4.51.8  Compliance Assurance Process (CAP) Examinations

Manual Transmittal

September 25, 2015

Purpose

(1) This transmits revised IRM 4.51.8, LB&I Case Management, Compliance Assurance Process (CAP) Examinations.

Background

CAP is a method of identifying and resolving tax issues through open, cooperative, and transparent interaction between the Internal Revenue Service (IRS) and Large Business and International (LB&I) taxpayers prior to the filing of a return. Through the CAP Program (the Program), the taxpayer should achieve tax certainty sooner and with less administrative burden than conventional examinations.

The CAP Program was initiated as a pilot for large business taxpayers in 2005, and became permanent on March 31, 2011.

Material Changes

(1) Clarification was added on the use of materiality thresholds in subsections 4.51.8.4 (10) and (11) and 4.51.8.5 (11).

(2) New subsection 4.51.8.5.1 was added to address transfer pricing and advance pricing agreement issues.

(3) Eligibility requirements for Compliance Maintenance were updated to require the completion of two entire CAP cycles in subsections 4.51.8.3 (3) and 4.51.8.6 (1).

(4) Subsections 4.51.8.4 (3) and 4.51.8.5 (3) were revised to change the preferred method of submitting a Pre-CAP and CAP application if under examination, and to add an email address as the only method to send applications if not under examination.

(5) Clarification was added on the timing of movement of a taxpayer between Compliance Maintenance and CAP in section 4.51.8.6 (3).

(6) The effect of the new LB&I IDR Enforcement Directive on the Pre-CAP and CAP IDR process was addressed in sections 4.51.8.4 (18) and 4.51.8.5 (18).

(7) Subsection 4.51.8.5 (33) was added to address types of tax returns not included in CAP.

(8) Subsection 4.51.8.5 (34) was added to address that Rev. Proc. 94-69 is not applicable to CAP.

(9) Subsections 4.51.8.4 (19) and 4.51.8.5 (21) were updated to reflect the joint IRS and taxpayer evaluation of cooperation and transparency.

(10) Subsection 4.51.8.2 (4) was added to list the IRS goals of the CAP Program

(11) Editorial changes have been made throughout.

Effect on Other Documents

IRM 4.51.8 dated June 15, 2012 is superseded.

Audience

LB&I personnel

Effective Date

(09-25-2015)

Tina D. Meaux
Director, Pre-Filing and Technical Guidance (PFTG)
Large Business and International Division

4.51.8.1  (09-25-2015)
Introduction

  1. The IRS initiated the Compliance Assurance Process (CAP) Pilot for large business taxpayers in 2005. See Announcement 2005-87, 2005-50 IRB 1144. The CAP Program (the Program) is structured to conduct real-time compliance reviews to establish the correct tax treatment of tax return positions prior to a taxpayer filing its federal income tax return.

  2. News Release IR 2011-32 (March 31, 2011) announced that the Program was being made permanent, and expanded to include the Pre-CAP and Compliance Maintenance phases.

4.51.8.2  (09-25-2015)
Overview of the Program

  1. The Program consists of three phases: Pre-CAP, CAP, and Compliance Maintenance.

  2. The Program focuses on issue identification and resolution through transparent and cooperative interaction between taxpayers and the IRS. The Program requires a contemporaneous exchange of information related to a taxpayer’s proposed return positions and its completed events and transactions that may affect federal tax liability.

  3. Taxpayers in the Program are able to achieve tax certainty sooner and with less administrative burden than in the traditional post-filing examination program, allowing taxpayers to better manage tax reserves and ensure more precise reporting of earnings on financial statements.

  4. Goals of the Program include:

    1. Ensure compliance through enhanced efficiency in issue identification and resolution

    2. Increase transparency and collaboration between the IRS and taxpayers

    3. Reduce burden of tax administration and compliance

  5. The Program does not provide taxpayers with guidance on, or resolution of, prospective or incomplete transactions outside of existing procedures.

4.51.8.3  (09-25-2015)
The Three Phases of the Program

  1. In the Pre-CAP phase, taxpayers work with the IRS in the traditional post-filing examination process to close examinations of filed tax returns with the goal of meeting the CAP selection criteria and progressing to the CAP phase. During this phase, taxpayers must execute the Pre-CAP Memorandum of Understanding (MOU). Taxpayers and the IRS develop an action plan to examine tax returns of the open years within an agreed upon timeframe. During the Pre-CAP phase, taxpayers are expected to display the same level of transparency and cooperation that is required of taxpayers in the CAP phase. Taxpayers will make open, comprehensive, and prompt disclosures of the transactions, description of steps within the transaction that have a material effect on their federal income tax liability, and other tax return items and issues related to the positions taken on their filed tax returns.

