2000, that is otherwise allowable under the Code, may not be taken into account prior to October 1, 2000. Further, any research credit attributable to the period beginning on October 1, 2000, and ending on September 30, 2001, that is otherwise allowable under the Code, may not be taken into account prior to October 1, 2001.

On or after the earliest date that an amount of research credit attributable to a research credit suspension period may be taken into account, the amount may be taken into account through the filing of an amended return, an application for expedited refund, or an adjustment of estimated taxes.

Because the research credit suspension periods merely delay the use of research credits attributable to a research credit suspension period, the limitations contained in § 38(c), § 39, and § 41(g) on the amount of research credit allowable to any person as a credit against tax for any taxable year remain applicable. Further, taxpayers not electing to take a reduced credit under § 280C(c)(3) must continue to reduce applicable deductions, amounts chargeable to capital account, and credits for the taxable year by the full amount of the research credit as required by § 280C(c)(1) and (2).

COMPUTATION OF THE RESEARCH CREDIT FOR TAXABLE YEARS INCLUDING SUSPENSION PERIODS

Section 502(d)(4) of the Act provides the rule for determining the amount of research credit suspended for taxable years including research credit suspension periods. To determine the amount of research credit that is suspended, taxpayers first must calculate the research credit for the taxable year. The amount of research credit that is attributable to a research credit suspension period under § 502(d) of the Act is the amount that bears the same ratio to the amount of research credit for the taxable year as the number of months in the research credit suspension period that are during the taxable year bears to the total number of months in the taxable year.

Form 6765, Credit for Increasing Re- search Activities, reflects the required computation of the research credit and the determination of the research credit allowed on a current year return and the suspended research credit attributable to the current year.

APPLICATION

ORIGINAL RETURNS

Research credits attributable to a research credit suspension period may not be used as a credit against tax on a timely filed or late filed original return for a taxable year that includes any part of such suspension period even if that original return is filed after the expiration of such suspension period. This rule is necessary for the Internal Revenue Service to properly administer § 502(d) of the Act.

CARRYBACK AND CARRYFORWARD OF SUSPENDED CREDITS

Any research credit that is not allowed for the taxable year that is attributable to a research credit suspension period may not be claimed as a carryback or carryforward until the day after the end of the applicable research credit suspension period. After the end of the applicable research credit suspension period, however, research credits attributable to a research credit suspension period that are not used currently as a credit against tax may be carried to other taxable years under the rules of § 39.

OVERPAYMENT OF TAX AND INTEREST ON OVERPAYMENTS

Because research credits attributable to a research credit suspension period may not be taken into account in determining any amount required to be paid for any purpose under the Code until the expiration of the applicable research credit suspension period, research credits attributable to a research credit suspension period are not available as a credit against tax until the expiration of the applicable research credit suspension period and may not be considered in determining any overpayment of tax until the expiration of the applicable research credit suspension period.

In computing interest on any overpayment attributable to any suspended research credit under the rules of § 6611, the date of the overpayment for purposes of computing the interest is the later of the date of the overpayment without regard to the research credit suspension period (even though the credit may not be claimed on an original return that includes any part of the suspension period) or the day after the close of the suspension period.

REFUND OF TAX AND EXPEDITED REFUNDS

If an overpayment of tax for a taxable year arises as of the expiration of a research credit suspension period, a claim for refund of the overpayment of tax may be taken into account by filing an amended return, an application for tentative refund, or an application for expedited refund on or after the earliest date that an amount of credit may be taken into account. A separate claim should be made for each taxable period.

An application for expedited refund of suspended research credits is made by filing a Form 1045, Application for Tentative Refund, or a Form 1139, Corporation Ap- plication for Tentative Refund, or by filing an amended income tax return (Form 1040X, Form 1120X, or other amended return) before the date that is the later of one year after the close of the research credit suspension period to which the application relates or one year after the close of the taxable year to which the suspended research credit relates. The application for expedited refund shall be filed with the Service

2001–2 I.R.B. 265 January 8, 2001

Center receiving the original return. The application for expedited refund shall indicate at the top “Application for Expedited Refund-Suspended Research Credit” and include a copy of the Form 6765 filed with the original return.

If an application for an expedited refund is filed before the date that is the later of one year after the close of the research credit suspension period to which the application relates or one year after the close of the taxable year to which the suspended research credit relates, the Internal Revenue Service will review the application, determine the amount of the overpayment, and apply, credit, or refund the overpayment, in a manner similar to the manner provided in § 6411(b), no later than 90 days after the date on which an application is filed.

