SECTION 6. PAPERWORK

REDUCTION ACT

The collection of information contained in this revenue procedure has 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 1545–1847. 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 OMB control number.

The collection of information in this revenue procedure is in Appendix B. This information is required to ensure compliance with the statistical sampling methodology contained in this revenue procedure. The information will be used to evaluate compliance with the procedures described in this revenue procedure. The collection of information is mandatory. The likely recordkeepers are businesses or other forprofit institutions.

The estimated total annual recordkeeping burden is 3200 hours. The estimated annual burden per recordkeeper varies from six to ten hours, depending on individual circumstances, with an estimated average of eight hours. The estimated number of recordkeepers is 400.

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 26 U.S.C. 6103.

DRAFTING INFORMATION

The principal author of this revenue procedure is Kari L. Fisher of the Office of Associate Chief Counsel (Income Tax

and Accounting). For further information regarding this revenue procedure, contact Ms. Fisher at (202) 622–4970 (not a toll-free call). For further information regarding Appendices A, B and C, contact Ed Cohen of the Large and Mid-Size Business Division at (212) 719–6693 (not a toll-free call).

APPENDIX A

SAMPLING PLAN STANDARDS

The statistical sampling must be conducted in accordance with the following methodology.

1. Statistical (probability) sampling methodology may not include the use of judgment sampling.

2. Taxpayers may apply the results of a statistical sample only to the taxable years included in the sample.

3. A statistical sample may include data from no more than three consecutive taxable years.

4. Data from a taxable year may be included in only one statistical sample.

5. The estimated amount of expenses not subject to the § 274(n)(1) limitation must be based on a statistical (probability) sample, in which each sampling unit has a known (non-zero) chance of selection, using either a simple random sampling method or stratified random sampling method.

6. In general, the computation of the estimated amount of expenses not subject to the § 274(n)(1) limitation must be at the least advantageous 95% one-sided confidence limit. The “least advantageous” confidence limit is either the upper or lower limit that results in the least benefit to the taxpayer. However, if the precision of the change in the estimated deductible amount of expenses not subject to the § 274(n)(1) limitation (see paragraph 9 below) divided by the change in the estimated deductible amount of expenses not subject to the § 274(n)(1) limitation does not exceed 10%, the point estimate may be used in place of the least advantageous confidence limit. All strata for which “substantially all” of the population sampling units are sampled will be treated as 100% strata. That is, the overall point estimate and its precision will be estimated by treating all 100% strata appropriately for the sample design used. Also, the calcu

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aspects of the sample plan and execution. The execution of the sample must include information for each of the following items:

1. The seed or starting point of the random numbers;

2. The pairing of random numbers to the frame along with supporting information to retrace the process;

3. List of sampling units selected and the results of the evaluation of each unit;

4. Supporting documentation such as notes, invoices, purchase orders, project descriptions, etc., which support the conclusion reached about each sample item;

5. The calculation of the projected estimate(s) to the population, including computation of the standard error of the estimate(s);

6. A statement describing any slips or blemishes in the execution of the sampling procedure and any pertinent decision rules; and

7. Computation of all associated adjustments.

APPENDIX C

TECHNICAL FORMULAS

The formulas below are included to clarify the statistical sampling terms used and to ensure consistent application of the procedures described in the revenue procedure.

STRATIFIED MEAN ESTIMATOR

b. Each stratum for a population estimate should contain at least 30 sample units.

c. The coefficient of variation of the paired variable must be 15% or less. The coefficient of variation of the paired variable (y) is defined as the standard error of the total “y” variables divided by point estimate of the total “y” variables when the “y” variables are commonly the reported values in accounting situations.

d. The coefficient of variation of the primary variable of interest, represented by either the corrected value or the difference between the reported and corrected values in common accounting situations, must be 15% or less. The coefficient of variation for the corrected value (x) is defined as the standard error of the total “x” variables divided by point estimate of the total “x” variables when the “x” variables are commonly the corrected values in accounting situations. The coefficient of variation for the difference (d) between the reported and corrected values (x-y) is defined as the smaller of the standard error of the total “x-y” or total “d” variables divided by the amount equaling total population value represented by “Y” plus point estimate of the total “x-y” or total “d” variables or the standard error of the total “x-y” or total “d” variables divided by the total “x-y” or total “d” variables when the “x-y” variables are commonly the difference (“d”) between the reported (“y”) and corrected (“x”) values in accounting situations.

e. For only the (combined) ratio method, the reported values of units must be of the same sign.

11. When sampling the same expense accounts for multiple taxable years, if a

single projection does not materially affect other computations that are more appropriately made on a yearly basis, it is permissible to combine the accounts into one population. There should be allocation of the combined result by a reasonable method determined prior to the selection of the sampling units.

12. A written sampling plan is required prior to the execution of a sample. A plan must include the following:

a. The objective of the plan including a description of the value for estimation and the applicable taxable year(s);

b. Population definition and reconciliation of the population to the tax return;

c. Definition of the sampling frame; d. Definition of the sampling unit; e. Source of the random numbers, the starting point or seed, and the method of selection;

f. Sample size, along with supporting factors in the determination;

g. Method to associate random numbers to the frame;

h. Steps to ensure that the serialization of the frame is independent of the drawing of random numbers;

i. Steps for evaluating the sampling unit; and

j. The estimator that was used for appraising the sample.

APPENDIX B

SAMPLING DOCUMENTATION

STANDARDS

The taxpayer must retain adequate documentation to support the statistical application, sample unit findings, and all

UNSTRATIFIED (SIMPLE RANDOM SAMPLE)

MEAN ESTIMATOR

Sample Mean of Audited Amounts

Estimate of Total Audited Amount

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UNSTRATIFIED (SIMPLE RANDOM SAMPLE)

MEAN ESTIMATOR

STRATIFIED MEAN ESTIMATOR

Estimated Standard Deviation of the Audited Amount

Estimated Standard Error of the Total Audited Amount

Achieved Precision of the Total Audited Amount

UNSTRATIFIED (SIMPLE RANDOM SAMPLE)

DIFFERENCE ESTIMATOR

Estimate of Total Difference

Estimate of Total Audited Amount

STRATIFIED DIFFERENCE ESTIMATOR

Estimated Standard Deviation of the Difference Amount

Estimated Standard Error of the Difference Amount

Achieved Precision of the Difference Amount

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UNSTRATIFIED (SIMPLE RANDOM SAMPLE)

RATIO ESTIMATOR

STRATIFIED COMBINED RATIO ESTIMATOR

Estimated Ratio of Audited Amount to Recorded Amount

Estimate of Total Audited Amount

Estimated Standard Deviation of the Ratio

Estimated Standard Deviation of the Ratio in i ^th Stratum

Estimated Standard Error of the Ratio Amounts

Achieved Precision of the Ratio Amounts

UNSTRATIFIED (SIMPLE RANDOM SAMPLE)

REGRESSION ESTIMATOR

STRATIFIED COMBINED REGRESSION ESTIMATOR

Estimated Regression Coefficient

Estimate of Total Audited Amount

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UNSTRATIFIED (SIMPLE RANDOM SAMPLE)

REGRESSION ESTIMATOR

STRATIFIED COMBINED REGRESSION ESTIMATOR

Estimated Standard Deviation of the Regression Amounts

Estimated Covariance between the Audited and Recorded Amounts in i ^th Stratum

Estimated Standard Deviation between the Audited and Recorded Amounts in i ^th Stratum

Estimated Standard Error of the Audited and Recorded Amounts

Achieved Precision of the Audited and Recorded Amounts

Definition of Symbols

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2004-20 I.R.B. 925 May 17, 2004