IRS issues final revised qualified intermediary agreements effective beginning in 2023

• The new qualified intermediary (QI) agreement, applicable for agreements entered on or after January 1, 2023, expands the scope of a QI agreement to allow QIs to assume withholding and reporting responsibilities for purposes of IRC Section 1446(a) and (f). 
• The new QI agreement updates requirements for qualified derivatives dealers (QDDs) and qualified securities lenders (QSLs) for payments of dividend equivalents under IRC Section 871(m). 
• The new QI Agreement also incorporates prior guidance from IRS FAQS, compliance and certification changes, stakeholder input and changes to the 2017 QI agreement.

In Revenue Procedure 2022-43, issued On December 13, 2022, the IRS sets forth a final, revised qualified intermediary (QI) agreement (hereafter, the 2023 QI Agreement) that will apply for QI agreements entering into effect on or after January 1, 2023.

The QI agreement established under Revenue Procedure 2017-15 (2017 QI agreement) will expire on December 31, 2022. The 2023 QI Agreement adopts many of the proposed changes in Notice 2022-23 (see Tax Alert 2022-0754).
 

Background

The QI agreement permits a foreign intermediary to simplify its obligations as a withholding agent under Chapter 3 (non-US resident withholding) and 4 (FATCA withholding), and as a payor under Chapter 61 and IRC Section 3406, for amounts paid to its account holders. With QI status, a foreign broker/dealer that engages as a principal in equity-derivatives-dealer transactions may also agree to act as a QDD and assume primary withholding and reporting responsibilities on all dividend-equivalent payments it makes.

All existing QIs must renew their QI agreements before March 31, 2023, to be covered by the 2023 QI Agreement from January 1, 2023 to December 31, 2028. Otherwise, an entity's QI status will terminate. For newly approved QIs, the effective date of their QI status upon application approval from the IRS will depend upon when the application is made and whether the prospective QI received any reportable payments before the application's submission.

Implications: Per the IRS user guide, there will be a renewal link on the QI portal, at the bottom of the home page, in the activity center. This link will appear during the "renewal open period." See Publication 5262 (rev. 10-2022) (irs.gov), p. 42. QIs are not required to execute new Forms W-8IMY upon renewal of the agreement. In Fall 2021, however, the IRS released an updated Form W-8IMY (Rev. Oct. 2021) with new checkboxes (and combinations of checkboxes) for purposes of IRC Section 1446. QIs should evaluate their classification/status for IRC Section 1446 withholding purposes and, if applicable, provide updated Forms W-8IMY to upstream withholding agents before January 1, 2023.

Beginning in 2023, all new and existing QIs must consent to have their name, QI status and QI-EIN disclosed on a public list to be published by the IRS on irs.gov. According to the IRS, this list will be published in an effort to prevent entities that are not QIs from representing themselves as QIs to withholding agents. For example, once the list is published, this could be considered a reason-to-know check for withholding agents when validating Forms W-8IMY provided by QIs.
 

IRC Section 1446 updates

The 2023 QI Agreement incorporates IRC Section 1446(a) and (f) withholding requirements. IRC Section 1446(a) is an existing US withholding tax that applies to distributions from publicly traded partnerships (PTPs). The 2017 QI Agreement did not include IRC Section 1446 withholding. As a result, QIs were subject to 37% withholding on PTP distributions from upstream withholding agents (with no possibility of a lower rate). The result was potential overwithholding on a QI's account holders. For example, a QI could have an account holder with a valid Form W-9 that should benefit from 0% withholding, but the 2017 QI Agreement did not permit it.

IRC Section 1446(f) is a relatively new provision that primarily impacts non-US persons who invest in partnerships engaged in a US trade or business. This new withholding tax is effective for PTP interests sold on or after January 1, 2023. Unless an exception applies, a 10% withholding tax applies under IRC Section 1446(f) to:

• The gross proceeds from the sale of a PTP interest
• PTP distributions that exceed the PTP's cumulative net income

Withholding tax exceptions are generally based on documentation provided by the investor (e.g., Forms W-9, or Forms W-8 with certain statuses) or "Qualified Notices" issued by the PTP (satisfying specific requirements).