Further, a claim for refund of the overpayment of tax attributable to suspended research credits may be taken into account by filing an amended income tax return (Form 1040X, Form 1120X, or other amended return) on or after the date that is the later of one year after the close of the research credit suspension period to which the claim relates or one year after the close of the taxable year to which the suspended research credit relates but before the expiration of the period of limitation on filing a claim for credit or refund under § 6511. An amended income tax return, filed on or after the date that is the later of one year after the close of the research credit suspension period to which the claim relates or one year after the close of the taxable year to which the suspended research credit relates, claiming a refund of the overpayment of tax attributable to suspended research credits shall indicate at the top “Refund-Suspended Research Credit” and include a copy of the Form 6765 filed with the original return. Further, an amended income tax return filed on or after the date that is the later of one year after the close of the research credit suspension period to which the claim relates or one year after the close of the taxable year to which the suspended research credit relates and before the expiration of the period of limitation on filing a claim for credit or refund under § 6511 will be processed under the general rules for processing refund claims in lieu of the expedited refund procedures described above.

Finally, any claim for refund of an overpayment of tax attributable to a research credit suspension period should not be filed before the expiration of the applicable suspension period or before the date the original return for the applicable taxable year is filed.

ESTIMATED TAXES

The prohibition on taking into account research credits attributable to a research credit suspension period extends to the determination of any estimated tax payment. Thus, for example, the research credit attributable to the period beginning on July 1, 1999, and ending on September 30, 2000, cannot be used to reduce any estimated tax payments due before October 1, 2000. The research credit attributable to the period beginning on July 1, 1999, and ending on September 30, 2000, can be used to reduce an estimated tax payment due on or after October 1, 2000.

ESTIMATED TAX PENALTIES

In general, additions to tax for failure to pay estimated tax are made under § 6654 or § 6655 for any underpayment of income tax imposed by the Code even if the underpayment was created or increased by reason of the suspension of the research credit under § 502 of the Act. No additions to tax for failure to pay estimated tax, however, will be made for any period before July 1, 1999, for any underpayment of income tax imposed by the Code to the extent the underpayment was created or increased by reason of the suspension of the research credit under § 502 of the Act.

EXAMPLE

Assume that taxpayer, a calendar-year corporation, had 800x dollars of research credit for 1999 and 800x dollars of research credit for 2000. The amount of research credit attributable to the period July 1 through December 31, 1999, is 400x dollars (6/12 x 800x dollars), and the amount of research credit attributable to the period from January 1 through September 30, 2000 would be 600x dollars (9/12 x 800x dollars).

On taxpayer’s original return for 1999, taxpayer may not reduce its 1999 tax liability by the research credit of 400x dollars attributable to the period July 1

through December 31, 1999. On or after October 1, 2000, taxpayer may file an amended return to claim the benefit of the 400x dollars of research credit attributable to the period July 1 through December 31, 1999. In lieu of filing an amended return, on or after October 1, 2000, taxpayer may file an application for tentative refund of the 400x dollars of research credit attributable to the period July 1 through December 31, 1999. An application for tentative refund of the 400x dollars of research credit attributable to the period July 1 through December 31, 1999, must be filed before October 1, 2001. An amended return or application for tentative refund filed before October 1, 2001, claiming the 400x dollars of research credit attributable to the period July 1 through December 31, 1999, with the designation “ Application for Expedited Refund-Suspended Research Credit ” will be treated as an application for expedited refund.

Taxpayer’s 400x dollars of research credit attributable to the period July 1 through December 31, 1999, and 600x dollars of research credit attributable to the period January 1 through September 30, 2000, may not be taken into account in determining any of the estimated tax payments that are due before October 1, 2000. If taxpayer makes an estimated tax payment for its 2000 taxes based on its prior year tax liability, that liability must be determined without regard to the 400x dollars of research credit attributable to the period July 1 through December 31, 1999. If taxpayer makes an estimated tax payment for its 2000 taxes based on its current year tax liability, whether or not that liability is annualized, that liability must be determined without regard to the 600x dollars of research credit attributable to the period January 1 through September 30, 2000, or any research credit attributable to the second research credit suspension period.

Because taxpayer’s first estimated tax payment due on or after October 1, 2000, is the payment due on December 15, 2000, taxpayer may use its 600x dollars of research credit attributable to the period January 1 through September 30, 2000, and available on October 1, 2000, to reduce the amount of estimated tax payments otherwise required to be paid on December 15, 2000. In addition, if tax

January 8, 2001 266 2001–2 I.R.B.

payer indicates on its amended return filed on or after October 1, 2000, that all or part of the 400x dollars of research credit attributable to the period July 1 through December 31, 1999, and available on October 1, 2000, is to be applied to its estimated tax for the succeeding taxable year (in lieu of a refund), then the amount requested will be applied to the taxpayer’s estimated tax payment due on December 15, 2000. Alternatively, assume taxpayer files an amended return on December 1, 2000 to claim a refund of the 400x dollar overpayment of tax attributable to the period July 1 through December 31, 1999. Taxpayer is entitled to interest under § 6611 on the overpayment from October 1, 2000 (the end of the applicable suspension period) to December 1, 2000 (the date the amended return was filed). Assuming that the overpayment is refunded within 45 days

after the amended return is filed, no additional interest is allowed on the refund.

