Part VI. Substitute — Internal Revenue Bulletin 2017-3

Complete only if a QI that has assumed primary withholding responsibility for payments of substitute interest (as described in section 3.03(A) of the QI Agreement).

A. General Information

Total number of accounts receiving substitute interest payments.
Total number of accounts receiving substitute interest reviewed as part of the periodic review.

B. Documentation

Total accounts reviewed with valid documentation.
Total accounts reviewed with invalid documentation or no documentation for which documentation or additional documentation was obtained after the initial review.
Total accounts reviewed for which treaty benefits were claimed.
Total accounts reviewed for which treaty benefits were claimed where QI did not obtain sufficient documentation to establish the payee’s entitlement to treaty benefits (including, where applicable, the treaty statement and limitation on benefits information required by section 5.03(B) of the QI Agreement).
Total accounts reviewed held by U.S. non-exempt recipient account holders.
Total accounts held by U.S. non-exempt recipient account holders reviewed for which QI has obtained a valid Form W-9.

C. Withholding

The aggregate amount reported as withheld under chapter 3 by QI on Forms 1042-S with respect to substitute interest payments.
Number of accounts for which amounts were withheld under chapter 3 with respect to substitute interest payments.
The aggregate amount reported as withheld under chapter 4 by QI on Forms 1042-S with respect to substitute interest payments.
Number of accounts for which amounts were withheld under chapter 4 with respect to substitute interest payments.
Additional withholding required under chapter 4 based on results of periodic review.
Additional withholding required under chapter 3 based on results of periodic review.
Aggregate amount reported as withheld on Forms 1099 on reportable payments (including reportable amounts) subject to backup withholding.
Additional backup withholding required based on results of periodic review.
The aggregate amount of deposits made in accordance with section 3.08 of the QI Agreement with respect to substitute interest payments.

D. Reporting

Total amount of interest or substitute interest payments received for which QI represented itself as assuming primary withholding responsibility.
Aggregate amount of substitute interest payments made.
Total amount of payments in Question 2 that were reported on Forms 1099.
Total amount of payments in Question 2 that were amounts subject to chapter 4 reporting reported on Form 1042-S.
Total amount of payments in Question 2 that were amounts subject to chapter 3 reporting reported on Form 1042-S.
Aggregate amount of any claims for credit or refund made by QI with respect to payments of substitute interest.

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APPENDIX II

Section I. Background.

To the extent provided in section 10.05 of the QI Agreement, the reviewer is permitted to use a sampling methodology to perform the periodic review. This Appendix includes safe harbor procedures covering basic sample design parameters and methodologies, including sample size, strata allocation, and projection. Generally, sampling should only be used whenever an examination of all accounts within a particular class of accounts would be prohibitive in terms of time and expense. If it is reasonable to examine all accounts in connection with a particular part of the periodic review, sampling techniques should not be used. Except as otherwise provided herein, the terms used in this Appendix are as defined in section 2 of the QI Agreement.

Sampling should only be used if there are more than 60 accounts to review. If any accounts of a QI held by PAIs (“PAI accounts”) or accounts of a QI held by partnerships or trusts utilizing the Agency Option (“Agency Accounts”) are also included in the QI’s review (because the PAI or the partnership or trust did not perform its own compliance review), the PAI or Agency Accounts should be included in the sample of accounts for which QI acts as a QI (“QI accounts”) by adding additional strata, replicating the strata prescribed in section II.A.3 of this Appendix, as applicable, that contain only PAI accounts or Agency Accounts. For purposes of the QI’s periodic review, a QI account is referred to as a “sample unit” (and collectively as the “sample”) with respect to each review. If a population contains 60 or fewer sample units, all sample units for that population must be reviewed.

The sampling methodology employed envisions a documentation review (as prescribed in section 10.05(A) of the QI Agreement) requiring review of all selected sample units, and a review of: (1) withholding rate pool classifications (as prescribed in section 10.05(B) of the QI Agreement), (2) withholding responsibilities (as prescribed in section 10.05(C) of the QI Agreement), and (3) information reporting (as prescribed in section 10.05(D) of the QI Agreement) that requires review of a subset (a “spot check” under section II.B.1 of this Appendix) of the sample units reviewed in the documentation review. See section 10.05 of the QI Agreement.

