The IRS's Large Business and International Division (LB&I) on March 31, 2011, expanded and made permanent the Compliance Assurance Process (CAP) that allows corporate taxpayers to resolve tax issues before filing their tax return.

The CAP 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.

Since its creation in 2005, CAP had only been available by invitation. LB&I has overhauled the program and will now accept applications from corporations with at least $10 million in assets that are either publicly traded or willing to submit quarterly audited financial statements. The CAP program is one of several IRS alternative dispute resolution programs — such as Fast Track Settlement and the Pre-Filing Agreement Program — that the IRS hopes will relieve controversy and improve currency.

Because CAP is meant to reduce taxpayer uncertainty and burden, the expanded program may provide an excellent opportunity for appropriate corporations. While not suitable for every taxpayer, potential benefits include:

  • resolving issues before the return is filed;
  • achieving tax certainty sooner with less administrative burden than in traditional post-filing examinations; and
  • better management of tax reserves and more precise financial statements.

The expanded CAP program features three distinct phases: Pre-CAP, CAP and Compliance Maintenance.

Pre-CAP phase

The Pre-CAP phase provides taxpayers an opportunity to exhibit the transparency and cooperation required to be consider for CAP. In the Pre-CAP phase, taxpayers work with the IRS in the traditional post-filing examination process to close ongoing examinations of filed tax returns.

To be eligible for Pre-CAP, corporations:

  • must have at least $10 million in assets;
  • must either be a publicly held entity with a legal requirement to submit a Form 10K,10Q, 8K, 20F or equivalent form, or if privately held, must provide quarterly certified audited financial statements or equivalent documents; and
  • cannot be under investigation or in litigation with the IRS or another federal or state agency that would limit IRS access to tax records.


The Pre-CAP phase is meant to prepare a taxpayer to qualify for the CAP phase. If accepted in the Pre-CAP phase, taxpayers will sign a standardized memorandum of understanding (MOU) that outlines the agreement to reach the CAP phase and develop an action plan with an agreed upon time frame. The action plan will provide a time frame for the IRS and taxpayers to close the examinations of earlier year's returns. During the pre-CAP phase, taxpayers are expected to make comprehensive and prompt disclosure of transactions, material issues within transactions and other tax return issues related to the positions taken on their filed tax returns.

The Pre-CAP phase ends when the taxpayer becomes eligible for CAP, is terminated from Pre-CAP or elects to discontinue participation in Pre-CAP. Applications for Pre-CAP may be submitted beginning April 4, 2011, and will be accepted any time throughout the year.

The CAP Phase

The eligibility requirements for the CAP phase are identical to those for the Pre-CAP phase, except taxpayers who are in the Pre-CAP phase will be eligible to apply for CAP when all but one filed return under examination has been closed. Taxpayers who do not have an examination open in any year may apply directly to the CAP phase without going through the Pre-CAP phase.

Taxpayers that meet the eligibility requirements must complete the required application for acceptance into the CAP phase annually. Applications must be submitted between Sep. 1 and Oct. 31 of the year immediately preceeding the CAP year.

If admitted into the CAP phase, a taxpayer is required to work cooperatively and in a transparent manner with the IRS. (See the IRS's CAP overview, the Internal Revenue Manual section covering the CAP and the IRS's Frequently Asked Questions.) The taxpayer must sign a standardized MOU on an annual basis that outlines their agreement to meet the program requirements.

The taxpayer will be assigned an account coordinator and an IRS CAP team will be formed. Taxpayers will work collaboratively with the CAP team on a real-time basis to identify and resolve potential tax issues before the tax return is filed. Taxpayers are expected to make open, comprehensive and contemporaneous disclosures of their completed business transactions. Taxpayers must also disclose tax issues within those transactions and other material items or issues and pertinent facts regarding material issues that occur during a CAP year that could have a material effect on their federal income tax liability. Further, taxpayers must disclose their proposed tax positions with regard to these disclosures.

The IRS will issue either a Full Acceptance Letter or a Partial Acceptance Letter prior to the taxpayer filing their return. Taxpayers that 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. If all issues are not resolved, the remaining items will be resolved through the traditional examination process. Taxpayers and the IRS will perform a joint post-filing review to verify that all items and issues were reported and disclosed as agreed in the Partial or Full CAP acceptance letter. If a taxpayer determines that it cannot comply with the terms of the MOU, the taxpayer can withdraw from the program by submitting a written request to the IRS.

Compliance Maintenance phase

The Compliance Maintenance phase is available for CAP participants who have completed at least one CAP cycle. During this phase, if a CAP taxpayer has consistently demonstrated transparency and full disclosure, the IRS may at its discretion, adjust the level of review based on taxpayer's unique factors such as the complexity of and number of issues and the taxpayer's history of compliance and cooperation. That is, examination teams may conduct a significantly reduced scope and depth of review and examination.

Taxpayers accepted into the Compliance Maintenance phase must execute an MOU and continue to make open, comprehensive and contemporaneous disclosures of their completed transactions, tax issues within transactions, other material items or issues, and proposed tax positions with respect to these disclosures.

In this phase, taxpayers that resolve all material items and issues with the IRS are assured prior to filing that their returns will be accepted by the IRS if consistent with the agreed resolutions.

Conclusion

The expansion of the CAP program as outlined above represents an important step in the IRS's evolving relationship with corporate taxpayers. As IRS Commissioner Shulman has stated, "through greater cooperation and transparency, CAP taxpayers and the IRS can both benefit." Allowing taxpayers to resolve issues on a pre-filing basis in the CAP program can be an effective tool, especially in light of the requirements for reporting and accounting for uncertain tax positions under FIN 48 (ASC 740) and Schedule UTP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.