IRS Releases CAP Program FAQ

The Compliance Assurance Process (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 (TPs) prior to the filing of a return. Through the CAP program, the taxpayer should achieve tax certainty sooner and with less administrative burden than conventional post-file examinations.

1. What's different about the permanent CAP program?

Answer

The permanent CAP program features three distinct phases of participation available to TPs that meet program requirements as described below:

Pre-CAP Phase:

IRS and TP develop a plan to eliminate open years within a set timeframe.

• Provides TPs an opportunity to exhibit the transparency and cooperation required to be considered for the CAP program.

• TPs work with the IRS in the traditional post-file examination process to close ongoing, post-filing examinations of filed tax returns, with the ultimate goal of meeting the selection criteria and progressing to the CAP phase.

TP is required to be fully cooperative and transparent with significant managerial oversight.

• Requires TP to be fully cooperative and transparent during the Pre-filing process by identifying transactions and issues within transactions and providing timely information to resolve those issues.

• Taxpayers that resolve all material issues with the IRS are assured prior to the filing of their tax returns that the IRS will accept their return if filed consistent with the resolutions agreed to by both parties.

IRS will adjust the level of review and time applied to each TP based on their unique factors.

• Features an adjusted level of review based on the TP's unique experience in CAP and history of compliance risk.

• Requires TPs to continue to maintain full transparency and disclosure of all material and significant transactions and issues.

2. Are Foreign Owned TPs eligible for CAP?

Answer

Foreign-owned TPs that file 20Fs (Form 1120F filers) are permitted to be in the CAP if they can provide documentation equivalent to the information that must be filed by US companies quarterly with the Securities and Exchange Commission (SEC).

3. What are the eligibility criteria for the Pre-CAP phase?

• The TP must have assets of $10 million or more;

• The TP must 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 SEC or equivalent regulatory body or, if privately-held, agree to provide certified, audited financial statements or equivalent documentation on a quarterly basis; and

• The TP must 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.

4. What are the eligibility criteria for the CAP phase?

• The TP must have assets of $10 million or more.

• The TP must 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 SEC or equivalent regulatory body or, if privately-held, agree to provide certified, audited financial statements or equivalent documentation on a quarterly basis.

• The TP must 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.

• If currently under examination, the TP 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.

5. What criteria will be utilized for a TP to be considered for the Compliance Maintenance phase?

Answer

In coordination with the CAP team, the Director, Field Operations (DFO) will consider the following factors when evaluating a TP's eligibility for the Compliance Maintenance phase:

TP maintains professional relationship and open, honest communication with the CAP team and consistency in tax department personnel.

• Open communication procedures were established between the IRS and the TP personnel and are adhered to.

• TP was proactive in advising the CAP team of major transactions that required significant resource planning prior to the completion date.

• TP responses to written and/or oral IDRs were given within the timeframe outlined in the requests and were complete.

• All TP personnel familiar with the transactions were made available to the team in a timely manner.

• There have been no changes in tax department personnel that would result in a significant learning curve.

• The assessments of TP transparency and cooperation in the prior CAP Year were optimal.

• TP has disclosed all transactions that have a material effect, along with their proposed tax positions, and identified the tax issues within the transactions.

• TP disclosed all material issues with regard to completed business transactions and no additional issues were identified by the CAP team during the post-file examination.

• TP provided M3s or M3 equivalents on a quarterly basis.

A proven process is in place for disclosures that has worked unfailingly on prior CAP reviews.

Historically, TP has low risk transactions and limited controversy throughout the CAP.

• Minimal due diligence work is anticipated and the annual significant calculations have been reviewed with little to no changes during prior CAP Years.

• No issues have gone into post-file on prior CAP Years as a result of inadequate time to develop.

• No new issues have been discovered on the prior CAP Years when the return was filed.

6. What benefits does the CAP program provide to TPs and the IRS?

• While CAP is not suitable for every TP, it can deliver significant benefits to TPs and the IRS: Resolves issues prior to filing and provides tax certainty sooner.

• Decreases overall cycle time.

• Allows real-time review of transactions and promotes voluntary compliance.

• Provides resource and time savings to both IRS and TPs.

• Complements current corporate governance and accountability.

• Potential to avoid the need for TPs to file amended state tax returns.

• Provides earlier identification of emerging issues.

7. What is the application process for the CAP?

Answer

All CAP program phases require TPs to apply for participation. The Pre-filing and Technical Guidance (PFTG) group checks each application to ensure the applicant meets the eligibility criteria, and then forwards the application to the Industry Director. All final decisions regarding the acceptance of applicants into the CAP are made by the Operations Committee.

Pre-CAP applications are accepted at any time, and the timeline for the Pre-CAP cycle is based on agreed-upon timeframes between the IRS and the TP to close transition years.

