The FATCA regulations and recent harmonization regulations have given rise to a host of questions regarding the status of QI audits on a going forward basis.
In Section 10.03 of the QI Agreement, each QI is directed to have an external auditor conduct an audit according to its assigned audit schedule. In the audit, the external auditor is required to verify whether the QI is in compliance with its QI Agreement by providing a report to the IRS. The report must be submitted to the IRS, no later than 30 June of the year following the year being audited, unless an extension has been requested. For QIs that have been assigned 2013 as the audit year, reports are due to the IRS on or before 30 June 2014 (or 31 December 2014, if the automatic six month extension has been requested).
Temporary “Harmonization” Regulations
Among other things, the temporary regulations provide modifications to requirements of the QI Agreement. With respect to QI audits, the temporary regulations state that the QI must establish procedures to ensure compliance with its Agreement, arrange for a periodic review, and provide certain factual information to the IRS. In addition, the modified regulations provide that the IRS could require a formal external audit, upon request. Until the updated QI Agreement is released, the meaning of “periodic review” remains unknown.
Status of Requirements under Existing QI Agreements
While the new requirements outlined above relate only to the updated QI Agreements, which are not yet in effect, many QIs are unsure of the audit requirement for their existing QI Agreements that have not expired and where 2013 was identified as an audit year. This Alert confirms that the IRS QI Team has stated it expects to receive 2013 QI Audit reports “for those QIs that have an audit report due for 2013. For QIs that fulfilled their obligations under a QI Agreement that expired at the end of 2012 and was automatically renewed to 30 June 2014, here is no "rollover" requirement.”
This means that for a QI that has an Agreement that expired on 31 December 2012 and was automatically extended to 30 June 2014, if its audit cycle was years 1 and 4, the extended agreement does not consider 2013 to be year 1.
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