The statistical sampling methodologies used in this Appendix are not intended to be and cannot be used for any other tax purpose. A QI may use another sampling technique provided it documents its parameters and methodologies for the IRS to review, as described in section 10.05 of the QI Agreement. The standards and principles of Rev. Proc. 2011-42, 2011-37 I.R.B. 318, should be applied to any safe harbor sampling procedures. At the time it reviews the QI’s periodic certification, the IRS will determine if a projection of underwithholding identified utilizing a statistical sampling method is required based on that review, along with a review of the QI’s compliance report and other relevant information.

A reviewer may request approval to modify the safe harbor methodology or approval of another sampling methodology in order to select more than one sample or to use multistage, cluster, or other sampling methodologies including additional stratifications. To obtain IRS approval, contact the Financial Intermediaries Program in accordance with section 12.06 of the QI Agreement.

The safe harbor in this Appendix applies to all QIs, irrespective of whether the QI also acts as a QDD or not, with a certification period ending December 31, 2017. For a QI that also acts as a QDD, the safe harbor excludes a sample of QDD accounts, which will be added in 2017 and applicable to certifications ending after December 31, 2017.

Section II. Safe Harbor Methodology.

A. DOCUMENTATION REVIEW

Population .

Sample of QI Accounts . The reviewer selects a random sample of accounts from a portion of the population of all QI accounts. The portion of the population will consist of: (1) all accounts held by U.S. persons (or account holders presumed to be U.S. persons) that received a reportable payment and (2) all accounts held by non-U.S. persons (or account holders presumed to be non-U.S. persons) that received a reportable amount.

Sample Sizes for Documentation Review .

(a) Sample Size Calculations . If PAI accounts or Agency Accounts have been added to the sample of QI accounts because the PAI or Agency Partnership or Trust did not perform its own periodic review, a separate sample size calculation should also be performed for the PAI accounts or the Agency Accounts as if they were part of a separate QI sample. If multiple samples are used, the sample size for the each sample (including for any additional PAI accounts or Agency Accounts) is calculated independently. The sample size for each sample is the lesser of (1) the number of sample units determined using the sample formula in section II.A.2(c), or (2) 25 percent of the total number of sample units in the population. However, in determining the sample size, the reviewer must adhere to the guidelines for minimum stratum sample sizes in sections II.A.3 and II.A.4 of this Appendix. This may result in a sample size greater than the sample size resulting from using the formula in sections II.A.2(b) and II.A.2(c) of this section. The minimum sample size of any sample shall not be less than 60. A sample size larger than calculated under this section may be used without contacting the Financial Intermediaries Program.

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(b) Sample Size Adjustments . The variable P “error rate” should be set equal to 5 percent for the sample of QI accounts. (c) Sample Formula . The number of sample units to be reviewed is determined using the sample formula as follows:

where t� 1.645 (confidence coefficient at 95 percent one-sided) P� 5 percent (error rate) for the QI account sample Q� 1-P d - 2 percent (precision level) N� total population

Strata .

Sample of QI Accounts . The reviewer must segregate all of the QI accounts into the following strata. While segregating accounts, steps should be taken to ensure all partnerships and trusts for which the QI has utilized the joint account option are placed into the appropriate direct account stratum (stratum 1) while the underlying partners, beneficiaries, or owners of the partnerships or trusts are excluded from the indirect stratum (stratum 3). Such underlying accounts will be selected for review in accordance with section II.A.7 of this Appendix.

Further substratification by dollar amounts may be used in accordance with section II.A.6 of this Appendix. (a) A stratum of all accounts held by direct account holders that are not U.S. non-exempt recipients. (b) A stratum of all accounts that are held by direct account holders that are U.S. non-exempt recipients. (c) A stratum of all accounts held by indirect account holders.

