SECTION 7. ADJUSTMENTS

FOR OVER- AND UNDER-WITHHOLDING; REFUNDS

Sec. 7.01. Adjustments for NRA Overwithholding by WT. WT may make an adjustment for amounts paid to its direct beneficiaries or owners that it has overwithheld under chapter 3 of the Code by applying either the reimbursement or set-off procedures described in this section

August 11, 2003 328 2003-32 I.R.B.

that prevent the external auditor from examining any information relevant to the external audit to be performed under this Section 8 and that there are no legal prohibitions that prevent the IRS from communicating directly with the auditor. WT shall permit the IRS to examine the external auditor’s work papers and reports.

Sec. 8.02. Designation of External Auditor. WT's external auditor must be one of the auditors listed in Appendix A of this Agreement, unless WT and the IRS agree, prior to the audit, to substitute another auditor. WT 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.

Sec. 8.03. Timing of External Audits: General Rule. Unless WT has made a PR election, WT shall have the external auditor conduct an external audit only at such time and only for such calendar years as the IRS directs.

Sec. 8.04. Timing of External Audits: Special Rule for PR Election.

(A) If WT has made a PR election and the term of this Agreement is determined under Section 9.02(A), WT 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.

(B) If WT has made a PR election and the term of this Agreement is determined under Section 9.02(B), WT shall have the external auditor conduct an audit after the close of every other calendar year that this Agreement is in effect. The auditor shall examine the two previous calendar years. For example, the first audit will occur in the third calendar year that the Agreement is in effect and the external auditor will examine calendar years one and two.

Sec. 8.05. Scope of External Au- dit. The external auditor shall verify whether WT is in compliance with this Agreement by conducting an audit that meets the requirements of this Section 8.05. The report, described in Section

under Section 7.01 of this Agreement, WT may request a credit or refund of the total amount overwithheld by following the procedures of this Section 7.02. WT shall follow the procedures set forth under sections 6402 and 6414 of the Code, and the regulations thereunder, to claim the credit or refund. No credit or refund will be allowed after the expiration of the statutory period of limitation for refunds under section 6511 of the Code. WT may use the collective refund procedures under this Section 7.02 only if the following conditions are met:

(A) WT must not have issued Forms 1042–S to the direct beneficiaries or owners who were subject to overwithholding;

(B) WT must submit, together with its amended return on which it claims a credit or refund, a statement of the reason for the overwithholding;

(C) WT must submit, together with its amended return on which it claims a credit or refund, a statement that it has repaid the amount of overwithholding to the appropriate direct beneficiaries or owners prior to filing the claim for credit or refund; and

(D) WT must retain a record showing that it repaid the direct beneficiaries or owners the amount of the overwithholding.

Sec. 7.03. Adjustments for NRA Un- derwithholding. If WT knows that an amount should have been withheld under chapter 3 of the Code from a previous payment to a direct beneficiary or owner but was not withheld, WT may either withhold from future payments made to the same direct beneficiary or owner or satisfy the tax from the direct beneficiary's or owner's proportionate share of assets over which it has control. The additional withholding or satisfaction of the tax owed may only be made before the due date of the Form 1042 (not including extensions) for the calendar year in which the underwithholding occurred.

Sec. 7.04. NRA Underwithholding after Form 1042 Filed. If, after a Form 1042 has been filed for a calendar year, WT, WT's external auditor, or the IRS determines that, due to WT's failure to carry out its obligations under this Agreement, WT has underwithheld tax for such year, WT shall file an amended Form 1042 to report and pay the underwithheld tax. WT shall pay the underwithheld tax, the interest due on the underwithheld tax, and

any applicable penalties, at the time of filing the amended Form 1042. If WT fails to file an amended return, the IRS shall make such return under section 6020 of the Code.

Sec. 7.05. Special Rule Regarding Failure to Deposit Penalties. Solely for purposes of applying section 6656 of the Code (failure to make deposit of taxes), WT will not be considered to have made an underpayment of a deposit of NRA withholding taxes if the conditions of this paragraph are met. The conditions of this paragraph are that—

(A) WT makes its deposits within the time (deposit period) required by section 6302 of the Code; (B) The deposit is not less than 90 percent of the aggregate amount of the tax required to be withheld under chapter 3 of the Code during the deposit period applicable to WT; and

(C) WT determines the difference between the total amount required to be deposited and the amount actually deposited as of the end of the 3rd, 6th, 9th, and 12th months of the calendar year and the difference is deposited no later than the 15th day of the second following month ( i.e., May 15, August 15, November 15 and February 15, respectively). In determining whether there has been an underpayment, reimbursements and set-offs shall be taken into account.