On September 12, 2019 the IRS announced that it would be accepting applications to its 2020 Compliance Assurance Process program for the first time since 2015.1 Corporate applicants who meet the eligibility requirements are permitted to apply. The application window runs this Fall, with an acceptance decision expected in January 2020.
Goals and History of the CAP Program
The LB&I Division of the IRS developed the CAP program to improve the federal tax compliance of large corporate taxpayers by utilizing real-time issue resolution tools and techniques. The program has received positive feedback and is viewed as a “real-time audit” of taxpayers. The program is collaborative and requires proactive disclosure by the CAP taxpayer, as it is expected that the taxpayer make open, comprehensive, and contemporaneous disclosures of material issues. In providing real-time issue resolution, the CAP program seeks to benefit both the taxpayer and the IRS by resolving issues prior to filing, identifying emerging issues early, decreasing overall cycle time, and reducing the potential of amending both federal and state tax returns.
To be eligible to apply for the CAP program, applicants must:
- Have assets of $10 million or more;
- Be a U.S. publicly traded corporation with a legal requirement to prepare and submit SEC Forms 10-K, 10-Q, and 8-K; and
- Not be under investigation by, or in litigation with, any government agency that would limit the IRS’s access to current tax records.
Additionally, for applicants currently under IRS examination, there must be no more than one open filed tax return and one open unfiled return (“Open Years”) on the first day of the CAP participation year. For all new applicants, any unexamined return with an open status will be risk assessed as part of the required compliance check for the first CAP year. If the examination team determines that a material issue should be examined, the return with that issue may be placed under examination. 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 end of the second CAP year or the applicant may not be eligible to participate in the third CAP year. If the IRS has not examined the applicant for the last three tax years, the IRS may require a review of the most recent filed tax return to determine scope and suitability for the program.
A taxpayer applying to the CAP program for the first time must submit a Material Intercompany Transactions Template (MITT) with the application. This MITT should be based on the last filed tax return and it will be used to determine suitability for the CAP program. This MITT is only required for new CAP applicants. Not submitting a MITT by the due date without an approved extension or submitting an inaccurate or incomplete MITT may be treated as a significant or material failure to adhere to the terms of the CAP program and result in the issuance of a Termination Letter.
It is expected that the IRS could admit an additional 50 to 100 participants to the CAP program; however, due to resource constraints, the IRS will also consider factors such as previous cooperation and transparency in dealing with the IRS, as well as the suitability of the applicants’ tax issues for the program. According to the Service, the CAP program is still a work in progress and does not have a predetermined number of taxpayers who will be admitted.
Taxpayers are required to submit the following forms for the 2020 CAP year application process:
- Taxpayer Initial Issues List
- Research Credit Questionnaire
- Material Intercompany Transactions Template
- Tax Control Framework Questionnaire
Once accepted into the program, the taxpayer must sign a Memorandum of Understanding and establish a secure email account with the IRS.
Since the CAP program is based on the transparent and cooperative interaction between the taxpayer and the IRS, a taxpayer that does not exhibit this type of behavior is not suitable for the CAP program. Examples of significant or material failures of behavior include:
- Not adhering to IDR response times or providing incomplete responses
- Not engaging in meaningful or good faith issue resolution discussions
- Failing to thoroughly disclose a material issue in a timely manner
- Failing to disclose a tax shelter or listed transaction
- Failing to disclose an investigation or litigation that limits IRS access to current corporate records
- Frequently filing claims or requesting appeals
- Not adhering to the terms of the CAP Program
While CAP is a work in progress, it has received favorable feedback and provides corporate applicants who meet the eligibility requirements, with an opportunity to resolve issues prior to the filing of a tax return. It may be that not all issues are suitable for CAP, such as bespoke complex transactions, and the IRS, in its sole discretion, may decline to approve a taxpayer’s application whenever warranted by the facts and circumstances or in the interest of sound tax administration. Nonetheless, CAP provides a transparent and cooperative interaction between the corporate taxpayer and the IRS and should help to improve service and tax compliance.