DRAFTING INFORMATION

The principal author of this notice is Lisa J. Shuman of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Ms. Shuman at (202) 622-3120 (not a toll-free call).

Weighted Average Interest Rate Update

Notice 2001–3

Notice 88–73 provides guidelines for determining the weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability for the purpose of the full funding

limitation of § 412(c)(7) of the Internal Revenue Code as amended by the Omnibus Budget Reconciliation Act of 1987 and as further amended by the Uruguay Round Agreements Act, Pub. L. 103-465 (GATT).

The average yield on the 30-year Treasury Constant Maturities for November 2000 is 5.78 percent. The following rates were determined for the plan years beginning in the month shown below.

90% to 105% 90% to 110% Weighted Permissible Permissible Month Year Average Range Range

December 2000 5.93 5.34 to 6.23 5.34 to 6.52

Drafting Information

The principal author of this notice is Todd Newman of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please call Mr. Newman at (202) 283-9702 (not a toll-free number).

Clarifications of Qualified Intermediary Agreement Provisions and Procedures

Notice 2001–4

I. Purpose

Certain issues have arisen regarding the implementation of the new withholding and reporting regulations (T.D. 8734, 1997–2 C.B.109, and T.D. 8881, 2000–23 I.R.B. 1158) and the qualified intermediary agreement contained in Rev. Proc. 2000–12 (2000–4 I.R.B. 387). This notice provides guidance regarding certain transitional and other issues for qualified intermediaries (QIs) and U.S. withholding agents. In addi

tion, this notice provides a clarification regarding the use of the term “know your customer” in the context of the new withholding and reporting regulations. The Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) will continue to monitor the implementation of the new regulations and the qualified intermediary agreement and will provide, as appropriate, other guidance designed to ensure that the implementation process occurs as smoothly as possible.

II. Background

In T.D. 8734, as modified by T.D. 8881, (the “new withholding regulations”), Treasury and the IRS issued comprehensive regulations under chapter 3 (sections 1441-1464) and subpart G of subchapter A of chapter 61 (sections 6041-6050S) of the Internal Revenue Code (the “Code”). The regulations are a significant revision of the procedural rules regarding the withholding, documentation, and information reporting requirements that apply to payments of income to foreign persons, particularly as they relate to payments handled by financial in

termediaries. The regulations generally become effective January 1, 2001.

The provisions relating to QIs are a key component of the new regulations. Those provisions are intended to reduce the administrative burdens of both foreign financial institution intermediaries (as well as foreign branches of U.S. intermediaries) and the U.S. withholding agents from whom the foreign intermediaries and foreign branches receive income. To become a QI, an entity must submit an application and enter into a qualified intermediary withholding agreement (QI agreement) with the IRS. The application procedures and terms of the QI agreement are set forth in Rev. Proc. 2000–12 . Additional guidance has been provided to qualified intermediaries in Announcement 2000–48 (2000–23 I.R.B. 1243).

III. Transitional Guidance for QIs.

A. Acting as a QI Prior to Execution of the QI Agreement

Provisions Applicable to QIs. Some potential QIs have expressed concerns about their ability to act as QIs on January 1, 2001, if they file an application for a QI agreement before January 1,

2001–2 I.R.B. 267 January 8, 2001

2001, but do not receive a fully executed QI agreement by that date. Other potential QIs have expressed concerns about their treatment if they submit applications after January 1, 2001. To address these concerns, the IRS will apply the following rules to potential QIs.

An applicant for a QI agreement may represent on a Form W-8IMY that it is a QI for a limited period after it submits a complete application for a QI agreement and before it receives a fully executed agreement. An application is complete if it contains all of the information required by section 3 (Application for QI Status) of Rev. Proc. 2000–12, including a completed Appendix A (countries in which the applicant will operate as a QI) and Appendix B (list of auditors that may be used by the QI and any private arrangement intermediary of the QI to perform external audits). It is not necessary, however, for an applicant to attach the know-your-customer documentary evidence attachment for particular countries because the IRS has standardized those attachments.

An applicant that has submitted a QI application before January 1, 2001, may represent on Form W-8IMY that it is a QI without being in possession of a fully executed QI agreement until June 30, 2001. An applicant that has submitted a QI application after December 31, 2000, may represent on Form W-8IMY that it is a QI until the end of the sixth full month after the month in which it submits its QI application. An application is submitted on the date it is post marked. Because of limited resources, the IRS will not date stamp return copies of applications.