The CAP applications must be received between September 1st and October 31st of the year immediately preceding the CAP Year. TPs must sign a Memorandum of Understanding (MOU) once accepted into the program. In addition, the IRS will provide necessary CAP training and orientation to TPs the first year they are accepted into the CAP phase.

8. What does participation in the Pre-CAP phase involve?

Answer

Pre-CAP enables TPs to work with the IRS in the traditional post-file examination environment to develop an action plan that will prepare the TP for meeting the CAP eligibility criteria. The Pre-CAP examination process includes the following:

• Application: Potential Pre-CAP TPs will complete the required application for acceptance into the program at any time during the year. They will not have to reapply for Pre-CAP each year once they are accepted into this phase.

• MOU: Once accepted into Pre-CAP, TPs must sign an MOU that outlines their agreement to meet the program requirements. This MOU will be effective for the first Pre-CAP Year and will continue for all years until they can close their transition years and fulfill the CAP selection criteria.

• IRS Team Coordinator (TC): Pre-CAP TPs will be assigned an IRS TC who will facilitate compliance and serve as their IRS point of contact.

• Pre-CAP Action Plan: The TC and the TP will develop an action plan for the TP to close all transition years within a set timeframe.

• Disclosures: Pre-CAP TPs will make open, comprehensive, and prompt disclosures of the transactions, material issues within the transactions, and other tax return issues related to the positions taken on their filed tax returns.

• Progression to the CAP Phase: For a TP to be eligible for the CAP, all transition years must be closed except for one open, filed year and one unfiled year. A post-closing review must also be conducted.

• Termination or Withdrawal from Pre-CAP: If either party is unable or fails to comply with the responsibilities and obligations outlined in the MOU, the parties will invoke the Rules of Engagement (IRM Part 4.51.1) to resolve any disputes. If the Pre-CAP TP fails to address any areas of concern raised by the IRS, the TP will be terminated from Pre-CAP.

9. What does participation in the CAP phase involve?

Answer

CAP requires TPs to work cooperatively and in a transparent manner with the IRS during the Pre-filing review and involves the following activities:

• Application: Potential CAP TPs will submit the required application for acceptance into the CAP phase annually between September 1st and October 31st.

• MOU: Once accepted into the CAP, TPs must sign an MOU that outlines their agreement to meet the program requirements. This MOU will be effective for that CAP Year only and TPs must sign a new MOU for each year they are accepted into the CAP.

• CAP AC: CAP TPs will be assigned an AC who will facilitate compliance and serve as their IRS point of contact.

• CAP Plan: The scope of the review and materiality thresholds will be documented in a CAP Plan that will be discussed and provided to the TP.

• Disclosures: CAP TPs will make open, comprehensive, and contemporaneous disclosures of their completed business transactions, proposed tax positions, the tax issues within the transactions and other material items or issues and pertinent facts regarding material items.

• • Items Subject to Review Regardless of Materiality Thresholds:

  • • Tax Shelters

    • Listed Transactions (mandatory IDR issued in the CAP)

    • Transactions of Interest

    • Fraudulent Transactions

    • LB&I Compliance Initiatives

    • Industry Director and Operating Division Directives (go to website)

    • Coordinated Issues

    • Emerging Issues

• Acceptance Letter: The IRS will issue either a Full Acceptance Letter or a Partial Acceptance Letter prior to the TP filing the return. The type of letter issued will depend on whether all of the material items or issues have been resolved.

• CAP Conclusion and Post-filing Exam: The IRS and TP 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:

• • 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, an issue focused examination will be conducted for those items or issues and normal post-file procedures will be followed.

  • If new items or issues are identified on the return, an issue focused examination will be conducted for those items or issues and normal post-file procedures will be followed.

  • If a Partial Acceptance Letter was issued to the TP, those items or issues identified on the letter will continue to be worked in the post-file environment and normal post-file procedures will be followed.

  • The team will make a recommendation for TP continuance in the CAP for the following year.

  • Termination or Withdrawal from the CAP: If either party is unable or fails to comply with the responsibilities and obligations outlined in the MOU, the parties will invoke the Rules of Engagement (IRM Part 4.51.1) to resolve any disputes and the TP may be terminated from the program. If at any time the TP determines it cannot comply with the MOU requirements, the TP may submit a written request to withdraw from the CAP and the IRS will issue a Termination Letter.

10. What does participation in the Compliance Maintenance phase involve?

Answer

If CAP TPs have consistently demonstrated transparency and full disclosure, the IRS may, at its discretion, adjust the level of review based on the TP's unique factors such as the complexity and number of issues, and the TP's history of compliance, cooperation and transparency in the CAP. To be considered, TPs also must have completed two CAP cycle through post-file review. Compliance Maintenance is the same as the CAP phase except the level of review is continually evaluated and adjusted based on each TP's individual circumstances.