  2. In the CAP phase, taxpayers will make open, comprehensive, and contemporaneous disclosures of their completed business transactions. Taxpayers must also disclose the steps within those transactions and other material items and pertinent facts regarding material items that occur during the CAP year that could have a material effect on their federal income tax liability and other items or issues that meet the agreed materiality thresholds. Further, taxpayers must disclose their proposed tax positions with regard to these disclosures. During this phase, taxpayers must execute the CAP Memorandum of Understanding (MOU). Taxpayers who resolve all material items and positions taken with regard to transactions with the IRS are assured prior to the filing of their tax returns that the IRS will accept their tax returns if filed consistent with the resolutions agreed to by the taxpayer and the IRS. Items and positions that cannot be resolved prior to the filing of the return, or any new material items or positions discovered on the return, as filed, will be resolved through traditional post-filing examination processes.

  3. Taxpayers who continue to meet the CAP eligibility requirements and expectations, and have completed two full CAP cycles, may progress, if approved, to the Compliance Maintenance phase. During this phase, taxpayers must execute the CAP Memorandum of Understanding (MOU) and provide the required information. In the Compliance Maintenance phase, the IRS reduces the level of review based on the complexity and number of issues, and the taxpayer’s history of compliance, cooperation and transparency in the CAP. In this phase, taxpayers will continue making open, comprehensive, and contemporaneous disclosures of their completed business transactions. Taxpayers must also disclose the steps within those transactions and other material items and pertinent facts regarding material items that occur during the CAP year that could have a material effect on their federal income tax liability and other items or issues that meet the agreed materiality thresholds. Further, taxpayers must disclose their proposed tax positions with regard to these disclosures. Taxpayers who resolve all material items and issues with the IRS are assured prior to the filing of their tax returns that the IRS will accept their tax returns if filed consistent with the resolutions agreed to by the taxpayer and the IRS. Items and issues that cannot be resolved prior to the filing of the return, or any new material items or issues discovered on the return, as filed, are resolved through traditional post-filing examination processes.

  4. A taxpayer can withdraw from any phase of the CAP by submitting a written request. Additionally, the IRS can terminate a taxpayer’s participation in any phase when the taxpayer fails to adhere to the terms of the Program.

4.51.8.4  (09-25-2015)
The Pre-CAP Phase

  1. Taxpayers under examination on filed tax returns (other than the most recently filed tax return) that are otherwise eligible for the CAP may request participation in the Pre-CAP. The Pre-CAP is a process by which the IRS and taxpayers work to resolve ongoing examinations on filed tax returns so that the taxpayer may become eligible for the CAP. Taxpayers not under examination for any tax year may apply for either the Pre-CAP or the CAP. With respect to taxpayers not under examination, prior open year returns will be inspected for purposes of risk assessment and the IRS reserves the right to open tax years for examination should the circumstances warrant.

  2. To be eligible for participation in the Pre-CAP, taxpayers must meet the following criteria:

    1. Have assets of $10 million or more;

    2. Be a publicly held entity with a legal requirement to prepare and submit Forms 10K, 10Q, 8K or 20F or other disclosure type forms to the Securities and Exchange Commission or equivalent regulatory body or, if privately held, agree to provide to the IRS certified, audited financial statements on a quarterly basis or equivalent documentation;

    3. Not be under investigation by, or in litigation with, the IRS or other federal or state agency that would limit the IRS’ access to current corporate tax records.

  3. Taxpayers who meet the eligibility requirements for the Pre-CAP must complete the required application. Pre-CAP applications may be submitted by taxpayers at any time. Taxpayers accepted into the Pre-CAP need not re-apply for the Pre-CAP annually as long as they do not withdraw or are not terminated from the Pre-CAP.
    The Pre-CAP application is available at http://www.irs.gov/pub/irs-utl/cap_form_final.pdf and should be submitted by one of the following methods:

    1. If a taxpayer is under examination, submit to the Team Coordinator or Case Manager.

    2. If not under examination, email the completed Pre-CAP Application to: lbi.irs.cap.program@irs.gov. Enter "Pre-CAP Application" and the tax year in the subject line.

  4. If a taxpayer meets the eligibility criteria, the application is sent to the LB&I Industry Director with jurisdiction over the taxpayer for an evaluation of the application. The Industry Director will make a determination regarding the taxpayer’s suitability for the Pre-CAP.

  5. If a taxpayer’s Pre-CAP application is approved by the IRS, the taxpayer will be notified, in writing, by the Territory Manager assigned to the taxpayer that its Pre-CAP application is approved. After approval and prior to acceptance into the Pre-CAP, taxpayers must execute a standardized Pre-CAP MOU (http://www.irs.gov/pub/irs-utl/pre-cap_mou-final.pdf) that outlines the Pre-CAP requirements and establishes the agreement to meet the requirements. The Pre-CAP MOU is effective for the first Pre-CAP year and will continue for all years until either:

    1. the transition years are closed in examination and the taxpayer fulfills the CAP selection criteria,

    2. the taxpayer is terminated from the Pre-CAP, or

    3. the taxpayer voluntarily withdraws from the Pre-CAP.

    Once the Pre-CAP MOU is executed by the taxpayer and the IRS, the taxpayer is accepted into the Pre-CAP.

