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 1545–2072.

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 2,400 hours. The estimated annual burden per recordkeeper varies from 6 to 10 hours, depending on individual circumstances, with an estimated average of 8 hours. The estimated number of recordkeepers is 300.

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 authors of this revenue procedure are David McDonnell and Lauren Ross Taylor of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue procedure, contact Mr. McDonnell or Ms. Taylor at (202) 622–3040 (not a toll-free call). For further information regarding Appendices A, B, and C, contact Michael Curley of the Large and Mid-Size Business Division at (630) 699–6020 (not a toll-free call).

APPENDIX A

SAMPLING PLAN STANDARDS

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

1. The statistical sample must be conducted in an unbiased scientific manner with the goal of achieving the correct answer. Any attempt to manipulate the process to achieve a desired result will invalidate the sample. However, steps

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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 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, and project descriptions that 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.

7. Recognizing that many methods exist to estimate population values from the sample data, only the following estimators will be considered acceptable by the Service. Variable estimators permitted include the mean (also known as the direct projection method), difference (using “paired variables”), (combined) ratio (using a variable of interest and a “correlated” variable), and (combined) regression (using a variable of interest and a “correlated” variable). The first variable used for the difference, ratio and regression estimators must be the variable used in the mean estimator. The second variable used for the difference, ratio and regression estimators must be a variable that can be paired with the first variable and should be related to the first variable. For example, in a typical audit-sampling situation, the first variable would be the audited value of a transaction and the second variable would be the originally reported value of the same transaction. Because the latter two variable methods are statistically biased, there must be a demonstration that the bias is negligible before the Service will accept the method.

8. Variable sampling plans must use the qualifying final estimate with the smallest overall standard error as an absolute value (for example, the size of the estimate is irrelevant in the determination of the reported value).

9. Variable sampling plans must calculate confidence limits by addition and subtraction of the precision of the estimate from the point estimate in which the determination of precision proceeds by multiplication of the standard error by (i) the 95% one-sided confidence coefficient based on the Student’s t-distribution with the appropriate degrees of freedom, or (ii) 1.645 (the normal distribution), assuming the sample size is at least 100 in each non-100% stratum.

10. To demonstrate that little statistical bias exists for either the (combined) ratio or regression method, the following applies after excluding all strata tested on 100% basis (the entire population of a stratum is selected for evaluation).

a. The total sample size of all strata must be at least 100 units.

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. 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;

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;

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UNSTRATIFIED (SIMPLE RANDOM SAMPLE)

MEAN ESTIMATOR

Sample Mean of Audited Amounts

Estimate of Total Audited Amount

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

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UNSTRATIFIED (SIMPLE RANDOM SAMPLE)

DIFFERENCE ESTIMATOR

STRATIFIED DIFFERENCE ESTIMATOR

Estimated Standard Error of the Difference Amount

Achieved Precision of the Difference Amount

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

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UNSTRATIFIED (SIMPLE RANDOM SAMPLE)

REGRESSION ESTIMATOR

STRATIFIED COMBINED REGRESSION ESTIMATOR

Estimated Regression Coefficient

Estimate of Total Audited Amount

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

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Definition of Symbols

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