Allocation of Sample Size to Each Stratum .

The reviewer must allocate the number of sample units for each sample (including for any PAI accounts or Agency Accounts added to the sample of QI accounts) independently of the other samples. The reviewer must allocate the number of sample units in the sample determined under section II.A.2 of this Appendix to each stratum described in section II.A.3 by multiplying the number of sample units in the sample, as determined under section II.A.2, by a fraction, the numerator of which is the total number of sample units in the stratum and the denominator of which is the total number of sample units in the population. If the allocation of sample units to a stratum using the above method results in a sample size of a stratum that is less than 60 and less than the actual number of sample units in the stratum, the minimum allocation to that stratum is the lesser of (1) 60 sample units or (2) the total number of sample units in the stratum. If there are fewer than 60 sample units in any stratum, all sample units in that stratum must be examined, and the difference between 60 and the number of sample units in the stratum must be reallocated to the remaining strata on a pro rata basis. If there are 60 or more sample units in the stratum, but the allocation, as determined under the fraction above, is less than 60 sample units, the number of sample units to be used in the sample from that stratum is 60.

Random Number Generator .

The reviewer must select for the documentation review sample units from each stratum identified in section II.A.3 of this Appendix by using a random number generator. Random numbers should be drawn separately for each sample (including for any PAI or Agency Account added to the sample of QI accounts) including the use of separate seeds. Information regarding the random number generator used must be included in the records as required in section III.D of this Appendix. This information must be sufficient to allow the IRS to replicate the random numbers as well as to allow the reviewer to continue the sequences of randomly generated numbers if it is determined additional sample units need to be reviewed. This information must include the name and version of the random number generator, the seed numbers used or generated, specification of any options selected, and the computer equipment on which it was run.

Optional Further Stratification by Dollar Amounts .

For each sample (including for any PAI or Agency Account added to the sample of QI accounts), the reviewer may further stratify by dollar amounts for that sample without submitting a request for approval when the reviewer is otherwise selecting the sample in accordance with this Appendix. Reportable amounts for foreign recipients and reportable payments for U.S. recipients are to be

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considered in the substratification. If the reviewer chooses to substratify under this section, the reviewer must comply with the following rules: (a) The strata consisting of sample units that have received payments of the highest dollar amounts during the audit year shall not consist of more than 30 accounts. All items in these strata shall be reviewed. (b) The remaining strata shall be randomly selected to contain approximately equal amounts in each substratum. (c) The minimum strata size shall not be less than 30 sample units.

Determining Rate of Withholding for Partnerships and Trusts for Which the QI has Applied the Joint Account Option .

When reviewing documentation of partners, beneficiaries, or owners of a partnership or trust to which a QI has applied the joint account option to determine the rate of withholding the QI should have applied to the partnership or trust, the reviewer may limit the review to the number of partners, beneficiaries, or owners by referring to the table below.

Number of partners, beneficiaries, or owners/Number to be reviewed

0 - 10 All

11 - 14 10

15 - 19 13

20 - 24 16

25 - 29 18

30 - 34 20

35 - 39 21

40 - 49 22

50 - 74 24

75 - 99 26

100 - 199 27

200 - 499 29

500 - 4,999 31

4,999 32

B. WITHHOLDING RATE POOL, WITHHOLDING RESPONSIBILITIES, AND RETURN FILING AND INFORMATION REPORTING REVIEWS (SPOT CHECK)

Selection of Accounts for Review .

For purposes of further reviewing and testing accounts previously reviewed in the documentation review for compliance with the withholding rate pool, withholding responsibilities, and return filing and information reporting subsections of sections 10.05(B) through 10.05(D) of the QI Agreement, the reviewer must review accounts from every stratum in the sample that has failed the documentation review specified under section 10.05(A) of the QI Agreement, taking into account the applicable presumption rules where documentation is missing, invalid, or unreliable.