IRC Section 1446(f) is the first time that withholding tax applies to gross proceeds paid to non-US resident persons from the sale of a publicly traded security.

The 2023 QI Agreement allows a QI to assume primary IRC Section 1446 withholding responsibilities (or pass those responsibilities to an upstream withholding agent). A QI may choose to assume primary IRC Section 1446 withholding responsibility on a sale of a PTP interest (but not a distribution) or can assume IRC Section 1446 withholding responsibility on a distribution (but not on a sale). For a PTP distribution, a QI must assume either full withholding responsibility for the entire distribution under Chapter 3 (including IRC Section 1446) and Chapter 4, or no responsibility. A QI can assume withholding responsibilities for a PTP distribution regardless of whether it has assumed primary Chapter 3 (and Chapter 4) withholding responsibilities for other types of income (e.g., distributions on stock).

Documentation requirements

Holders of PTP units are considered partners in a partnership; if that partnership has income from a US trade or business, a unit holder generally must file a US tax return (and obtain a US taxpayer identification number (TIN) to do so). The 2023 QI Agreement allows a Form W-8 to be valid documentary evidence for IRC Section 1446 purposes only if it contains the customer's TIN. If the TIN is not provided, the QI must presume the account holder is foreign and may not reduce the rate of IRC Section 1446 withholding on the basis of the Form W-8 itself (for example, in reliance on a treaty claim).

A QI must use "best efforts" to obtain valid documentation from its account holders. Under the TIN requirement, a QI is treated as using its best efforts if (1) it makes an initial written solicitation for the account holder's US TIN in 2023 or, if later, the calendar year in which an account holder acquires PTP interests, and (2) sends additional written solicitations in each of the next two calendar years if the account holder has not provided a TIN.

Implications: This solicitation requirement borrows heavily from the requirements in Treas. Reg. Section 301.6724-1(e), which relieve filers from penalties for failing to report a TIN on an information return. Unlike the draft QI Agreement, the final 2023 QI Agreement acknowledges that QIs may not always have the TINs of PTP investors. QIs should be prepared to retain records of solicitations and be able to demonstrate "best efforts."

Disclosing QIs

The 2023 QI Agreement introduces the concept of a Disclosing QI (DQI) that elects to provide customer documentation to an upstream withholding agent for IRC Section 1446 purposes, which may relieve the QI from other aspects of IRC Section 1446 compliance. Historically, QIs have relied on the QI agreement to allow them to keep customer documentation confidential (as opposed to nonqualified intermediaries (NQIs), which must disclose customer documentation). QIs retain the option to not disclose customer documentation.

Implications: Typically, accounts are opened at upstream withholding agents under either an omnibus or a segregated structure. Omnibus accounts consist of the assets and positions of multiple account holders and do not disclose details on those actual account holders (for example, accounts are opened in the name of a broker/custodian). Alternatively, segregated accounts are opened on a "fully disclosed" basis, holding the assets and positions of a specific account holder. The account holder's name is disclosed (for example, broker/custodian "for benefit of" or "as nominee of" the named account holder). Often, additional fees and account opening requirements apply to segregated accounts. Therefore, the DQI concept appears primarily to benefit QIs with a small population of direct beneficial owner account holders when the QI does not want to build out IRC Section 1446 withholding and reporting processes. It is analogous to the subset of QIs that may have opened segregated accounts at upstream withholding agents for purposes of Form 1099-B reporting on its US Person account holders.

The choice of whether a QI will be a DQI creates new IRC Section 1446 documentation, withholding and reporting considerations. The Form W-8IMY (Rev. Oct. 2021) does not have a checkbox to indicate DQI status. Instead, upstream withholding agents will largely make this determination based on the accompanying documentation provided by the DQI and how accounts are structured (discussed later).

Documentation

A QI can assume IRC Section 1446 withholding responsibility or provide IRC Section 1446 withholding rate pools to upstream withholding agents for IRC Section 1446(f) (for PTP sales and PTP distributions of ECNI) and IRC Section 1446(a) (for PTP distributions).

