Compliance Assurance Process (CAP) - Frequently Asked Questions (FAQs)

 

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CAP Overview
How to apply for CAP
Eligibility and suitability criteria
New taxpayer transition rule
Phases of CAP
Issue identification, disclosures and materiality thresholds
Issue development and resolution
Termination and withdraw
Miscellaneous

CAP Overview

  • Large Business and International (LB&I) Division developed the Compliance Assurance Process (CAP) to improve the federal tax compliance of large corporate taxpayers. CAP employs real-time issue resolution tools and techniques. In CAP, the IRS and taxpayer work together to achieve tax compliance by resolving issues prior to the filing of the tax return. Successful conclusion of CAP allows the IRS to achieve an acceptable level of assurance regarding the accuracy of the taxpayer’s filed tax return and to substantially shorten the length of the post filing examination.
  • While CAP is not suitable for every taxpayer, it can deliver significant benefits to taxpayers and the IRS when CAP is working as intended:
    • Resolves issues prior to filing and provides tax certainty sooner.
    • Allows real-time review of transactions and promotes voluntary compliance.
    • Provides resource and time savings to both the IRS and taxpayers.
    • Complements current corporate governance and accountability.
    • Reduces the need for taxpayers to amend state tax returns.
    • Provides earlier identification of new and potentially emerging issues.
  • While the CAP Program can deliver significant benefits to both the taxpayer and the IRS, there are challenges.
    • Resource constraints may affect timely issue resolution.
    • Reticence to view the other party as a partner and to be less adversarial may elongate the process.
    • Aggressive timelines do not necessarily correspond to the complexity of certain issues.
    • Due to the complexity of certain issues, taxpayers may have more than one open filed tax year and one open unfiled tax year when the new CAP year begins.
  • The same standardized CAP Program MOU is used for each of the three phases of the CAP Program: CAP, CM and Bridge. The annual CAP MOU sets the expectations and requirements for both the taxpayer and the IRS. The only variable elements to the MOU are the taxpayer name, EIN, and tax year.

  • No.  As in traditional post-filing examinations, the IRS will respect all taxpayer rights and privileges.

  • The IRS LB&I Division manages the CAP Program. For additional information about and updates to the CAP Program, please visit the CAP webpage on IRS.gov.

How to apply for CAP

  • The applications and information about the CAP Application Process are available on the Compliance Assurance Process webpage. 
  • Taxpayers must apply for the CAP Program each year. The application period is typically from September 1st through October 31st.

  • Starting with the 2020 CAP Application period, new taxpayers are able to apply to the CAP Program.

Eligibility and suitability criteria

  • A CAP taxpayer must be a U.S. publicly held corporate taxpayer with assets of $10 million or more. A CAP taxpayer must not be under investigation by, or in litigation with, the IRS or any Federal or state agency which would limit access to current corporate tax records. If currently under IRS examination, must not have more than one filed return and one unfiled return open on the first day of the applicant’s CAP year. For further details and updates see the CAP Eligibility and Suitability Criteria on IRS.gov.
  • In general, taxpayers are required to file SEC Forms 10-K, 10-Q and 8-K.
  • Grandfathered privately-held and/ or grandfathered foreign owned taxpayers must provide audited U.S. GAAP Financial Statements on an annual basis and unaudited U.S. GAAP financial statements on a quarterly basis to be eligible for the CAP Program.
  • The disclosures presented in the notes of the quarterly and annual financial statements must fulfill the same requirements as in SEC reporting to be eligible for the CAP Program.
  • The grandfathered CAP taxpayer must submit audited U.S. GAAP annual financial statements to the CAP Program 90 days after the fiscal year end.
  • The grandfathered CAP taxpayer must submit unaudited quarterly financial statements under U.S. GAAP 45 days after the end of the quarter.
  • For the 2020 Compliance Assurance Process only, the grandfathered CAP taxpayer may combine the first quarter and second quarter unaudited U.S. GAAP financial statement results and submit these statements 45 days after the end of the second quarter.
  • The closed case eligibility criteria state that If currently in the CAP Program, must not have more than one filed return and one unfiled return open on the first day of the applicant’s CAP year. However, there are some exceptions where open years are considered closed. See the exceptions listed in the CAP Eligibility and Suitability Criteria page.
  • Taxpayers in the CAP Program must disclose any Federal or State Agency investigation that could limit the Service’s access to corporate books and records or could result in a material tax item.
  • Must adhere to all the CAP MOU commitments
  • Must timely respond and provide complete responses to formal and/ or informal information requests
  • Must engage in meaningful or good faith issue resolution discussions
  • Must thoroughly disclose material items, tax shelters and listed transactions in a timely manner
  • Must not file frequent claims
  • For further details and updates see the CAP Eligibility and Suitability Criteria on IRS.gov.