An applicant may not represent that it is a QI if it receives a notice from the IRS stating that it may not make the representation unless it receives a fully executed QI agreement. The IRS will only issue such notices in cases where an application is not substantially complete or the IRS has determined on a preliminary basis that it will not enter into a QI agreement with the applicant.

The IRS has instituted procedures to issue applicants a QI employer identification number (QI-EIN) upon receiving an application. An applicant should include the QI-EIN on any Form W-8IMY it provides as a QI after it receives the number. If an applicant has provided a Form W-8IMY before it has received a number,

it should write “awaiting QI-EIN” on line 6 of Part I of the form. If an applicant provides an “awaiting QI-EIN” statement on a Form W-8IMY, or an applicant has provided a Form W-8IMY before the date of this notice in anticipation of becoming a QI, the applicant should provide the QIEIN to its withholding agent as soon as practicable after it is received. It is not necessary, however, for the applicant to provide a newly executed Form W-8IMY with the QI-EIN after it receives the QIEIN or after it receives a fully executed QI agreement provided all of the information on the original form remains valid. The applicant may furnish its QI-EIN to its withholding agent in any manner agreed to by the applicant and its withholding agent.

Provided that it submits its application before July 1, 2001, a potential QI may apply all of the provisions of the QI agreement beginning January 1, 2001. An applicant that submits its application after June 30, 2001, may represent to a withholding agent that it is a QI effective on the date it submits a complete application. Such a QI, however, will not be permitted to apply the reporting provisions of section 8 of the QI agreement or the collective credit or refund procedures of section 9.04 of the QI agreement to any payments received prior to the effective date contained in its QI agreement. Thus, a QI that submits its application after June 30, 2001, must report all payments that it makes prior to the effective date of its QI agreement as a nonqualified intermediary. See e.g., §1.1461–1(c)(4).

The IRS will not assess any penalties for failure to make a deposit of withheld amounts prior to the date the QI receives its QI-EIN provided the QI makes a deposit of any amounts otherwise required to be made within 3 days of receiving its QI-EIN. In addition, if a QI applies to enroll in the Electronic Federal Tax Payment System (EFTPS) within 30 days of receiving a QI-EIN, no penalty will be assessed for failure to deposit withheld amounts if any deposit otherwise required to be made before the date that the QI is enrolled in EFTPS is made within 3 days of being enrolled in EFTPS.

Rules Applicable to Withholding Agents

A withholding agent that receives a Form W-8IMY with an “awaiting QI

EIN” statement may treat the person that provides the form as a QI unless it knows, or has reason to know, that the provider of the form cannot validly represent that it is a QI. A withholding agent that receives a Form W-8IMY with an EIN, or that receives an EIN with respect to an otherwise valid Form W-8IMY without an EIN, may treat the provider of the form as a QI unless it knows, or has reason to know, that the provider of the Form is not a QI. A withholding agent is not required to determine when a QI applied for an agreement or if it is actually in possession of a fully executed agreement. A withholding agent is also not required to verify whether the EIN is a QI-EIN.

A withholding agent should report any payments made prior to receiving a Form W-8IMY on which a person represents that it is acting as a QI in accordance with any other valid documentation that the withholding agent has for such person or, in the absence of such documentation, in accordance with the presumption rules provided in the withholding agent’s QI agreement (if the withholding agent is a QI) or the presumption rules contained in the new withholding regulations (if the withholding agent is not a QI).

B. Documentation Transition Rules for QIs.

Under section 5.01 of the QI agreement, a QI is required to apply the presumption rules of section 5.13(C) to any payment made to an account holder unless the QI can reliably associate the payment with valid documentation from the account holder. The presumption rules may result in withholding at a 30-percent or 31-percent rate. Under section 11.03(F), failure to obtain documentation from a significant number of direct account holders constitutes an event of default for which the IRS may terminate a QI agreement.

Some potential QIs have indicated that they will be unable to obtain the account holder documentation required under section 5 of the QI agreement by January 1, 2001, because they have a substantial number of existing accounts for which documentation must be sought. These institutions have requested clarification regarding the operation of the documentation requirements and, in particular, the audit provisions of the QI agreement. Specifically, they have asked whether the audit provi

January 8, 2001 268 2001–2 I.R.B.

sions of the QI agreement afford them a documentation transition period.

Section 10.03 of the QI agreement provides that the QI shall have its external auditor conduct an audit of the second and fifth full calendar years that the agreement is in effect. Section 10.06 provides that, upon review of the external auditor’s report, the IRS may request, and the 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.