    Note:

    The Pre-CAP MOU defines specific objectives for the Pre-CAP, sets parameters for the disclosure of information, describes the methods of communication, and serves as a statement of the parties’ commitment to good-faith participation in the Pre-CAP.

  6. The IRS, in its sole discretion, may decline to approve a taxpayer’s application for the Pre-CAP when appropriate in the interest of sound tax administration, whenever warranted by the facts and circumstances of a particular case. If a taxpayer’s Pre-CAP application is not approved, the taxpayer will be informed in writing of that decision, including the reasons that led to that decision. The taxpayer may appeal this decision to the Deputy Commissioner (Operations), LB&I.

  7. Adherence to the processes established by the MOU is an integral part of identifying and resolving items and issues and assuring the IRS of the accuracy of the tax return and meeting the goals of the Pre-CAP phase. Failure to comply with the terms of the MOU will result in removal of the taxpayer from the Pre-CAP.

  8. Once a taxpayer is accepted into the Pre-CAP, the IRS will assign a Team Coordinator (TC) to the taxpayer. The TC serves as the primary IRS representative, facilitates compliance, and provides a single point of contact for all federal tax matters. The IRS will also provide a list of additional IRS participants on the Pre-CAP team to the taxpayer. The IRS team members will include, but may not be limited to, the Team Manager, the Territory Manager, and the Director, Field Operations (DFO). Similarly, the taxpayer must provide a list of designated personnel to act as points of contact for gathering information and resolving questions or issues.

    Note:

    If the TC is unable to continue to act in the role of the TC or the IRS determines the need to replace the TC, the IRS will notify the taxpayer and promptly assign a successor.

  9. Under the Pre-CAP, the IRS and taxpayers work together to develop an action plan to complete all required examinations within an established timeframe. During the Pre-CAP phase, taxpayers must exhibit the same level of transparency and cooperation that is required of taxpayers in the CAP phase. Taxpayers must identify transactions, material items and steps within the transactions, and other tax return items and positions taken on their filed returns and provide relevant information within the established timeframes. The taxpayer disclosures described in this paragraph will be in writing.

  10. The IRS and taxpayers will jointly determine the scope of the Pre-CAP examinations, including materiality thresholds. Materiality thresholds are used as a guide by both parties in determining the transactions to review. The parties will openly discuss situations where exceptions to the materiality threshold may be warranted. However, the ultimate decision of identifying transactions, items and issues for the Pre-CAP examinations remains within the discretion of the IRS. Materiality thresholds may be reconsidered during the Pre-CAP examination. The materiality thresholds will be documented in the Pre-CAP action plans.

  11. Materiality thresholds are used in Pre-CAP for the taxpayer to know which transactions may be reviewed. They are not relevant to the adjustments that may be made with regard to the tax consequences of such transactions. Therefore, adjustments to examined transactions may be made that are below the materiality thresholds.

  12. Notwithstanding the materiality thresholds and issue identification procedures discussed above, the IRS may conduct an examination of the following items regardless of when or how they are identified:

    • Tax shelters

    • Listed transactions

    • Transactions of interest

    • Fraudulent items

    • LB&I compliance initiatives

    • Industry Director and Operating Division Directives

    • Emerging issues

    In addition, obvious computational/mathematical or accounting errors/omissions that are not technical or legal in nature may be corrected.

  13. Taxpayers will provide information and documentation proactively and as requested by the TC. The TC will promptly review all relevant information provided and will communicate to the taxpayer whether:

    1. Additional information is required.

    2. The IRS disagrees with the taxpayer’s tax treatment.

    3. The tax treatment is appropriate.

  14. Taxpayers will provide the IRS with:

    • An industry overview

    • Current legal, accounting, and tax organizational charts reflecting all related entities and the flow of relevant information involving those entities

    • Financial performance information

    • Information on any significant events that affected the reporting for the tax year

    • Access to accounting records and systems

    • Necessary resources for disclosure of requested information

  15. Taxpayers will provide the TC with tax schedules and computations for all rollover and recurring adjustments from any previously examined and closed tax period(s) that impact the returns of the Pre-CAP years, including the impact of any closing agreements or Appeals settlements. Taxpayers will provide these disclosures within 15 business days of the Pre-CAP Opening Conference.

  16. Taxpayers will provide notice and documentation of any subsequent resolution(s) of items or issues in prior exam cycles within 15 business days of the agreed determination(s). The IRS and the taxpayer will discuss the effect of such resolutions on any unexamined tax year(s) and on the Pre-CAP years and incorporate the changes as appropriate.

  17. Taxpayers will immediately notify the TC of any investigation initiated on the taxpayer by a federal or state agency. The notification should include: a detailed explanation of the investigation, an evaluation of whether access to corporate books and records could be limited, and any material tax item(s) that could result from the investigation.

