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Updated Periodic Review and Certification FAQ and the

Contributed by Comply Exchange
April 12, 2019

Who is Impacted

Any Qualified Intermediaries (QIs), Withholding Foreign Partnerships (WPs), or Withholding Foreign Trusts (WTs) that, according to their agreements with the Internal Revenue Service (IRS), have chosen a periodic review year prior to 2019, and tax advisors seeking to provide these services and reports, will be interested in the newly published IRS Foreign Account Tax Compliance Act (FATCA) Frequently Asked Questions (FAQs) regarding independence standards on this review. 

What Changed

On April 5, 2019, the IRS updated their FATCA FAQs regarding periodic reviews and certifications.  Specifically, new FAQ (Q2) pushes the independence standard stated for periodic review years prior to 2018 to include years prior to 2019.

The QI, and WP/WT agreements cover periodic reviewer information in Sections 10.04 and 8.04, respectively.  Each agreement states that an internal or external reviewer must be independent.  In the Preamble to the QI agreement, we learn that the reviewer must have sufficient independence to conduct the review objectively and cannot review his or her own work or the work of others in the same "firm."  This means that an internal reviewer cannot review his or her own work, procedures or results.  Further, an external reviewer firm cannot review systems, policies, or procedures or the results of which it was involved in designing, implementing, or maintaining.

The terms "firm" and "independence" in the agreements raise an issue very particular to the information reporting world.  They seem to preclude external reviewers from firms that provided any type of services to support a QI, WP, or WT, in their systems, policies, or procedures.  Because this area of tax compliance is so niche and nuanced, the population of subject matter specialists is quite limited.  This means that the number of persons that might have the knowhow to conduct periodic reviews likely already helped implement the processes internally or that helped review systems, policies, or procedures externally.  Internal reviewers, without a doubt, would have helped management in their decision processes, as management likely would rely on the internal reviewers for their expertise.  Similarly, QIs, WPs, and WTs, may have relied on the support of an external firm for tax advisory services in their implementation.  What "independent" "firm" reviewers would be left to perform the periodic reviews?

This leaves a number of questions and comments from the industry.  There are some items that we all agree might case certain reviewers to cross the independence line, such as:
  • Reviewers with management responsibility or control of implementation of the QI, WP, or WP agreements, FATCA, or certain other integral functions required by the agreements.
  • Reviewers that are responsible for reviewing client withholding certificates, onboarding documents, applying withholding tax to payments made to clients, and calculating the amounts that will be reported on Forms 1042, 1042-S, 1099, 8966, and other related tax returns and information return reports.
But what about reviewers that are members of a firm that previously provided certain services – albeit through a different set of individuals?  All firms that offer information reporting services (and there are not many!) have provided at least one of the following levels of support:
  • Advising on FATCA, QI, WP, and WT rules and application.
  • Advising on the application of withholding and reporting rules under chapters 3, 61, and/or 4 in specific and general situations.
  • Preparing and submitting data to the IRS or local tax authority, but only with signoff and confirmation of correctness by the client regarding the underlying data.
  • Providing quality assurance review services to the QI, WP, or WT.
Due to the uncertainty of which "firms" might be allowed to conduct a periodic review and draft a report, the IRS has agreed that for review years prior to 2019, an external reviewer of a QI, WP, or WT may apply the standards of independence that would otherwise apply to its engagement to conduct the periodic review.  The IRS provides an example using the standards for an agreed-upon procedures (AUP) engagement by a certified public accountant.  Similar to the 2018 FAQ, the IRS does intend to update this FAQ to provide further guidance on the independence standard for reviews of calendar years 2019 and later.  But does this clarify anything?  What do the AUPs do?

AUPs generally require the following:
  • The reviewer performs specific procedures and provides the requestor with a report of factual findings based on the procedures performed. 
  • The requestor of the report determines and agrees to the procedures performed by the reviewer. 
  • The report distribution is limited to the requestor of the report.
In applying the AUPs to the periodic review scenario, the reviewer generally will be the subject matter specialist and will have to provide a fair amount of input in drafting or developing the specific procedures.  Is it okay for the reviewer to provide this insight?  Should there be an advisor that provides comment on the specific procedures and then a separate reviewer might carry out the procedures?  Finally, the reviewer would draft a report, but that report will be provided to and limited to the requester.  Could the requestor include this report as part of his or her basis for the periodic review?

Using the term "independence" causes a bit of confusion when crossing tax advisory services with AICPA assurance standards.  While everyone agrees that one should not review his or her own work and attest to its compliance, in the rather small information reporting world, this population becomes smaller and smaller based on the size of the institution that provides general tax advisory services.

How to Implement

In considering the updated FAQ that pushes the same concept from 2018 to 2019, we recommend including the following key stakeholders and specialists:
  • Tax and General Legal Counsel.
  • Independence, Risk Management, or other similarly aligned leaders.
  • Internal audit and other similarly aligned leaders.
  • Specialists that can identify areas of risk under tax law and accounting standards.
This applies to both parties, the requestor of the periodic review report and the person providing the report.  Before you engage with another party to perform a periodic review and draft a report, it is important to determine whether either of you will cross the independence threshold.


Tags: Foreign Account Tax Compliance Act (FATCA) | tax compliance | tax | United States



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