Source: https://www.thetaxadviser.com/issues/2018/mar/external-reviewer-independence-requirements-2017-qi-agreement.html
Timestamp: 2019-04-21 02:19:52+00:00

Document:
Rev. Proc. 2017-15 (the 2017 QI Agreement) allows foreign persons to enter into an agreement with the IRS to simplify their obligations as withholding agents under Chapters 3 and 4 and as payers under Chapter 61 and Sec. 3406 for amounts paid to their account holders under the Internal Revenue Code. Under the terms of the 2017 QI Agreement and its earlier iterations, qualified intermediaries (QIs) are required to periodically conduct a review of their controls and systems and certify their effectiveness.
Prior to 2014, an external auditor conducted this review of controls and systems and was required to report his or her findings directly to the IRS. Commencing with the 2014 QI Agreement, the IRS replaced the traditional requirement for a formal external audit with the more lenient instruction that the QI maintain an "internal compliance program." Under this new standard, a QI may still engage a third party to assist it with evaluating its internal controls and systems, but, if it does, the third party is no longer required to make an attestation or render an affirmative opinion regarding a QI's compliance.
As formal attestation is no longer required, the new standard substitutes in place of traditional auditor standards of independence a more generic requirement that the reviewer have sufficient independence "to objectively conduct the review and cannot review his or her own work" (Rev. Proc. 2017-15, §4.02(7)). Industry stakeholders remain uncertain as to the meaning of the new rules and the standard of independence required of an external reviewer performing a periodic review on behalf of a QI.
On Dec. 8, 2017, the IRS published guidance in the form of a Foreign Account Tax Compliance Act (FATCA) FAQ stating that for review years prior to 2018, an external reviewer of a QI may "apply the standards of independence that would otherwise apply to its engagement to conduct the periodic review (such as the standards for an agreed-upon-procedures engagement by a certified public accountant (CPA))" (FATCA — FAQs General, Certifications and Periodic Reviews, Q2, available at www.irs.gov. The IRS intends this FAQ as a stopgap measure establishing a temporary standard of independence applicable only until it can provide comprehensive independence guidance that will apply for reviews of calendar year 2018 or later.
As the July 1 and Dec. 31 deadlines for periodic certification are now fast approaching, many QIs either have commenced or are about to commence periodic reviews. This item is intended to provide timely discussion of the standard of independence applicable to external reviewers performing periodic reviews under the 2017 QI Agreement. It traces the evolution of the external reviewer independence standard and provides an interpretation of the present regulations.
Prior to June 30, 2014, entities admitted to QI status were governed under the terms of Rev. Proc. 2000-12 (as amended). Rev. Proc. 2000-12 generally provided that a QI was required to engage an external auditor to complete an audit of the second and fifth full calendar years that the then-applicable QI agreement was in effect. The external auditor was required to provide its findings directly to the IRS.
Be subject to the laws, regulations, or rules that impose sanctions for failure to exercise independence and to perform the audit competently (Rev. Proc. 2000-12, QI Agreement §10.02).
Provide certain factual information regarding the QI that would vary depending on the number of reportable accounts received by the QI (Rev. Proc. 2014-39, §2.03(J)).
Any combination thereof (2014 QI Agreement, §10.04(A)).
In the case of an auditor other than a CPA, any standard of independence otherwise applicable to the auditor for such an engagement (2014 QI Agreement, §10.04(A)(3)).
The independence provisions of the 2014 QI Agreement arguably read as a modified version of the earlier attest standard (at least with respect to periodic reviewers who are CPAs). However, the 2014 QI Agreement explicitly stated that an external auditor conducting a periodic review on behalf of a QI was "not required to make an attestation or render an opinion regarding [a] QI's compliance" with that agreement (2014 QI Agreement, §10.04(A)(3)). In addition, the prescriptive audit steps set forth in Rev. Proc. 2002-55 were replaced with less formal procedures granting "auditors" significant flexibility in the performance of the mandated periodic review (Rev. Proc. 2014-39, §2.03(J)).
A sizable number of account holders drew from the auditor independence provisions of the 2014 QI Agreement an inference that a QI periodic review must satisfy the standards of a financial audit or other attestation engagement of a CPA (Rev. Proc. 2017-15, §4.02(7)). Responding to this inference, Notice 2016-42 (Proposed QI Agreement) clarified that under the 2014 QI Agreement, attest standards of independence were no longer required in the context of a QI periodic review (Notice 2016-42, §2.02(A)). Additionally, the Proposed QI Agreement replaced all references to the term "auditor" in the 2014 QI Agreement with the more generic term "reviewer" (Notice 2016-42, §2.02(A)).
That people who review client tax forms, perform withholding for clients, or calculate amounts required to be reported be disqualified from performing the review (Rev. Proc. 2017-15, §4.02(7)).
Critically, the IRS ultimately did not adopt any of the above proposals (Rev. Proc. 2017-15, §4.02(7)), stating affirmatively that the provisions of the 2017 QI Agreement regarding the independence of the reviewer are unchanged from the Proposed QI Agreement.
The 2017 QI Agreement does not include a complete set of rules with respect to external reviewer independence. This is intentional. As the 2017 QI Agreement itself explains, the independence of any particular reviewer necessarily depends on specific facts and circumstances. Applying detailed prescriptive rules is therefore likely to result in requirements that are both over- and underinclusive (Rev. Proc. 2017-15, §4.02(7)). While this claim has some logic, the IRS's previously mentioned December 2017 FATCA FAQ release (promising future detailed guidance on the independence standards applicable to external reviewers of QIs), suggests the agency now favors a more prescriptive approach.
Industry comment to the Proposed QI Agreement, which, in having not being adopted, sheds important light on the meaning of the QI Agreement's independence provisions.
From these sources, one can glean that an external reviewer acting on behalf of a QI must have sufficient independence to objectively conduct a review and may not review his or her own work (Rev. Proc. 2017-15, §4.02(7)). In slightly more technical terms, Section 10.04(A)(2) of the 2017 QI Agreement provides that any qualified CPA, attorney, or third-party consultant may serve as an external reviewer to a QI, provided he or she is not reviewing systems, policies, procedures, or results thereof that he or she (or the firm with which he or she is affiliated) is involved in designing, implementing, or maintaining.
This standard is flexible and thematic and may possibly be interpreted to permit an otherwise qualified external reviewer to carry out a periodic review, so long as the reviewer is not in a position where he or she would be reluctant to make a negative assessment of the QI's practices and procedures out of concern for the negative impact of such a determination on the reviewer and his or her employer. Hence, a reviewer who previously assisted solely with the physical submission of client data may carry out a periodic review on that client's behalf. By contrast, a person may not act as an external reviewer with respect to systems he or she designed or documentation he or she validated (Notice 2016-42, §2.02(A)).
As a final note, readers will have observed that the IRS FATCA FAQ released late last year was published in part as a response to stakeholder confusion with respect to the meaning of the word "firm" as it is used in the context of the 2017 QI Agreement. This confusion might stem in part from industry comment on the Proposed QI Agreement requesting that the independence standard be applied on an individual or team basis rather than a "company" or firmwide basis. The IRS has firmly rejected these requests. The independence standard applicable to external reviewers of QIs should not be applied on an individual or team basis but instead on a company or firmwide basis. The term "company or firmwide basis" should be interpreted expansively to incorporate all individuals and subgroups reasonably characterized as belonging to a single professional services firm or corporate enterprise.

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