The IRS intends to implement the audit provisions in a manner that will permit a QI to have a transition period for obtaining account holder documentation. To effect a documentation transition period, the IRS will not request an external auditor to examine the first year of the QI agreement provided that the IRS determines, based on the external auditor’s report, that the QI is in substantial compliance with all of the provisions of the QI agreement, including the documentation requirements, by the end of the second full year of its agreement. In addition, the IRS will not impose failure to deposit penalties to the extent that the under-deposit is attributable solely to the failure to apply the presumption rules in the second full year of the agreement. The IRS will, however, require a QI to pay the tax due from the second full year of the agreement if the amount actually withheld from an account holder is less than the amount supported by valid documentation on file by the end of the second full year of the agreement or, if there is no documentation on file, the amount withheld was less than required under the presumption rules. No penalties will be assessed on underpaid tax; however, interest will be charged on any tax due that is paid after the due date of the Form 1042 for the second full calendar year of the agreement.

The following example illustrates the documentation transition rule. Assume that after the audit of the second year of its QI agreement, a QI is found to be in substantial compliance with the QI agreement and all but an insignificant number of its accounts have valid documentation. The external auditor determines that payments of dividends were received by a particular individual account holder, B, prior to B furnishing the QI with any doc

umentation. The QI applied withholding on dividends received by B in year 2 at the rate of 15 percent. By the end of year 2, B does provide the QI with documentation that supports the 15 percent rate. No penalties will be asserted against the QI even though 30 percent was not withheld from the dividends as required under the presumption rules. If, however, B did not provide valid documentation supporting the 15-percent treaty rate by the end of the second full calendar year of the agreement, the QI would be liable for the tax equal to the difference between the 15percent rate of withholding actually applied and the 30-percent rate that should have applied under the presumption rules. Because the QI is in substantial compliance with the QI agreement and has valid documentation for all but an insignificant number of its accounts, however, the underpayment will be computed only with respect to dividends paid in the second year of the agreement.

The IRS will not apply the transition approach to any QI that is found not to be in substantial compliance with the QI agreement by the end of the second full year of the agreement. In that case, the IRS may, in accordance with the terms of the QI agreement, request the external auditor to audit the first year of the QI agreement, and the IRS may assess the appropriate penalties for both the first and second years of the agreement. The provisions of this section III. B. shall not apply for years after 2002.

C. Documentation and Reporting Relief for Simple and Grantor Trusts.

Under section 5.07 of the QI agreement, a QI is generally required to obtain a Form W-8IMY from a flow-through entity, which includes a foreign simple or foreign grantor trust, together with appropriate documentation from the interest holders in the flow through entity. Section 8.02(B) of the QI agreement provides that a QI must file separate Forms 1042-S for each interest holder in a flow-through entity that is not itself a nonqualified intermediary or flow-through entity. Thus, the pool basis reporting provisions of section 8.03 of the QI agreement do not apply to payments made to beneficiaries or owners of foreign simple trusts and foreign grantor trusts.

Commentators have requested that the IRS consider treating beneficiaries of for

eign simple trusts and owners of foreign grantor trusts as direct account holders of a QI in appropriate circumstances. They argue that where local “know-your-customer” rules ( i.e ., the rules that require a person to obtain documentation confirming the identity of a customer or account holder) require a QI to identify the beneficiaries or owners of such trusts, plus certain additional precautions are taken, it is appropriate to treat the beneficiaries or owners as direct account holders. In addition, they argue that a company providing fiduciary services as a trustee should be able to become a QI if it is subject to know-your-customer rules, even though it is not a financial institution or a clearing organization described in §1.1441– 1(e)(5)(ii)(A) and (B). The IRS will permit a QI to treat the beneficiaries of a foreign simple trust or the owners of a foreign grantor trust as direct account holders for purposes of the QI agreement if the following criteria are met. First, the QI must be required, pursuant to the applicable know-your-customer rules, to determine the identity of the beneficiaries or owners of foreign simple or foreign grantor trusts. Second, the QI must obtain the type of know-yourcustomer documentation set forth in paragraph 4 of the appropriate know-yourcustomer attachment to the QI agreement. This second requirement cannot be satisfied by obtaining a Form W-8. Third, the QI must obtain a valid Form W-8 from the beneficiary or owner of the trust. The IRS will apply the documentation transition approach described in section III. B. of this notice to these documentation requirements. The documentation may be provided to the QI directly rather than being attached to a Form W-8IMY, or it may be attached to a Form W-8IMY on which the trust represents that it is a foreign simple or foreign grantor trust. If a Form W-8IMY is provided, it is not necessary for the trust to provide a withholding statement. In addition, if a Form W-8IMY is provided and the trust has 5 or fewer owners, the IRS will not require the trust to provide the QI with a taxpayer identification number despite §1.1441–1(e)(4)(vii)(G).