New taxpayer transition rule

  • For a new applicant currently under examination to be eligible for participation in the CAP Program, the current cycle must be closed, and the subsequent cycle not started on the first day of the applicant’s CAP year.
  • Unexamined returns with an open statute will be risk assessed as part of the required compliance check for the first CAP year to determine if an examination is warranted. See the CAP Eligibility and Suitability Criteria for more details.
  • Any unexamined returns that are placed under examination will be treated as one filed return for purposes of the return criterion. These returns must be closed by the first day of the third CAP year or the applicant may not be eligible to participate in the third CAP year. See the CAP Eligibility and Suitability Criteria for further details.

Phases of CAP

  • The CAP Program has three phases: the CAP Phase, the Compliance Maintenance (CM) Phase and the Bridge Phase.
  • In this phase, the parties work contemporaneously to achieve compliance and certainty by resolving all or most tax positions prior to filing of a tax return.  A successful pre-filing review allows the IRS to achieve an acceptable level of assurance regarding the accuracy of the taxpayer’s filed tax return.
  • The taxpayer will proactively provide the IRS with pertinent facts in order to develop material issues.
  • Transparency and cooperation should reduce the taxpayer’s and the IRS’ use of resources.
  • Within 30 days of the date the return is filed, the taxpayer will provide a Post-Filing Representation that states that the filed return is consistent with the pre-filing resolution agreements. The representation must be signed by an officer of the Taxpayer with authority to sign the Taxpayer’s U.S. income tax returns.
  • In the CM phase, the IRS, at its discretion, will adjust the level of review of the tax year based on the complexity and number of issues.
  • It is important to note that the CM Phase relies on the same provisions as the CAP Phase. The same MOU and criteria that apply to the CAP Phase also apply to the CM Phase.  Taxpayers will need to continue to make open, comprehensive, and contemporaneous disclosures of their completed business transactions in CM. After the taxpayer’s annual application for the CAP Program, LB&I will consider if CM or another phase is appropriate and will consider the taxpayer’s history of compliance, cooperation and transparency in the CAP Program.
  • To be eligible for the CM Phase
    • The taxpayer has completed at least one CAP cycle through post-file.
    • The taxpayer and the IRS have an effective CAP process in place and have a history of concluding post-file examinations timely.
    • A taxpayer in the CM Phase has a history of generally receiving full acceptance letters and has relatively few issues to be considered.
  • The Bridge phase is reserved for taxpayers whose risk of noncompliance does not warrant the continual use of LB&I examination resources. The IRS will not accept any taxpayer disclosures, will not review any issues and will not provide any assurance. If the taxpayer has a specific issue on which it wants certainty, the taxpayer may request a Pre-Filing Agreement (PFA) for that issue.
  • A taxpayer selected for the Bridge Phase remains in the CAP Program, executes the CAP MOU, and will be considered as a returning taxpayer when applying for the CAP program in the next application period.