A DQI, on the other hand, provides payee-specific documentation of its account holders. This includes both Forms W-8 and W-9 (to the extent a US person is not included in a US payees pool for IRC Section 1446(f) purposes). The Forms W-8 are not required to include US TINs, but the DQI must make "best efforts" to obtain US TINs (as discussed previously).The DQI cannot provide documentary evidence for its account holders.

Withholding

Unless the QI assumes primary IRC Section 1446 withholding responsibilities, an upstream withholding agent will perform withholding based on the IRC Section 1446 withholding rate pools provided by a QI (or maximum withholding if valid withholding rate pools are not provided).

If a QI is a DQI, an upstream withholding agent will perform IRC Section 1446 withholding based on the payee-specific documentation provided by the DQI.

Under the 2023 QI Agreement, a DQI "must act as a disclosing QI for the entire payment of an amount realized from the sale of a PTP interest or a PTP distribution (regardless of the number of account holders that are partners receiving the payment)." The Preamble to the 2023 QI Agreement notes that this requirement was added to "prohibit a disclosing QI from acting as a nonqualified intermediary with respect to any account holder" in order to apply additional withholding if the QI's withholding agent underwithheld on a payment to the account holder.

Implications: A QI can generally open segregated accounts at an upstream withholding agent to act as a QI or NQI. However, the IRS appears to be limiting this option for a payment on a sale of a PTP interest or a PTP distribution by providing that "A QI that acts as a disclosing QI for a payment must act as a disclosing QI for the entire payment of an amount realized from the sale of a PTP interest or a PTP distribution (regardless of the number of account holders that are partners receiving the payment)" and viewing a payment as the income stream to the QI on PTP sales or distributions.

All QIs (regardless of whether acting as a DQI) have a "residual" withholding responsibility if the appropriate IRC Section 1446 withholding was not performed by an upstream withholding agent.

Form 1042-S reporting

Unless the QI acts as a DQI, Forms 1042-S will be issued directly to the QI that is treated as the recipient on the Form 1042-S.

The upstream withholding agent for a DQI, on the other hand, must issue Forms 1042-S directly to the disclosed foreign account holders of the DQI (with the DQI referenced as the intermediary on the Form 1042-S). A copy of those Forms 1042-S must also be sent to the DQI.

Nominee reporting

A "nominee" holding a PTP interest on behalf of an investor generally must provide an IRC Section 6031 nominee statement to the PTP (or the PTP's agent). This statement contains specific information about the partner and its interest (e.g., name, address, tax ID, description of the interest, etc.). This information is then used by the partnership for its own reporting requirements. If the nominee does not provide this information, it must provide a different type of statement to the investor showing the investor's distributive share of partnership income, gain, loss or credit that must be shown on the investor's US tax return.

A QI is considered a "nominee" for purposes of these reporting requirements. The 2023 QI Agreement incorporates these requirements and distinguishes between whether or not the QI is acting as a DQI. A QI generally must perform the appropriate IRC Section 6031 nominee reporting directly to the PTP (or the PTP's agent). Alternatively, a DQI could either:

• Provide the IRC Section 6031 nominee statement information to its nominee (e.g., an upstream withholding agent) or the PTP itself (or the PTP's agent)

  or

• Fully shift this responsibility to an upstream withholding agent if "fully segregated and disclosed" accounts are opened

Nonqualified intermediaries

IRC Section 1446(f) 10% withholding applies to nonqualified intermediaries (NQIs) (even if the NQI's account holders are US persons or would be entitled to treaty relief). The 2023 QI Agreement provides two reporting approaches for NQI account holders:

• "Standard" approach — Forms 1042-S are issued to the NQI reflecting an "unknown" recipient
• "Alternative" approach — Forms 1042-S are issued to the NQI's underlying account holders with copies provided to the NQI

Both the QI and the NQI must satisfy several requirements to facilitate the alternative approach. The NQI must provide valid documentation (i.e., Form W-8IMY, withholding statement, Forms W-8 or W-9 for each underlying account holder) and an IRC Section 6031 nominee statement. In addition, the QI must have an "agreement" in place with the NQI to perform all required reporting, including being "appointed" its agent for purposes of the IRC Section 6031 nominee requirements.