The IRS will also permit a company that is in the business of providing fiduciary services as a trustee ( i.e ., a trust company) and that is subject to know

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your-customer rules that have been approved by the IRS for purposes of the QI agreement to become a QI provided that the trust company agrees to the provisions of the QI agreement as set forth in Rev. Proc. 2000–12. Such a QI must treat the trusts and trust beneficiaries or owners as account holders for purposes of applying the QI agreement. Such a QI may also treat beneficiaries and owners of foreign simple trusts and foreign grantor trusts as direct account holders provided they meet the conditions of this section III. C.

Treasury and the IRS will monitor whether the rules of this notice applicable to grantor and simple trusts are appropriate and may provide further guidance as necessary.

D. Proprietary Accounts of Qualified Intermediaries

Section 1.01 of the QI agreement provides that a QI must act as a qualified intermediary for those accounts which it designates as QI accounts with a withholding agent. Clearing organizations have argued that the language that requires a QI to act as a QI with respect to an account prohibits the QI from including assets for which the QI is the beneficial owner in the same account as one containing assets for which the QI acts as a QI. Separating proprietary and intermediary assets into separate accounts would, they argue, erode the efficiencies that clearing organizations provide their financial institution members and shareholders.

Notwithstanding Section 1.01, the IRS will permit a QI that maintains an account with a clearing organization in which it is a member or shareholder to include the assets for which the QI is the beneficial owner in the same account with those assets for which it acts as a qualified intermediary if the QI timely and accurately reports the income for which it is the beneficial owner by filing the appropriate Forms 1042-S for each year showing itself as the recipient of the income for which it is the beneficial owner. For purposes of this exception to section 1.01 of the QI agreement, a clearing organization is an entity which is in the business of holding obligations for member organizations or shareholders and transferring those obligations among the members or shareholders by credit or debit to the account of the member or shareholder without the necessity of physical delivery of the obligation. Under no circumstances, how

ever, may a QI maintain assets for which it acts as a QI in the same account as assets for which it acts as a nonqualified intermediary.

E. Assumption of Primary Form 1099 Reporting and Backup Withholding Responsibility

Section 3.07 of the QI agreement contains the terms for those QIs assuming primary Form 1099 reporting and backup withholding responsibilities. The introductory language to that section provides that QIs that are not U.S. payors must obtain IRS approval to assume primary Form 1099 reporting and backup withholding responsibility. The IRS evidences its approval by inserting the Commissioner’s, or his delegate’s, signature in the margin of section 3.07 of the QI agreement.

The IRS will no longer require QIs that are not U.S. payors to obtain IRS approval before assuming primary Form 1099 reporting and backup withholding responsibility. A non-U.S. payor QI may, therefore, assume such responsibilities by making the appropriate representations on Form W-8IMY, or the associated withholding statement, provided to a withholding agent.

IV. Transition Relief for Foreign Partnerships

Under the regulations as well as the QI agreement, foreign partnerships are generally treated as flow-through entities. As such, they should provide withholding agents, including QIs, with a Form W-8IMY together with documentation from each partner and a withholding statement that, among other things, allocates the payment made to each of the partners in the partnership.

To achieve a smoother transition period for foreign partnerships and their withholding agents, the IRS will permit for calendar year 2001 a foreign partnership to provide a withholding agent, including a QI, with a Form W-8IMY together with a withholding statement that provides the withholding agent with information regarding withholding rate pools. The foreign partnership must associate the documentation from each of its partners with the Form W-8IMY. However, if a partner is a foreign person or a U.S. exempt recipient (e.g., a corporation), that documentation may be provided to the withholding

agent at any time during calendar year 2001. A Form W-9 must be provided, however, with respect to any U.S. nonexempt recipient before a payment is made to a partnership.

A withholding rate pool is a payment of a single type of income, determined in accordance with the categories of income reported on Form 1042-S or Form 1099, as applicable, that is subject to a single rate of withholding. The foreign partnership, must provide a separate withholding rate pool for each U.S. non-exempt recipient partner (e.g., a U.S. individual, U.S. partnership, U.S. trust, or U.S. estate).

A withholding agent, including a QI, may withhold in accordance with the withholding rate pool information provided by the foreign partnership. In addition, a withholding agent that is not a QI should report payments allocated to withholding rate pools, other than a withholding rate pool attributable to a U.S. non-exempt recipient, on Form 1042-S as if the payment were made to the foreign partnership as a recipient. A QI should report such payments as if it were made to its general withholding rate pool. A withholding agent that is not a QI must report payments to U.S. non-exempt recipients in accordance with the regulations under chapter 61 of the Code. A withholding agent that is a QI must treat U.S. non-exempt recipients in accordance with the provisions of the QI agreement. Withholding agents that cannot allocate a payment to a withholding rate pool must apply the appropriate presumption rules.