To the extent the number of sample units listed above from the sample (or in the population, if the reviewer has not used statistical sampling) in any stratum is less than 30, the reviewer must also select for review (in the order selected by the random number generator under section II.A.5 of this Appendix or, if the reviewer has not used statistical sampling, in the order used by the QI for its record keeping) an additional number of sample units drawn from that stratum that equal the difference between 30 and the number of sample units from the sample in that stratum.

When performing portions of the spot check review, if the reviewer determines underwithholding occurred on a payment to an account, all payments to that account must be considered when calculating total underwithholding for that account.

Section III. Additional Requirements Regarding the Use of Sampling

A. DOCUMENTATION OF SAMPLE PLAN

The reviewer should provide in its periodic report the information described in Rev. Proc. 2011-42, Appendix (A), Sampling Plan Standards, and Appendix (B), Sampling Documentation Standards, as applicable. Additionally, originally recorded payment and withholding amounts as well as the amount that should have been withheld and the amount actually withheld as determined by the compliance review should be retained for every sample unit, as well as any other additional information required by this Appendix.

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B. DETERMINATION OF UNDERWITHHOLDING

If the reviewer determines that underwithholding has occurred with respect to the sampled accounts, QI shall report and pay, in accordance with the requirements of the QI Agreement, the actual underwithheld tax without regard to projection. The QI will also notify the Financial Intermediaries Program within 30 days of the completion of the review, at the address provided in section 12.06 of the QI Agreement, of any underwithholding identified as a result of the review. The QI must report to the IRS the amount of any underwithholding without regard to any curing of any documentation required to support reduced withholding applied by the QI as well as the amount of any underwithholding following any such curing. Curing for purposes of the preceding sentence is limited to curing performed after the selection of the sample.

C. PROJECTION

At the time it reviews the QI’s periodic certification, the IRS will determine if a projection of underwithholding identified from the sample is required based on that review, along with a review of QI’s compliance report and other relevant information. If projection is required, the QI or the QI’s reviewers will be directed to perform the projection. The IRS will instruct the QI or the QI’s reviewers on the use of the formulas in Rev. Proc. 2011-42 to perform the projection.

If the reviewer has determined that overwithholding has occurred with respect to a sample, and the IRS determines projection is appropriate, projection may not be used for the QI to claim a refund. A projection of overwithholding may offset any underwithholding in the sample, provided that QI enters into a closing agreement (Form 906) that QI will not file a claim for refund for any overwithholding that the reviewer has discovered.

The IRS reserves the right to review and adjust any projection. If after reviewing all relevant information, the IRS determines that further action is necessary with respect to determining the amount of underwithholding for the year of review or any other year, the IRS may request that QI have the reviewer review additional sample units or conduct a full review of the entire sample or may determine that it is not appropriate to project an amount of underwithholding.

D. REPORTING OF SAMPLE RESULTS IN THE PERIODIC REVIEW REPORT

At a minimum, the reviewer should describe in the report, the steps taken to construct the sample population and the steps taken to ensure all accounts subject to review were included in the population and subject to sampling under the procedures outlined in this Appendix.

The reviewer should also record the original population and sample statistics separately for each sample (including for any PAI or Agency Account added to the sample of QI accounts) by stratum as follows:

(1) Total number of sample units in the population; (2) Total number of sample units in the sample; (3) Total reportable amounts for foreign recipients for the population; (4) Total reportable payments for U.S. recipients for the population; (5) Total reportable amounts for foreign recipients for the sample; (6) Total reportable payments for U.S. recipients for the sample; (7) Total chapter 3 withholding for the population; (8) Total backup withholding for the population; (9) Total chapter 4 withholding for the population; (10) Total chapter 3 withholding for the sample; (11) Total backup withholding for the sample; and (12) Total chapter 4 withholding for the sample. Additionally, the reviewer should note a reconciliation of amounts included in the sample population to payments and withholding of reportable amounts as detailed in Part IV, sections E (Reconciliations of Reporting on Payments of Reportable Amounts) and F (Reconciliation of Withholding on Reportable Amounts) of Appendix I to the QI Agreement.

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Updated FFI Agreement

Rev. Proc. 2017–16