The 2023 QI Agreement notes that a QI applying the alternative approach will also perform reporting "if required, under [IRC] Section 6045" — in other words, Form 1099-B reporting to US customers of the NQI.

Implications: The draft 2023 Form 1042-S instructions state that: "In a case in which a partner that is a US person was treated as a foreign partner for purposes of withholding under [IRC] Section 1446(a) or (f) (including an allocation of a payment to the person made on a withholding statement), a Form 1042-S may be used to report the payment (and withholding) with respect to the US person." This would occur when IRC Section 1446(f) withholding applies and the Forms W-9 underlying a Form W-8IMY (based on withholding statement allocations) were provided under the alternative method of reporting.

Refund claims

The QI Agreement allows a QI to adjust for overwithholding or underwithholding under IRC Section 1446(a) or (f) during the calendar year using the same procedures used for Chapter 3 purposes.

A QI may generally claim a "collective refund" of any tax overwithheld from its customers under Chapter 3, rather than requiring customers to file their own claims for refund with the IRS. However, a QI may not include any claim of overwithholding on a sale of a PTP interest, or tax withheld from a distribution by a PTP, in a collective refund claim. Instead, a QI must issue a recipient-specific Form 1042-S to a PTP investor who has provided a TIN and asks for the form in writing within three full calendar years after the payment.

Implications: A PTP distribution may include amounts, like interest and dividends, that are subject to Chapter 3 withholding and ordinarily could be included in a collective refund claim. Consistent with a customer's requirement to file a US return, however, the customer must claim a refund of any overwithholding on any part of a PTP distribution. When the QI issues a separate Form 1042-S for amounts overwithheld under IRC Section 1446(a) or (f), the QI also must issue separate Forms 1042-S for any other reportable amounts paid to that account holder in the same year. The issuance of those separate Forms 1042-S would preclude the QI from including that customer's Chapter 3 overwithholding in the QI's collective refund claim, effectively forcing the customer to include any such claim on its own return. Accordingly, QIs may want to consider implementing controls to prevent such customers from being included in a collective refund claim.

The 2023 QI Agreement also adds restrictions on requests for separate Forms 1042-S outside of the PTP context. A QI must issue a Form 1042-S to a direct account holder that makes a request only within two full calendar years following the year in which QI made the payment and only if the account holder presents a US TIN.

Implications: This is a welcomed change from the 2017 QI Agreement, which did not include restrictions on timing or the requirement to present a US TIN. While these requirements should reduce requests for Forms 1042-S, non-US individuals have had notorious difficulties obtaining US TINs, and this new rule could allow a QI to both refuse to include the customer's claim in a collective refund and decline to issue a Form 1042-S, even if there is proof that the individual has requested a US TIN.
 

Mergers and acquisitions

The 2023 QI Agreement includes revised requirements for QI terminations relating to mergers and acquisitions. If the acquired QI (i.e., the predecessor QI) merges into or is acquired by another QI (i.e., the successor QI) and the predecessor QI must submit a periodic review report due to its termination, the predecessor QI may satisfy certain requirement through a "combined periodic review." Such a review covers one of the permissible calendar years before the year of the predecessor QI's termination and includes both the predecessor QI's and successor QI's documentation and withholding accounts. The predecessor QI and successor QI must make separate certifications for the period covered by the combined periodic review (including the required factual information specific to each QI). It may be possible for a predecessor QI to obtain a six-month extension to submit its final certification which would otherwise be due at termination.
 

QDD requirements

The 2023 QI Agreement includes significant changes for QDDs, including (1) the addition of a QDD's obligations when organized as a partnership, (2) how a QDD partnership calculates its QDD tax liability, (3) QDD reporting and (4) the definition of an eligible entity for purposes of QDD applications, as well as changes to the existing Qualified Securities Lender (QSL) regime. Additionally, the 2023 QI Agreement references future changes that will either be published through an IRS Notice or Revenue Procedure and provide additional guidance on dividend equivalents and QDDs.