  18. The scope of any necessary Information Document Requests (IDRs) will be discussed in an open and honest manner and the parties will reach mutually agreed upon due dates for the responses. If for any reason the taxpayer is unable to comply with the due date of an IDR, IRM 4.46.4.4, Information Document Request Management Process, which is impacted by the LB&I IDR Enforcement Directive under LB&I Control No. LB&I 04-0214-004, applies and a delinquency notice and subsequent summons may be issued. The IRS will promptly evaluate the IDR responses for completeness and, after a thorough analysis of the responses, will discuss the results of the review with the taxpayer. Both the IRS and the taxpayer must strive for expediency and urgency during this examination process in order to meet the Program objectives.

  19. The Case Manager, other members of the Pre-CAP team, and the taxpayer will meet to evaluate and document the transparency and cooperation of both parties at lease quarterly.

  20. See IRM 4.51.8.7 for rules relating to disputes, terminations, or withdrawals from the Pre-CAP. If a taxpayer is terminated or withdraws from the Pre-CAP, the IRS will continue with a traditional post-filing examination of the taxpayer’s filed returns.

  21. The Pre-CAP phase ends when the taxpayer is eligible for the CAP phase, is terminated from the Pre-CAP or elects to discontinue participation in the Pre-CAP.

4.51.8.5  (09-25-2015)
The CAP Phase

  1. The CAP employs real-time issue resolution to improve federal tax compliance. The IRS and the taxpayers work contemporaneously to achieve federal tax compliance by resolving all or most positions prior to filing of a tax return. Successful conclusion of the CAP allows the IRS to achieve an acceptable level of assurance regarding the accuracy of the taxpayer’s filed tax return and to substantially reduce the need for a traditional post-filing examination.

  2. To be eligible for participation in the CAP, a taxpayer must meet the following criteria:

    1. Have assets of $10 million or more;

    2. Be a publicly-held entity with a legal requirement to prepare and submit Forms 10K, 10Q, 8K or 20F or other disclosure type forms to the Securities and Exchange Commission or equivalent regulatory body or, if privately-held, agree to provide to the IRS certified, audited financial statements on a quarterly basis or equivalent documentation;

    3. Not be under investigation by, or in litigation with, the IRS or other federal or state agency that would limit the IRS’ access to current corporate tax records; and

    4. If currently under examination, must not have more than one filed return that has not been closed in examination and one unfiled return for the year that has most recently ended, the return for which is not yet due.

  3. Taxpayers who meet the eligibility requirements for the CAP must complete the required application for acceptance into the CAP phase annually. CAP applications must be submitted between September 1 and October 31 of the year immediately preceding the CAP year. The CAP application is available at http://www.irs.gov/pub/irs-utl/cap_form_final.pdf and should be submitted by one of the following methods:

    1. If a taxpayer is under examination or is a returning CAP taxpayer, submit to the Account Coordinator, Team Coordinator or Case Manager.

    2. If not under examination, email the completed CAP Application Form to lbi.irs.cap.program@irs.gov. Enter "CAP Application" and the tax year in the subject line.

  4. If a taxpayer meets the eligibility criteria, the application will be forwarded to the LB&I Industry Director with jurisdiction over the taxpayer for an evaluation of the application. In evaluating an application, the IRS will consider the following factors:

    • Level of cooperation and transparency and adherence to the MOU in prior CAP years or Pre-CAP years

    • The IRS and taxpayer resources

    • Whether the taxpayer had a majority ownership change

    • If the taxpayer had material financial restatements and the reasons for those restatements

  5. If a taxpayer’s CAP application is approved by the IRS, the taxpayer will be notified, in writing, by the Territory Manager assigned to the taxpayer, that its CAP application is approved. After approval and prior to acceptance into the CAP, taxpayers must execute a standardized CAP MOU (http://www.irs.gov/pub/irs-utl/capmou-final.pdf) that outlines the CAP requirements and establishes the agreement to meet the requirements. The MOU must be executed by the taxpayer and returned to the DFO by January 31 of the CAP year. Once the MOU is executed by the taxpayer and the IRS, the taxpayer will be accepted into the CAP.

    Note:

    The CAP MOU defines specific objectives for the CAP, sets parameters for the disclosure of information, describes the methods of communication, and serves as a statement of the parties’ commitment to good-faith participation in the CAP.

    Note:

    The CAP MOU is applicable to a single tax year, known as the CAP year. A new MOU is executed for each CAP year. To continue in CAP, taxpayers must reapply, be accepted into CAP, and execute a new MOU for each CAP year. Taxpayers in the CAP must continue to meet the CAP criteria and fulfill the CAP expectations to continue in the CAP.

  6. The IRS, in its sole discretion, may decline to approve a taxpayer’s application for CAP when appropriate in the interest of sound tax administration or whenever warranted by the facts and circumstances of a particular case. If a taxpayer’s CAP application is not approved, the taxpayer will be informed in writing of that decision, including the reasons that led to that decision. The taxpayer may appeal this decision to the Deputy Commissioner (Operations), LB&I.

  7. Adherence to the processes established by the MOU is an integral part of identifying and resolving items and issues and assuring the IRS of the accuracy of the tax return. Failure to comply with the terms of the MOU will result in removal of the taxpayer from the CAP.