  • See the 2020 Bridge Frequently Asked Questions for more details

Issue identification, disclosures and materiality thresholds

  • As part of the CAP Application Process, the taxpayer will submit Form 14234-C, Taxpayer Initial Issues List.  The taxpayer will disclose known or expected transactions for the upcoming CAP tax year.  The taxpayer and CAP team will work together to determine which of these preliminary issues will be included as part of the CAP review.
  • As the CAP year progresses, the taxpayer will make contemporaneous disclosures of all additional material issues. 
  • In addition to issues disclosed by the taxpayer, the IRS may identify issues for potential consideration based on the review of various sources of information, such as SEC filings.
  • Taxpayers are required to make disclosures of material transactions and issues. Taxpayer disclosures must be in writing and include a full description of each step in the process, the historical facts, the surrounding circumstances, the proposed reporting position, and the associated tax authority.
  • Taxpayers must disclose uncertain transactions below the materiality threshold if those transactions would ordinarily need to be reported on Schedule UTP.
  • In CAP, taxpayers make open, comprehensive, and contemporaneous disclosures of their material issues.  To be considered contemporaneous, an issue must now be disclosed within 30 days of the transaction being completed or of becoming aware of an issue having a material impact upon the federal income tax liability. 
  • While the MOU states that the issue must be “fully” disclosed within 30 days, there is recognition that taxpayers may not have all the information needed to make a full disclosure at the 30-day juncture.  As such, a taxpayer will meet this requirement by providing as much information as possible within 30 days (sufficient information to facilitate preliminary resource planning and risk assessment by the CAP team) and completes its full disclosure within 90 days of the transaction being completed or of becoming aware of an issue having a material impact upon the federal income tax liability. 
  • The MOU continues to provide that the latest date for the taxpayer to submit disclosures is 90 days after the end of the tax year.
  • This change from 90 to 30 days is rooted in allowing sufficient time for issue resolution in a pre-filing environment.  Moving from a periodic or quarterly disclosure model and more toward a contemporaneous disclosure model ultimately better positions the taxpayer to meet the number of open years eligibility criteria going forward.
  • Within the CAP program, materiality thresholds are mutually agreed upon amounts that are used as a guide for both the IRS and the taxpayer in determining which issues and transactions to review. There are separate thresholds for permanent and timing items and tax credits.
  • The taxpayer and the IRS will openly discuss situations where exceptions to the materiality threshold may be warranted.  However, the ultimate decision of identifying issues for the compliance review remains within the discretion of the IRS.
  • Materiality thresholds do not affect any adjustment to arrive at the corrected tax return amount on an Issue Resolution Agreement (IRA), or an adjustment to the tax return on a Form 5701 Notice of Proposed Adjustment (NOPA).
  • Tax Shelters
  • Listed Transactions
  • Transactions of Interest
  • Fraudulent Transactions
  • LB&I Compliance Initiatives
  • LB&I Directives
  • Emerging Issues

Issue development and resolution

  • In CAP the IRS reviews completed business transactions in real-time when the necessary specialists, experts and records are available.
  • The taxpayer must facilitate the participation of their knowledgeable employees in issue development. The taxpayer must fully disclose and provide all pertinent information.
  • Both the IRS and the Taxpayer must agree that all the relevant facts have been provided.
  • Once an issue has been fully disclosed by the taxpayer, the IRS will ordinarily have 90 days to complete the review and determine agreement or disagreement with the tax treatment.  If additional time is required beyond the 90 days to complete a review of the issue, the Territory Manager in collaboration with the Issue Territory Manager, if applicable, may approve additional time.  The IRS will promptly inform the taxpayer of any approved extensions of time. 
  • Issue resolution is structured to provide timely specialist and Counsel support throughout the process. If for some reason resolution cannot be reached in the pre-filing environment, the IRS will issue a Partial Acceptance Letter and allow the resolution process to continue in a post-filing examination.
  • All Issue Resolution Tools remain available to the CAP team and taxpayers throughout the pre-filing and post-filing activities.
  • The CAP Program does not put the IRS in the business of providing tax advice. The CAP Team reviews fully disclosed completed business transactions and determines the resulting tax consequences.
  • A completed business transaction is one where the tax treatment of that transaction or item can no longer be affected by events that have not yet occurred.
  • “Because the CAP Program does not change existing Service procedures for issuing determinations regarding prospective transactions or incomplete transactions and oral discussions of these types of transactions present significant hazards, CAP teams should not discuss with taxpayers the tax implications of any transaction or item until the tax treatment of that transaction or item can no longer be affected by events that have not yet occurred.” CCA No. 200944040

 

  • A prospective transaction is one that has not yet occurred.  CCA No. 200944040
  • An incomplete transaction or issue is one for which the tax consequences may be affected by events that have not yet occurred. CCA No. 200944040
  • Fast Track is available as an Issue Resolution Tool during the CAP on an issue by issue basis both during pre-filing and post-filing.
  • If the tax treatment of an issue is unagreed between the Parties after 90 days from the date of full disclosure, or different period if an extension is approved, an application to FTS may be made.  If the IRS offers FTS, the taxpayer must agree to FTS and both Parties will make a good faith attempt to resolve the disagreement.  If an issue is still unagreed after FTS, the taxpayer and IRS may use other applicable issue resolution processes such as a submission to Appeals.
  • Once the taxpayer elects FTS in pre-filing, it cannot be used for the same issue during post-filing.