11. How can TPs submit applications for Pre-CAP?

Answer

The applications will be available on the CAP home page and should be submitted by one of the following methods:

• If a TP is under examination, submit to the Team Coordinator or Team Manager.

• If not under examination, email the completed Pre-CAP Application Form to: IRS CAP Application. Please enter "Pre-CAP Application" and the tax year in the subject line.

12. How can TPs submit applications for the CAP?

Answer

The applications will be available on the CAP home page and should be submitted annually between September 1 and October 31 by one of the following methods:

• If a TP is under examination or is a returning CAP TP, submit to the Account Coordinator or Team Manager.

• If not under examination, email the completed CAP Application Form to: IRS CAP Application. Please enter "CAP Application" and the tax year in the subject line.

13. What is the CAP AC's role?

Answer

The AC builds cooperative and collaborative relationships with their assigned TP. The AC will work with the TP, team member(s), and specialist(s) throughout the CAP Year to identify and resolve tax-related issues and ensure the filing of a compliant return. The AC's specific roles include the following:

• Ensure TP understands the expectations and requirements of the CAP and the MOU through discussions and training.

• Prepare exam plan, quarterly risk analyses, and 10k review, incorporating specialist plans and analyses.

• Provide input regarding TP cooperation and transparency assessments.

• Complete Issue Resolution Agreements (IRAs), Closing Agreement Form(s) 906, and issue the Acceptance Letters as well as obtain the TPs' Post-filing Representation Letter.

• Conduct post-filing exam and follow normal post-filing procedures to close the case.

14. What is the CAP Team Manager's (TM) role?

• Obtain team support for recommendations to accept/reject the CAP applications and forward to Territory Manager (TTM).

• Deliver decision to TP of CAP acceptance/rejection.

• Ensure TP understands the expectations and requirements of the CAP and the MOU through discussions and training.

• Attend the Opening Conference and support training.

• Prepare the quarterly assessments of TP cooperation and transparency.

15. What is the Pre-CAP Team Coordinator's (TC's) role?

• Work with TP to develop an action plan for the TP to close all transition years within a set timeframe.

• Ensure TP understands the expectations and requirements of the MOU and Pre-CAP/ CAP through discussions and trainings (inviting all involved parties).

• Provide input regarding the assessments of TP's cooperation and transparency.

16. What is the Territory Manager's (TTM's) role?

• Sign acceptance/rejection letter to TP.

• Attend Opening Conference for initial year of CAP and support other training and meetings as necessary.

• Ensure MOU has been signed by TP and DFO and original returned to the TM.

• Ensure signed copy of MOU has been returned to the TP.

• Review and approve exam plan and mid-cycle risk analysis.

• Review TMs' quarterly assessments of the TP cooperation and transparency.

• Assess the CAP team's adherence to the CAP policies/procedures.

17. What is the Director of Field Operations' (DFO's) role?

• Obtain team recommendations of TPs and accept/reject CAP applications; forward to Specialist DFO to obtain their acceptance/rejection of the TP.

• Approve and sign MOU then forward to TTM.

• Manage Form(s) 906, sign and return to TTM.

• Assess TTM's adherence to CAP policies/procedures.

• Support the CAP team as needed.

18. How are issues identified in CAP?

Answer

Cooperation and transparency by both the TP and the IRS are critical to successful identification of issues in the CAP. Issues and items are identified in a number of ways:

• TPs should inform the IRS of all material items and issues immediately upon completion of business transactions.

• The IRS will review all internal and external sources (i.e. SEC documents) for any information related to the TP.

• The IRS will conduct a review of quarterly books and records supplied by the TP.

19. How are issues developed in the CAP?

Answer

CAP allows the IRS to review a completed business transaction in real-time while the necessary specialists, experts and records are available. The TP should invite their experts to participate in the process to ensure all pertinent information is gathered and considered as issues are disclosed and developed.

20. How are issues resolved in the CAP?

Answer

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 audit.

All of LB&I issue management tools remain available to the CAP team and TPs throughout the Pre-filing and post-filing activities. For example, specialists, technical advisors and Counsel will be valuable members of the CAP team which will result in earlier recognition of emerging issues and quickly elevate the need for issuance of published guidance.

21. Does the CAP put the IRS in the business of providing tax opinions?

Answer

No. ACs are responsible for reviewing completed business transactions only and the resulting impact on book to tax transactions. While the AC will not be rendering an opinion on pre-transactional events, they will work with TPs to ensure appropriate tax treatment of completed transactions before the tax return is filed.