  8. Once a taxpayer is accepted into the CAP, the IRS will assign an Account Coordinator (AC) to the taxpayer. The AC serves as the primary IRS representative, facilitates compliance, and provides a single point of contact for all federal tax matters. The IRS will also provide a list of additional IRS participants on the CAP team to the taxpayer. The IRS team members will include, but may not be limited to, the Team Manager, the Territory Manager, and the DFO. Similarly, the taxpayer must provide a list of designated personnel to act as points of contact for gathering information and resolving questions or issues.

    Note:

    If the AC is unable to continue to act in the role of the AC or the IRS determines the need to replace the AC, the IRS will notify the taxpayer and promptly assign a successor.

  9. Under the CAP, the IRS and taxpayers work together on a contemporaneous basis toward the goal of achieving an acceptable level of tax compliance prior to the filing of the tax return. Taxpayers are expected to make open, comprehensive, and contemporaneous disclosures of their completed business transactions. Taxpayers must also provide a description of the steps within those transactions and other material items and pertinent facts regarding material items that occur during the CAP year that could have a material effect on their federal income tax liability and other items or issues that meet the materiality thresholds agreed to in the MOU. Further, taxpayers must disclose their proposed tax positions with regard to these disclosures. The taxpayer’s disclosures described in this paragraph will be in writing.

  10. For purposes of the CAP, a matter that has a material effect includes, but is not limited to:

    1. Those items the taxpayer will or would be required to reserve for purposes of any financial statement for the CAP year

    2. Those items the taxpayer anticipates that it will or would be required to reserve for purposes of any financial statement for any period subsequent to the CAP year

  11. The IRS and the taxpayer will jointly determine the scope of the CAP review, including materiality thresholds. Materiality thresholds are used as a guide by both parties in determining the scope of transactions to disclose and review. The parties will openly discuss situations where exceptions to the materiality threshold may be warranted. Materiality thresholds are used in CAP for the taxpayer to know which completed business transactions should be disclosed. They are not relevant to the adjustments that may be made with regard to the tax consequences of such transactions. Therefore, adjustments to examined transactions may be made that are below the materiality thresholds. The ultimate decision of identifying transactions, items and issues for compliance review remains within the discretion of the IRS. Further, materiality thresholds may be reconsidered during the CAP. The materiality thresholds will be documented in the CAP Plan and apply only to the relevant CAP year. The CAP Plan will be discussed with and provided to the taxpayer.

  12. Notwithstanding the materiality thresholds and issue identification procedures discussed above, the IRS may consider for a compliance review the following items regardless of when or how they are identified:

    • Tax shelters

    • Listed transactions

    • Transactions of interest

    • Fraudulent items

    • LB&I compliance initiatives

    • Industry Director and Operating Division Directives

    • Emerging issues

    In addition, obvious computational/mathematical or accounting errors/omissions that are not technical or legal in nature may be corrected.

  13. Taxpayers will provide information and documentation proactively and as requested by the AC. The AC will promptly review all relevant information provided and will communicate to the taxpayer whether:

    1. Additional information is required.

    2. The IRS disagrees with the taxpayer’s proposed tax treatment.

    3. The proposed tax treatment is appropriate.

  14. Taxpayers will provide the IRS with:

    • An industry overview

    • Current legal, accounting, and tax organizational charts reflecting all related entities and the flow of relevant information involving those entities

    • Financial performance information

    • Information on any anticipated significant events that will affect the reporting for the tax year

    • Access to accounting records and systems

    • Necessary resources for disclosure of requested information

  15. Taxpayers will provide the AC with tax schedules and computations for all rollover and recurring adjustments from any previously examined and closed tax period(s) that impact the CAP year return, including the impact of any closing agreements or Appeals settlements. Taxpayers should provide these initial disclosures within 15 business days of the CAP Opening Conference.

  16. Taxpayers will provide notice and documentation of any subsequent resolution(s) of items or issues in prior exam cycles within 15 business days of the agreed determination(s). The IRS and the taxpayer should discuss the effect of such resolutions on any unexamined tax year(s) and on the CAP year and incorporate the changes as appropriate.

  17. Taxpayers will immediately notify the AC of any investigation initiated on the taxpayer by a federal or state agency. The notification should include:

    • A detailed explanation of the investigation

    • An evaluation of whether access to corporate books and records could be limited

    • Any material tax item(s) that could result from the investigation

  18. The scope of any necessary IDRs should be discussed in an open and honest manner and the parties should reach mutually agreed upon due dates for the responses. If for any reason the taxpayer is unable to comply with the due date of an IDR, the taxpayer will notify the IRS immediately, and explain the circumstances for the delay, and will agree to a revised due date. The IRS will promptly evaluate the IDR responses for completeness and, after a thorough analysis of the responses, will discuss the results of the review with the taxpayer. Both the IRS and the taxpayer must strive for expediency and urgency during this real-time compliance review process in order to meet the CAP Program objectives. With respect to IDRs, IRM 4.46.4.4, Information Document Request Management Process applies. The requirements in Attachment I of the LB&I IDR Enforcement Directive, issued on February 28, 2014, apply to the pre-file and post-filing phases of CAP cases. However, the IDR enforcement process outlined in Attachment II of the Directive applies only to filed returns and would only apply during the post-filing phase of CAP.