Eligible entity

The 2023 QI Agreement clarifies which entities will be considered eligible entities for purposes of the 2023 QI Agreement. The 2023 QI Agreement refers to IRS FAQ 14 for QIs — New Applications/Renewals, noting that "any other person otherwise acceptable to the IRS" is not meant to be a catch-all provision or a significant expansion of the definition of an eligible entity. Rather, the provision is available to a QDD applicant that does not fit into one the defined categories but has facts and circumstances similar to one of the delineated entity types and is similarly regulated.

Implications: Before its QDD renewal, an entity that became a QDD under the "any other person otherwise acceptable to the IRS" provision should review (1) how its activities align to one of the delineated categories of QDD eligible entities and (2) any similarity to the regulatory regime of an eligible entity. An explanation of the regulatory limitations to which the QDD is subject should be included in its application for renewal.

QDD periodic reviews and certification

While the 2023 QI Agreement does not require a QDD to perform a periodic review of its activities for the 2023 and 2024 calendar years, a QDD must certify that it made a good faith effort to comply with the IRC Section 871(m) regulations and the relevant portions of the 2023 QI Agreement. The Preamble to the 2023 QI Agreement refers to IRS FAQ 19 for QIs — Certifications and Periodic Reviews for the 2017 QI Agreement. This FAQ notes that a QDD must "must retain information to support the good faith effort certification."

Implications: Although not specified in the 2023 QI Agreement or FAQ 19, QDDs should retain information on the identification, withholding and reporting of in-scope IRC Section 871(m) contracts as well why certain contracts were deemed out of scope. Additional records should include copies of Forms 1042, Forms 1120-F and accompanying Schedules Q.

A QI acting as a QDD is still obligated to perform a periodic review of its non-QDD, QI activities.

Future amendments to the periodic review procedures for QDDs

Appendix I, Part V and the sampling methodology for QDD accounts in Appendix II of the 2023 QI Agreement remain reserved for future guidance. The Preamble notes that these sections will be addressed in a future Notice or Revenue Procedure that will serve as a "rider" to the 2023 QI Agreement. Additionally, the Preamble notes that (1) this guidance will include "any changes to the requirements of QDDs deemed necessary," and (2) additional guidance on dividend equivalents and QDDs is forthcoming.

Implications: The inclusion of changes to the QDD requirements language and the reference to additional guidance in the Preamble is interesting in that Treasury may change certain requirements as it pertains to QDDs. It remains to be seen whether these changes will significantly affect how QDDs operate.

QDD tax liability

For calendar years 2023 and 2024, the 2023 QI Agreement incorporates Notice 2022-37, under which QDDs are not liable for tax on dividends or dividend equivalents received in an equity-derivatives-dealer capacity. Dividends and dividend equivalents received in a non-equity-derivatives-dealer capacity, however, remain subject to tax and withholding.

QDD partnerships

The 2023 QI Agreement adds guidance on how a QDD organized as a partnership should calculate its QDD tax liability under Section 3.09 of the 2023 QI Agreement: a QDD partnership calculates its QDD tax liability using the "gross income components" under each subsection of Section 3.09. Section 3.09 does not allow a QDD partnership to reduce the dividends or interest received as a QDD with respect to potential IRC Section 871(m) transactions or underlying securities that are not dividend equivalent payments received by any amount withheld at source. This withholding will be reported to the QDD partnership's partners. In addition, any withholding required of the QDD partnership on its partners on the modified Section 3.09 amounts is included in the QDD tax liability.

Implications: The Section 3.09 QDD tax liability calculation differs for QDDs organized as partnerships. As the partners of the QDD partnership are entitled to any income resulting from the QDD's activities, the QDD partnership must withhold on its partners where necessary. This is likely to occur on the Section 3.09(A) IRC Section 871(m) amount, if the net delta is positive, and on any amounts calculated under Sections 3.09(B) and (C).

Additionally, Section 3.03 of the 2023 QI Agreement has been changed to include a QDD partnership's obligation to assume primary Chapter 3 and Chapter 4 withholding responsibility for the Section 3.09 amounts on the QDD partnership's partners.