  • All Appeals rights will remain available to the taxpayer.

  • Full Acceptance Letters are issued if all the issues under consideration have been resolved in the pre-filing period. Partial Acceptance Letters are issued if one or more issues are unresolved at the end of the pre-filing period.

  • The IRS and the taxpayer will conduct a joint post-filing exam to verify that all items or issues were reported and disclosed as agreed and there were no new items or issues on the return that were not disclosed.
  • For 2019 tax years and forward, the Full or Partial Acceptance Letter will be issued after the team reviews the taxpayer’s Post Filing Representation.
  • If the items or issues were reported as agreed and no new items or issues were discovered, the IRS will issue a No Change Letter to conclude the exam.
  • If the items or issues were not reported as agreed, or new items or issues are identified in post-filing, an issue focused examination will be conducted for those items or issues and normal post-filing procedures will be followed.

Termination and withdraw

  • If the Taxpayer or the IRS is unable or has failed to comply with the responsibilities and obligations contained in the CAP Memorandum of Understanding (MOU), the parties will attempt to resolve their concerns.
  • If the concerns cannot be resolved and the IRS determines that the Taxpayer continues to fail to adhere to the terms of this MOU, the Territory Manager assigned to the case will issue a written notice of the IRS concerns.
  • If the stipulated concerns are not resolved within 30 days after receiving a written notice of IRS concerns, the DFO assigned to the case will issue a Termination Letter to the taxpayer and the taxpayer’s participation in the CAP Program will cease.
  • The IRS may then conduct a traditional post-filing examination of the Taxpayer’s return after it is filed.
  • If at any time the taxpayer determines it cannot comply with the MOU requirements, the taxpayer may submit a written request to withdraw from the CAP and the IRS will issue a Termination Letter.

Miscellaneous

  • The IRS’ participation in the pre-filing review during the CAP or Compliance Maintenance (CM) Phase does not constitute an examination or inspection of the taxpayer’s books of account for purposes of IRC section 7605(b).
  • The Account Coordinator (AC) is the primary contact for the taxpayer.
  • The CAP Plan includes essential aspects of the process, including the Organizational Structure, Materiality and Other Pertinent Agreements, Communications Agreement (Taxpayer Contacts), Internal Revenue Service CAP Team Members and the Timeline.
  • The CAP Plan attaches certain documents including but not limited to the CAP MOU, the Initial Issues List and, if applicable, the Secure Enterprise Messaging System (SEMS) Memorandum of Understanding.
  • CAP taxpayers with uncertain tax positions at their tax return filing will be required to file Schedule UTP.
  • Acquired entities that are owned 100% by the CAP taxpayer and that will be included in the consolidated return are subject to the CAP MOU after the acquisition is completed.  The short year return of the acquired entity (the period before the entity was acquired) can be reviewed in the CAP environment if the CAP taxpayer has control over the preparation of the short period return.
  •  The short period return for entities departing the consolidated group should not come under the purview of the CAP MOU since the departing entities are no longer under the control of the CAP taxpayer. 
  • If a CAP Program taxpayer owns 100% of a partnership, either directly or indirectly, the completed business transactions of the partnership can be worked real-time before the partnership return is filed.
  • If the CAP Program taxpayer does not own 100% of a partnership, either directly or indirectly, the completed business transactions of the partnership cannot be worked until the partnership return is filed. 
  • The procedures of Rev. Proc. 94-69 are not applicable to CAP taxpayers.
  • The requirements in Attachment 1 of the Directive issued on February 28, 2014 for issuing IDRs apply to the pre-filing and post-filing period of CAP cases.  However, the IDR enforcement process outlined in Attachment II of the Directive applies to only filed returns and would only apply during the post-filing period of CAP. 
Page Last Reviewed or Updated: 25-Aug-2023