V. Transition Relief for U.S. Withholding Agents

A. Documentation Transition Rules. Some U.S. withholding agents that are financial institutions have stated that despite the extensive period they have been given to obtain Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY, they have nevertheless had difficulties re-documenting the large number of accounts they must handle. In addition, they have stated that the rule in §1.1441–1(e)(2)(ii), which prohibits the use of a P.O. box as a permanent residence address on a Form W-8, presents an insurmountable difficulty for Forms W-8 provided by residents of foreign countries that do not have street addresses and instead use P.O. boxes as permanent residence addresses. Finally, some commentators have

January 8, 2001 270 2001–2 I.R.B.

noted that T.D. 8881, issued on May 15, 2000, made certain changes to the rules regarding when a withholding certificate may be treated as reliable that are more restrictive than the rules promulgated under T.D. 8734. In particular, they note that under T.D. 8881, a withholding agent cannot rely on a Form W-8 if the form has a U.S. mailing address or the withholding agent has a U.S. mailing address as part of its account information, unless the withholding agent obtains both documentary evidence that is less than three years old and a written explanation from the account holder that substantiates the account holder’s foreign status.

To address these concerns, the IRS will permit a U.S. withholding agent during calendar year 2001 to rely on old Form W-8 ( i.e., Form W-8 as revised November 1992), Form 1001, Form 1078, Form 4224, and Form 8709 obtained under the regulations in effect prior to January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1992), even if the validity period of those forms has expired, provided that the U.S. withholding agent can demonstrate on audit that it has made good faith efforts to obtain Forms W-8BEN, W-8ECI, W-8EXP, W-8IMY, and W-9 from account holders required to provide those forms. In addition, and until further notice, the IRS will permit Forms W-8 that contain a P.O. box as a permanent residence address to be relied upon provided that the withholding agent does not know, or have reason to know, that the person providing the form is a U.S. person and provided that the withholding agent does not know, or have reason to know, that a street address is available. Finally, the IRS will permit a withholding agent to rely on Forms W-8 for which there is a U.S. mailing address provided the Form was received prior to December 31, 2001, without applying the provisions of 1.1441–7(b) regarding the presence of a U.S. mailing address on the Form W-8 or as part of the withholding agent’s account information.

Under no circumstances, however, may a U.S. withholding agent apply the socalled address rule contained in §§1.1441–3(b)(3) and 35a.9999–3 Q&A 36 for dividends paid after December 31, 2000. Thus, a withholding agent may not treat dividends as paid to a foreign person, or as subject to a reduced rate of withholding under an income tax treaty, based

solely on the address of the person to whom the dividends are paid. The withholding agent may treat the payee of dividends as a foreign person, and as a resident of a treaty country, if applicable, in the absence of a Form W-8BEN if it is in possession of a Form W-8 (revised November 1992) or a Form 1001 for the same payee and it does not know, nor have reason to know, that the payee is not entitled to treaty benefits.

Notwithstanding the provisions of this section V. A., a withholding agent may not rely on an old Form W-8 (revised November 1992) to treat a foreign financial institution as the beneficial owner of income if the withholding agent knows, or has reason to know, that the foreign financial institution is acting as an intermediary on behalf of others.

B. Year 2001 as Transition Year for U.S. Withholding Agents

In Notice 98–16 (1998–1 C.B. 847) and Notice 99–25 (1999–1 C.B. 979), the IRS stated that it would regard the calendar years 1999 and 2000 as transition years. Calendar year 2001 will similarly be regarded as a transition year for U.S. withholding agents by the IRS in enforcing compliance for the administration of the withholding tax system. Accordingly, the IRS will take into account in performing audits of the year 2001, the extent to which a U.S. withholding agent has made good faith efforts in 1999, 2000, and 2001 to transform its business practices and information systems to comply with the new withholding regulations. Thus, the IRS will take into account whether a U.S. withholding agent has made reasonable efforts during 1999, 2000, and 2001 to modify its account opening practices to conform to the new documentation requirements, obtain new withholding certificates on existing accounts, and make appropriate systems changes to comply with the new withholding regulations. The IRS will also take into account whether or not a U.S. withholding agent has effectively implemented the new withholding regulations by January 1, 2002. C. Reporting Relief for U.S. Payors in U.S. Possessions.

Under the new withholding regulations, U.S. payors that pay foreign source income outside the United States to U.S. non-exempt recipients must generally report such payments on Form 1099 and, if

appropriate, apply backup withholding. A commentator has noted that the new withholding regulations will require reporting of income from sources within a possession of the United States, including Puerto Rico, on Form 1099 if that income is paid to persons that are U.S. citizens, even though that income may be exempt from Federal income taxation under section 931 section 932, section 933, or section 935.

