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The QI audit must be carried out in accordance with the requirements of Rev. Proc. 2000-12 (QI Agreement) utilizing the procedures contained in Rev. Proc. 2002-55 (QI Audit Guidelines) as subsequently amended by the IRS. The audit methodology to be used is “agreed upon procedures” (AUP) based upon the procedures as contained in the QI Audit Guidelines. The QI Audit Guidelines provide for an incremental three phase QI audit process. The first phase, Phase 1, consists of the collection of information regarding the QI procedures of the QI during the audit year. In case substantial non-compliance is reported during Phase 1, the IRS may notify the QI and the QI’s external auditor that a Phase 2 QI audit is required and additional fact finding will be required. In case the Phase 2 findings reveal further non-compliance the IRS may request a Phase 3 fact finding. The decision to request a Phase 2 or Phase 3 QI audit is at the sole discretion of the IRS.

The audit of a PAI is conducted using the same methodology and procedures as for a QI.

The QI audit must be performed by an auditor listed in Appendix B of the QI Agreement. The QI must notify the IRS in writing if it wishes to have the QI audit performed by a different auditor.

The QI audit report for the 2009 audit year must be submitted to the IRS by June 30, 2010. The QI auditor may request the IRS for an extension until December 31, 2010 to submit the QI audit report.

The QI Audit Guidelines allow the QI auditor to perform a modified QI audit in case the reportable amounts of the QI for the audit year do not exceed US$5,000,000. The principle advantage of utilizing the modified audit procedures is to reduce the size of the audit sample in case the QI client population is larger than 780. The other advantage is that the QI Modified External Auditor’s Report presents the audit findings in a manner more easily understood.

There are two standard QI audit reports, the QI External Auditor’s Report and the QI Modified External Auditor’s Report. Although it is not required that the QI auditor utilize the standard reports, it is strongly recommended so as to ensure the completeness of the QI audit. The most recent standard QI audit reports (in Excel format) were released by the IRS in April 2006. Make sure to change “2005” in the standard report to the actual audit year.

Make sure to check the QI FAQ's on the IRS web site for important information for external QI auditors.