QDD partnership IRS reporting

Section 7.01 of the 2023 QI Agreement retains the requirement for corporate QDDs to file the Form 1120-F and accompanying Schedule Q to report their QDD tax liability. As a partnership does not file a Form 1120 or 1120-F, Section 7.01(c) of the 2023 QI Agreement now requires a QDD partnership to report its QDD tax liability calculations on a "statement [attached] to its Form 1065." A QDD partnership operating on a fiscal-year basis must include with the Form 1065 separate statements for each portion of the fiscal year during which it operated. The statement(s) to the Form 1065 must include all the information required to be reported on the Form 1120-F, Schedule Q. As with the Forms 1120-F and Schedule Q, a QDD partnership must file a Form 1065 and statement(s), regardless of whether the QDD partnership would be required to file a Form 1065 absent its QDD status.

QDD partnership recipient reporting to partners

A QDD partnership must withhold on its partners' allocation of the QDD tax liability and provide recipient-specific reporting to its foreign partners. A separate Form 1042-S must be given to each foreign partner allocating that foreign partner's share of the QDD tax liability subject to withholding under Section 3.09 of the 2023 QI Agreement.

QDD partnership reconciliation schedule

The 2023 QI Agreement requires a QDD to keep a reconciliation schedule for each US equity for which the QDD calculates an IRC Section 871(m) amount. The reconciliation schedule requirements for QDD partnerships, however, have been modified to be similar to those for calculating the QDD tax liability — instead of including the IRC Section 881 tax paid on amounts received as a QDD, the QDD partnership must include the withholding by the QDD partnership in the Section 3.09 QDD tax liability amounts.

Implications: This change requires a QDD partnership to record the amounts that were either withheld at source or that the QDD partnership itself withheld on its partners. The analysis of the payments and withholding should be done when calculating the QDD's tax liability.

QDD withholding statements

For tax years 2023 and 2024, any withholding statement provided by a QDD must include which dividends (if any) the QDD receives in its equity-derivatives-dealer capacity. The 2023 QI Agreement notes that this may be accomplished by designating one account for QDD activity and another account for other activity, such as QI activity.

Implications: This change may require QDDs to provide updated withholding statements to their counterparties, with designated accounts to receive dividends on hedging transactions. Because these positions are frequently changing, however, this can be very challenging. Unfortunately, the 2023 QI Agreement does not provide an alternative instruction.

QDD partnership withholding statements

Section 5.07(E) of the 2023 QI Agreement includes language on the reporting of payments to QDD partnerships. For payments to a QDD partnership, a QI may associate the payment with a withholding statement that specifically identifies the partners to whom the payment is allocated. This withholding statement may either name the ultimate beneficial owners of the partnership (as well as any partners that are foreign flow-through entities), or provide withholding rate pool information, if applicable.

Implications: When providing a withholding statement to another QI, a QDD partnership must disclose its ultimate beneficial owners. A withholding statement cannot merely disclose a foreign flow-through-entity partner.

QSL regime changes

The 2023 QI Agreement changes the existing QSL regime (announced in Notice 2010-46). The QSL regime will no longer be available to withholding agents after the end of 2024. Until that time, QIs acting as QSLs must assume primary withholding and reporting responsibility for all substitute dividends that they receive and pay when acting as an intermediary on a securities lending or similar transaction.

Certification of internal controls and periodic review requirements

The 2023 QI Agreement introduces many changes to the certification of internal controls and periodic review requirements (Section 10 and relevant appendices), most of which were made to accommodate the new compliance requirements around PTP activities. The IRS also included other changes on curing invalid documentation, extrapolating underwithholding identified in a sample review and administrative items around submitting periodic review reports to the IRS.

PTP considerations in the certification of internal controls and periodic review

The 2023 QI Agreement has been updated to include certifications on compliance with withholding and reporting on PTP interests. The list of material failures and events of default now includes when the QI has failed to comply with the documentation (specifically, US TIN collection), withholding and reporting requirements for PTP interests. For the periodic review, certain review and fact-finding steps have been added for accounts that receive PTP distributions or amounts realized from the sale of PTP interests (PTP activities). Similar to the familiar steps for reviewing documentation, withholding and reporting for the more traditional transactions around QI accounts, the new agreement inserts new steps requiring review of areas specific to the new PTP compliance requirements. For example, the reviewer must:

