The Compliance Assurance Process (“CAP”) is a program where a team from the Internal Revenue Service (“IRS”) works with participating taxpayers collaboratively to identify and resolve potential tax issues before the tax return is filed each year. This allows for major potential tax issues to be largely settled before filing and allows for shorter and narrower post-filing reviews of the return. CAP was launched as a trial pilot program in 2005 and became permanent on March 31, 2011. The goals of the program are to ensure compliance through efficient issue identification and resolution, increase transparency and collaboration between the IRS and taxpayers, and reduce the burden of tax administration and compliance. CAP is structured with large corporate taxpayers in mind who generally have complex issues which need to be addressed in an efficient manner well before tax filing deadlines.
CAP is separated into three phases:
(1) Pre-CAP phase. In this phase, taxpayers work with the IRS in a traditional post-filing examination process to close examinations of filed tax returns to meet the CAP selection criteria and progressing towards the CAP phase. The taxpayer and the IRS work collaboratively to develop an action plan to examine tax returns for open years in an agreed upon timeframe. Taxpayers must make open, comprehensive and prompt disclosures of transactions and describe 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. The taxpayer must also execute a Pre-CAP Memorandum of Understanding (“MOU”), which details the specifics of the program and the rules which the taxpayer must follow, as well as requiring the taxpayer to furnish certain information;
(2) CAP phase. During this phase, taxpayers must make open, comprehensive and contemporaneous disclosures of their completed business transactions, including disclosing 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. Taxpayers must also disclose their proposed tax positions regarding these transactions. Taxpayers are assured that the IRS will accept their tax returns if consistent with the material items and positions which were disclosed and resolved with the IRS for the CAP year. Any deviations will be reviewed through the traditional post-filing examination process. The taxpayer must also execute a CAP MOU, which details the specifics of the program and the rules which the taxpayer must follow, as well as requiring the taxpayer to furnish certain information;
(3) Compliance Maintenance phase. Taxpayers who continue to meet the CAP eligibility requirements and expectations and complete two full CAP cycles may progress to the Compliance Maintenance phase upon approval. During this 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. Otherwise, taxpayers are still required to complete all the steps they would otherwise during the CAP phase and are granted the same assurances when filing a tax return during the Compliance Maintenance phase. The taxpayer must also execute a CAP MOU for this phase, similar to the one executed during the CAP phase.
Each phase has their own eligibility criteria as well:
To be eligible for the pre-Cap phase, taxpayers must:
- Have assets of $10 million or more;
- Be a publicly held entity and required 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. If privately held, agree to provide to the IRS certified and audited financial statements on a quarterly basis; and
- 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.
To be eligible for the CAP phase, taxpayers must:
- Meet the requirements a through c of the pre-Cap phase; and
- If currently under examination by the IRS, 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.
To be eligible for the Compliance Maintenance phase, the taxpayer must continue to meet the requirements of the CAP phase.
At any phase of CAP, a taxpayer may withdraw by submitting a written request. The IRS may also terminate a taxpayer’s participation in CAP during any phase if the taxpayer fails to adhere to the terms of the program.