  19. Taxpayers and the IRS should interact on a regular basis. Regular periodic (weekly, monthly, or, at a minimum, quarterly) meetings should be held to discuss and provide relevant information, documentation and interviews, and, as needed, to discuss the status of the CAP and resolve concerns as they arise during the course of the CAP. Each party should have in attendance representatives with authority to resolve any problems, issues or concerns being addressed.

  20. On a quarterly basis, the AC will prepare a list of disclosures made by the taxpayer during that quarter. This list will be submitted to the taxpayer to verify that the items disclosed are all the material items and steps within the transactions completed to date.

  21. The CAP Case Manager, other members of the CAP Team, and the taxpayer will meet to evaluate and document the transparency and cooperation of both parties at least quarterly.

  22. The IRS and taxpayers will work together during the CAP to identify and review material transactions and issues. The IRS and taxpayers should regularly engage in discussions for the purpose of resolving any factual or technical differences related to the identified transactions and issues. After the IRS and a taxpayer have completely addressed atransaction or issue, the IRS will draft an Issue Resolution Agreement (IRA) for each transaction or issue reviewed in the CAP, except in the case of transactions or issues that are resolved through simple factual clarification. Upon the issuance of each IRA, the IRS and the taxpayer will mutually agree to a timely response date. In the response, the taxpayer will indicate their agreement or disagreement with the IRA. If the taxpayer is in disagreement with the IRA, they will state all relevant facts and legal arguments for their position(s). If for any reason the taxpayer is unable to comply with the due date of an IRA response, the taxpayer will notify the IRS immediately, explain the circumstances for the delay, and the IRS and the taxpayer will agree to a revised due date.

  23. Ordinarily an IRA is sufficient for documenting most material issues reviewed. However, as deemed appropriate by the IRS, the AC may incorporate the resolution of the agreed upon issues in Form(s) 906, Closing Agreement(s), based on the completed IRA(s). Issues resolved using Form(s) 906, Closing Agreement(s) may be, but are not limited to, very large, controversial, tax shelters, or issues that may materially affect subsequent years. Issues that are resolved through requests for simple factual clarification or that merely require a taxpayer to expand or elaborate on information that was previously provided by the taxpayer do not generally require an IRA or a Form 906, Closing Agreement.

  24. If a taxpayer does not agree with the proposed resolution, the taxpayer and the IRS may use existing issue resolution processes. These processes will be available on an expedited basis. The IRS will participate in Fast Track Settlement (see Rev. Proc. 2003-40, 2003-1 C.B. 1044) if requested by the taxpayer and not otherwise precluded.

  25. If, at the conclusion of the pre-file stage of the CAP, a taxpayer has fully complied with the terms of the MOU and all identified items and issues have been resolved through simple factual clarification, IRA(s) and/or closing agreement(s) , the IRS will provide the taxpayer with a Full Acceptance Letter. The Full Acceptance Letter constitutes written confirmation that, subject to the completion of a post-filing review of the return, the IRS will accept the taxpayer’s return if it is filed consistent with those resolutions and no additional items or issues or correlative adjustments are discovered during the post-filing review that were not previously disclosed.

  26. If, at the conclusion of the pre-file stage of the CAP, a taxpayer has fully complied with the terms of the MOU, but the IRS and the taxpayer cannot resolve all identified items or issues prior to filing the tax return, the IRS will provide the taxpayer with a Partial Acceptance Letter. The Partial Acceptance Letter constitutes written confirmation that, subject to the completion of a post-filing review of the return, the IRS will accept the taxpayer’s return but for the identified unresolved items and issues and correlative adjustments, if the return is filed consistent with those resolutions and no additional items or issues are discovered during the post-filing review that were not previously disclosed.

  27. After a taxpayer files its tax return, the AC will secure a copy of the return and initiate the post-filing review. For taxable years ending after December 31, 2009, those taxpayers required to file Schedules UTP will include the Schedules UTP with the filed tax return. During the post-filing review, the IRS and the taxpayer will jointly review the filed return to verify that all resolved items and issues were reported as agreed and that all material disclosures were made in accordance with the CAP MOU. In cases where a Full Acceptance Letter is issued, the goal for completing the post-filing review of the filed return is within 90 days of the filing of the return. If the return is not consistent with the terms of the closing agreement(s) and/or IRA(s), there are identified items or issues that are not resolved prior to filing the tax return, or there are material items on the return that were not adequately disclosed, the IRS will examine any such issues through the traditional post-filing examination process. The taxpayer will retain access to consideration by the Office of Appeals with respect to any traditional post-filing examination that is conducted.

  28. If the post-filing review indicates that all material disclosures were made in accordance with the CAP MOU and resolved, the IRS will issue a No-Change Letter concluding the examination of the taxpayer’s books of account for purposes of IRC 7605(b).