The IRS intends to revise the new withholding regulations so that income from sources within a possession of the United States that is exempt from taxation under section 931, section 932, section 933, or section 935 and that a payor reasonably believes to be paid to a resident of a possession of the United States is not required to be reported on Form 1099. U.S. payors will not be required to report such income pursuant to the authority of this notice until the regulations are amended.

D. Use of the Documentary Evidence Rule in U.S. Possessions

Section 1.6049–5(c)(1), effective January 1, 2001, states that a payor may rely on documentary evidence instead of a beneficial owner withholding certificate ( i.e., a Form W-8) for a payment made to an offshore account, or, in the case of broker proceeds, for the sales effected outside the United States. For this purpose, the term offshore account means an account maintained at an office or branch of a U.S. or foreign bank or other financial institution at any location outside the United States and outside of U.S. possessions. The IRS intends to amend section 1.6049–5(c)(1) so as to permit the use of documentary evidence in lieu of a Form W-8 in the U.S. possessions. U.S. payors will be permitted to rely on documentary evidence in lieu of a Form W-8 in a U.S. possession pursuant to the authority of this notice until the regulations are amended.

E. Foreign Source Services Income Under section 6041, a U.S. payor must report payments of foreign source income paid for services performed outside the United States unless the U.S. payor has a Form W-8 from the payee stating that the payee is not a U.S. person. Under the presumption rules of §§1.6049–5(d)(2) and 1.14441–1(b)(3)(iii), a U.S. payor must presume that the payee of income for services is a U.S. payee and subject to Form

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1099 reporting, and potentially backup withholding, if the payee is an individual. U.S. payors, which include controlled foreign corporations, contend that the rule contained in the regulations is overly burdensome in that it requires them to ask all persons to whom they make payments for services performed outside the United States to represent that they are not U.S. persons.

Until further notice, the IRS will not require a U.S. payor to report, under section 6041, income paid for services if (1) the payee of the income is an individual, (2) the U.S. payor does not know that the payee is a U.S. citizen or resident, (3) the payor does not know, and has no reason to know, that the income is (or may be) effectively connected with the conduct of a U.S. trade or business, and (4) all of the services for which payment is made were performed by the payee outside the United States.

VI. Issuance of New Forms W-8.

The IRS has released new versions of Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY, all of which were revised in December 2000. Withholding agents have asked for clarification regarding whether the prior versions of those forms (Forms W-8 as revised October 1998) may be relied upon now that new versions of those forms have been released.

Withholding agents, including QIs, may rely on the October 1998 versions of Forms W-8BEN, W-8ECI, W-8EXP, W-8IMY that they receive prior to January 1, 2002, for the normal validity period applicable to those forms. Withholding agents are advised, however, to use the newer versions of the forms in all mailings they make after December 2000.

VII. Clarification Regarding Use of the Term “Know Your Customer”

Treasury and the IRS have recently become aware that some confusion may have arisen concerning the use of the term “know your customer” in relation to the QI agreement. Accordingly, Treasury and the IRS wish to clarify the meaning of “know your customer” in that context, to avoid any misunderstanding by foreign financial institutions or officials in other countries.

Use of the term “know your customer” in the QI context should not be confused

with the use of that term in other contexts, specifically including the use of the term in the area of international standards relating to money laundering control. As used in the QI context, the term “know your customer” generally relates to the capacity of financial institutions to determine whether their customers are U.S. persons and, if their customers are non-U.S. persons claiming the benefits of an income tax treaty, whether these customers are residents of the applicable treaty country.

The term “know your customer” in the context of international money laundering control efforts, for example in recommendations of the Financial Action Task Force (FATF), refer to a broad range of rules and practices designed to ensure that financial institutions properly identify their customers and understand enough about their customers’ customary banking activities to be able to comply with applicable suspicious activity reporting rules and other obligations that may apply under antimoney laundering regimes. Although the meaning of the term “know your customer” in the QI context is often closely related to the meaning of the term in the broader context of money laundering control, the concepts are nevertheless distinct and should not be regarded as having the same meaning or scope.

Contact Information

The principal author of this Notice is Laurie Hatten-Boyd of the Office of the Associate Chief Counsel (International), Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224. For further information regarding this Notice contact Ms. Hatten-Boyd at 202-622-3840 (not a toll-free call).

26 CFR 601.204: Changes in accounting periods and in methods of accounting. (Also Part 1, §§ 162, 263A, 446, 471, 481, 1001; 1.162–3, 1.263A–1, 1.446–1, 1.471–1, 1.481–1, 1.481–4, 1.1001–1.)

Rev. Proc. 2001–10