• Gather certain facts about the QI's obligation to obtain US TINs from PTP account holders
• Determine whether the QI has assumed primary withholding responsibility on payments of PTP distributions and perform test checks on whether the QI properly withheld on distributions under IRC Section 1446(a) and (f), considering the amounts subject to withholding per the PTP's qualified notice or by applying the default rule under Treas. Reg. Section 1.1446-4
• Verify that the QI, if a nominee for PTP interests, properly provided to the PTP the statements specified in Treas. Reg. Section 1.6031(c)-1T(a) and Section 8.07 of the 2023 QI Agreement

The 2023 QI Agreement further clarifies the selection of the review sample as it relates to accounts with PTP activities. All such accounts must be included in the QI population of accounts for purposes of the sample selection. The reviewer must first select a certainty stratum for IRC Section 1446(a) and (f) purposes consisting of the 30 accounts with the highest dollar value. The accounts in this certainty stratum must be separated from the population of QI accounts before the remaining periodic review sample is selected. The agreement also specifies the spot check selection for the review of the PTP certainty stratum.

Periodic review report

The 2023 QI Agreement has three appendices:

• Appendix I — Where the QI certifies internal controls and reports the factual information gathered in the periodic review
• Appendix II — Where the QI reports information about the sample and the sample selection methodology for purposes of the periodic review
• Appendix III — A new addition to the QI Agreement under which the QI's responsible officer submits certain information about Form 1042 and 1042-S filings for years that are not in the periodic review (this information has not been required in the past)

Appendix I has been expanded to include Part VII, under which the reviewer must report information about accounts that receive PTP distributions or amounts realized from the sale of PTP interests.

The 2023 QI Agreement requires that the responsible officer submit the periodic review report to the IRS with a certification of internal controls, rather than simply having it available upon IRS request (as required by the 2017 QI Agreement). Presumably, this makes it easier for the IRS to see periodic review reports and may indicate that the IRS intends to assess them more carefully.

If QI is required to submit a qualified certification, the 2023 QI Agreement now requires the periodic review report to be accompanied by a remediation plan and sets forth the requirements for that plan in Appendix I. See "Curing and Extrapolation" below for more information about remediation of underwithholding.

In addition, the 2023 QI agreement is more specific about the required information for documentation validity and underwithholding for both "pre-curing" and "post-curing," as well as the dates and periods when curing occurred.

Finally, when selecting accounts for the required spot check for underwithholding, the reviewer is no longer required to include undocumented accounts that did not reflect a reduction in withholding.

Implications: The additional information the IRS is requiring around documentation curing and underwithholding seems to indicate an intent to more closely monitor and address the ability of the QI's compliance program to maintain the standards of the QI Agreement. The Preamble states, "the IRS considers its analysis of a periodic review report integral to ensuring a QI's compliance (and thus typically requests the reports in its reviews). For efficiency, the 2023 QI Agreement requires QIs to submit a copy of their periodic review report with their periodic certification."

Curing and extrapolation of under- and over-withholding

Appendix II of the 2023 QI Agreement clarifies the process for projecting underwithholding discovered in a sample, including an example of its application. This process allows the IRS to project underwithholding on a post-cure basis. Once the IRS extrapolates the underwithholding and proposes the resulting deficiency, the QI will have an additional 60 days to cure invalid documentation and consider that documentation in the extrapolated result.

The 2023 QI Agreement clarifies that the impact of overwithholding can also be extrapolated, but only to offset extrapolated underwithholding. To do this, however, the QI must enter into a closing agreement (Form 906) with the IRS, agreeing not to claim a refund for any overwithholding.

In applying these extrapolation methods, the IRS retains the right to review and adjust any projection of underwithholding and (1) require closer review of any QI accounts for any year (even if it is not a year subject to periodic review) or (2) determine that a projection of cures is not warranted.

Implications: While the clarification of the projection process and the time to cure is a welcome addition to the QI Agreement, QIs should be aware that the language of the agreement leaves significant latitude for the IRS to scrutinize the QI's compliance and to make a final determination as to underwithholding. This increases the need for a strong compliance process and effective control and oversight.