  29. Within 30 days of the date the return is filed, the taxpayer will provide to the AC a Post-filing Representation executed by an officer of the taxpayer with authority to sign the taxpayer’s U.S. income tax returns stating:

    1. The taxpayer has disclosed all completed transactions, including transfer pricing issues, and other items that have a material effect on the taxpayer’s U.S. federal income tax liability for the CAP year; and

    2. As of the date of the representation, there are no remaining undisclosed transactions or tax positions for the CAP year related to the taxpayer’s U.S. federal income tax liability that would require the taxpayer to report reserves for purposes of any financial statement for the CAP year or any period subsequent to the CAP year.

  30. During the CAP, the IRS, at its discretion, may reduce the level of review based on the complexity and number of issues, and the taxpayer’s history of compliance, cooperation and transparency in the CAP.

  31. The IRS’ participation in the pre-file review during the CAP does not constitute an examination or inspection of the taxpayer’s books of account for purposes of IRC 7605(b) .

  32. All information provided to the IRS in connection with the CAP is return information protected from disclosure by the confidentiality provisions of IRC 6103.

  33. Non-income tax returns, such as, Forms 940, 941, 5500, 720, and 1042 are not included in the CAP and may be subject of traditional post-filing examinations. In addition, partnerships that are not 100% owned by members of the taxpayer’s consolidated group are not included in the CAP and may also be the subject of traditional post-filing examinations.

  34. The procedures of Rev. Proc. 94-69 are not applicable to CAP taxpayers.

4.51.8.5.1  (09-25-2015)
Transfer Pricing Issues and Advance Pricing Agreements

  1. The taxpayer will make open, comprehensive, and contemporaneous disclosures of its business transactions, including material transfer pricing issues. Complex transfer pricing issues may require additional time beyond the typical CAP.

  2. Taxpayers in the CAP Program that have already submitted a request for, or renewal of, an Advance Pricing Agreement under Rev. Proc. 2006-9 (or successor thereto) and/or a request for assistance from the U.S. Competent Authority under Rev. Proc. 2006-54 (or successor thereto) will notify their AC of the existence of such requests and provide a copy of the request or renewal. The AC will then contact the appropriate Advance Pricing and Mutual Agreement (APMA) Team or the Treaty Assistance and Interpretation Team (TAIT) lead or analyst to ensure ongoing coordination between the CAP and APMA/TAIT Programs.

  3. CAP taxpayers are encouraged to seek Advance Pricing Agreements to cover recurring controlled transactions. Taxpayers with ongoing transfer pricing issues may contact the AC to request a meeting with APMA to discuss the benefits of entering into an APA. The taxpayer will provide notice and documentation of any subsequent resolution(s) of items or issues in prior exam cycles within 15 business days of the agreed determination(s). The Parties will discuss the effect of such resolutions on any unexamined tax year(s) and on the CAP year and incorporate the changes as appropriate.

  4. The Taxpayer will notify the AC of any foreign initiated examinations, pending adjustments, or assessments that may impact income, expenses and/or credits reported in the United States, for the CAP year or any prior tax years, and will update such information on a quarterly basis as the information becomes available.

4.51.8.6  (09-25-2015)
Compliance Maintenance Phase

  1. Taxpayers who continue to meet the CAP eligibility requirements and expectations, and have completed two full CAP cycles, may progress, if approved, to the Compliance Maintenance phase. During this phase, taxpayers must execute the CAP MOU and provide the required information.

  2. In the Compliance Maintenance phase, the IRS, at its discretion, will reduce the level of review based on the complexity and number of issues, and the taxpayer’s history of compliance, cooperation and transparency in the CAP. Taxpayers continue making open, comprehensive, and contemporaneous disclosures of their completed business transactions. Taxpayers must also provide a description of the steps within transactions and other material items and pertinent facts regarding material items and issues that occur during the CAP year that could have a material effect on their federal income tax liability and other items or issues that meet the agreed materiality thresholds. Further, taxpayers must disclose their proposed tax positions with regard to these disclosures. Taxpayers who resolve all material items and issues with the IRS are assured prior to the filing of their tax returns that the IRS will accept their tax returns if filed consistent with the resolutions agreed to by the taxpayer and the IRS. If the return is not consistent with the terms of the closing agreement(s) and/or IRA(s), there are identified items or issues that are not resolved prior to filing the tax return, or there are material items on the return that were not adequately disclosed, the IRS will examine any such issues through the traditional post-filing examination process. The taxpayer will retain access to consideration by the Office of Appeals with respect to any traditional post-filing examination that is conducted.

  3. Taxpayers must apply for the CAP annually. Therefore, participation in Compliance Maintenance is considered on a yearly basis depending on the complexity and/or volume of transactions or other factors. For example, a taxpayer that is in the Compliance Maintenance phase in a current year may be moved to the CAP phase in a subsequent year if the IRS determines that the volume and/or complexity of transactions, or other factors make the CAP phase more appropriate in a particular year. If the complexity and/or volume of transactions change during the year the IRS and the taxpayer will adjust resources, accordingly.

  4. In coordination with the CAP team, the DFO will consider the following factors when evaluating a taxpayer’s eligibility for the Compliance Maintenance phase:

    1. The IRS has completed the post-filing review of at least two of the taxpayer’s CAP year returns.

    2. During the CAP phase, the taxpayer maintained professional relationships and open, honest communication with the CAP team and consistency in tax department personnel.

    3. During the CAP phase, the taxpayer was transparent and fully disclosed all material and significant completed business transactions, its proposed tax positions, the steps within the transactions and other material items and pertinent facts regarding material items and issues that occurred during the CAP phase.

    4. The taxpayer has good internal controls.

    5. Historically, the taxpayer has low levels of complexity and a limited number of issues, and has been consistently compliant, cooperative and transparent in the CAP phase.

    Note:

    The remaining processes and procedures for Compliance Maintenance are fundamentally the same as for the CAP. Therefore, in order to avoid duplication, they have not been listed here. Refer to IRM 4.51.8.5 for more information.

4.51.8.7  (06-15-2012)
Disputes Terminations or Withdrawals from Pre-CAP, CAP, and Compliance Maintenance

  1. Resolution of disputes as to whether the taxpayer or the IRS is unable, or has failed to comply with its responsibilities and obligations in Pre-CAP, the CAP, or Compliance Maintenance will follow the procedures in IRM 4.51.1. These procedures will be available on an expedited basis. If the IRS determines that the taxpayer failed to adhere to the terms of the Pre-CAP MOU or the CAP MOU, the Territory Manager assigned to the case will issue a written notice of the IRS’ concerns. If the concerns are not resolved within 30 days after receiving such notification, the DFO assigned to the case will issue a Termination Letter to the taxpayer and the taxpayer’s participation in the Program will cease. The IRS will then conduct a traditional post-filing examination of the taxpayer’s filed return.

  2. Examples of significant or consistent failures to adhere to the terms of the Pre-CAP MOU or the CAP MOU that will result in a Termination Letter include:

    1. Not adhering to IDR response times or providing non-responsive or incomplete responses to IDRs

    2. Not engaging in meaningful or good faith item or issue resolution discussions

    3. Failing to thoroughly disclose prior, concurrent, and on-going transactions and other material items

    4. Failing to disclose a tax shelter or listed transaction

    5. Failing to disclose an investigation or litigation that limits the IRS’ access to current corporate records

    6. Not adhering to any other commitment in the relevant MOU

  3. If at any time the taxpayer determines it cannot or will not comply with the expectations of the Pre-CAP MOU or the CAP MOU, the taxpayer may provide a written request to withdraw from the Program. Upon receipt of such a request, the IRS will issue a Termination Letter to the taxpayer and the taxpayer’s participation in the Program will terminate. The IRS will then conduct a traditional post-filing examination of the taxpayer’s filed return.

4.51.8.8  (09-25-2015)
Claims

  1. All potential refund claims must be brought to the attention of the AC Case Manager as soon as the taxpayer becomes aware that it has potential refund claims. All claims affecting federal income tax liability must be filed using Form 1120X or Form 1139. Such claims should meet the standards of Treasury Regulation section 301.6402-2, which provides that a valid claim must:

    • Have appropriate supporting evidence

    • Set forth in detail each ground upon which credit or refund is claimed

    • Present facts sufficient to apprise the IRS of the exact basis for the claim

    • Contain a written declaration that it is made under penalties of perjury

4.51.8.9  (09-25-2015)
Joint Committee on Taxation Review

  1. IRC 6405 applies if:

    1. It is determined prior to the filing of a CAP year return that the tax return, when filed, will result in a refund claim subject to review by the Joint Committee on Taxation (JCT).

    2. It is determined at the conclusion of a Pre-CAP examination that there is a refund or credit that is subject to review by the JCT.

      Note:

      If IRC 6405 applies, closing agreements cannot be executed on behalf of the government until they have been reviewed and approved by the JCT, IRM 4.36.3.6.2. Pursuant to IRM 8.13.1.4.6.1, closing agreements signed by the taxpayer will be submitted as part of the original Joint Committee report. If the JCT takes no exception to the report and the proposed closing agreements, the appropriate operating division official may sign the closing agreements.

  2. If a Full Acceptance Letter was issued prior to filing the return and the post-filing review confirms that the return was filed consistent with the pre-file resolutions and there were no additional items or issues discovered on the return as filed, the AC will prepare the documents necessary for a JCT specialist to perform a review, prepare the Joint Committee report and submit such report to the JCT. When the JCT has completed its review and sent clearance notification to the IRS, any applicable closing agreements will be executed by the IRS.

  3. For a return in which a Partial Acceptance Letter was issued prior to filing the return, once all of the remaining items or issues have been fully resolved, the Joint Committee report will be forwarded to the JCT. When the JCT has completed its review and sent clearance notification to the IRS, any applicable closing agreements will be executed by the IRS.


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