22. How will the CAP affect the Appeals process?

Answer

Appeals is committed to concurrent participation and involvement in CAP issue resolution discussions. In accelerating these discussions to a Pre-filing environment, LB&I anticipates the CAP will reduce the need for post-filing dispute resolution processes. All Appeals rights will remain available to the TP.

23. Can the Fast Track Settlement process be used in the CAP?

Answer

Yes. Fast Track continues to be available as an ADR (alternate dispute resolution) tool during the CAP on an issue by issue basis both during Pre-filing and post-filing. Once the TP elects Fast Track in Pre-filing, it cannot be used for the same issue during post-file.

24. How do the new Uncertain Tax Position (UTP) requirements impact the CAP?

Answer

All TPs subject to the new UTP reporting requirements will be required to submit Schedule UTP with their tax returns (the CAP does not exempt any TP from these requirements). Although it is acceptable for TPs to voluntarily provide UTPs during Pre-filing stages of the CAP, it is not a requirement as TPs should already be providing the tax issue associated with each material transaction that is disclosed.

25. Why is the CAP a valuable tool for LB&I?

Answer

The real-time review of material transactions with the necessary records, specialists and experts will serve to resolve issues, enhancing federal tax compliance (accuracy and correctness of the tax return) prior to filing, thus potentially eliminating the need for a post-filing examination. Real-time review of material transactions enables the IRS to address and resolve current tax year issues sooner.

26. How can I learn more about the CAP?

Answer

The IRS LB&I Division manages the CAP. For additional information about the program, please visit the CAP home page.

27. What does the Service mean by "[i]n addition to disclosing the existence of a transaction, the taxpayer will provide its proposed return reporting position and a description of the steps that have a material effect on its federal income tax liability" in section D1 of the CAP MOU?

Answer

In addition to disclosing all material completed business transactions, the TP also needs to disclose the steps within the transaction that will materially affect the TP's federal income tax liability. The examples below demonstrate this concept.

28. Do TPs waive any rights as a result of entering into a CAP MOU?

Answer

No. As in traditional post-filing audits, the IRS will respect all TP rights and privileges as well as follow the IRS policy of restraint.

29. The CAP MOU requires that TPs must immediately notify the Account Coordinator of any investigation initiated on the TP by a federal or state agency. What does this mean? For instance, will CAP TPs be required to disclose every state sales tax audit?

Answer

No, CAP TPs will not be required to disclose every state sales tax audit. However, CAP TPs 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.

30. The TP Disclosures section of the MOU notes that TPs will provide the IRS with access to accounting records and systems. Does this mean CAP TPs must give the IRS direct online access to their general ledger systems?

Answer

No, CAP TPs are not required to give the IRS direct online access to their general ledger systems. However, some CAP TPs do provide direct online access to facilitate the CAP review of books and records. At a minimum, CAP TPs are required to provide a quarterly download of their general ledger and other requested accounting records.

31. What do materiality thresholds mean in a CAP review? How are they used?

Answer

Materiality thresholds are used differently in CAP than in a traditional Post-file examination since there is not a filed tax return. CAP requires taxpayers to disclose completed business transactions above the materiality thresholds for the IRS to review before the return is filed. Adjustments to the amounts to be reported on the return for these completed transactions may be made that are below the materiality thresholds. If the issues are not resolved before the return is filed, these adjustments may be made on the return after it is filed. In other words, materiality thresholds are used in CAP for TPs to know which completed business transactions should be disclosed to the CAP teams. They are not relevant to the adjustments that may be made with regard to the tax consequences of such transactions.

Example: A CAP case has a materiality threshold of $20M and the TP acquires a new corporation for $25M. Once the acquisition is complete, the TP discloses the acquisition to the CAP team since it is above the materiality threshold. During the review of the acquisition, the CAP team notes that the TP is proposing to expense $500,000 in costs that should be capitalized. The CAP team will prepare an IRA for the $500,000 adjustment before the return is filed. It is the transaction, rather than the adjustment that is subject to the materiality threshold under CAP.

NOTE: If the CAP team does not finish the review of the acquisition before the return is filed, a Form 5701 Notice of Proposed Adjustment will be prepared for the $500,000 adjustment instead of an IRA.

32. Can changes be made to the Pre-CAP or CAP MOUs?

Answer

Changes to the approved form Pre-CAP or CAP MOUs are not permitted. The only variable elements to the MOUs are TP name, EIN, and tax year(s). Additionally, supplements and/or addendums to the approved form MOUs are not allowed.

33. How are stub period returns for corporate acquisitions and dispositions handled in CAP?

Answer

Acquired entities that are owned 100% by the CAP TP and that will be included in the consolidated return are subject to the CAP MOU after the acquisition is completed. The stub period return of the acquired entity (the period before the entity was acquired) can be reviewed in the CAP environment if the CAP TP has control over the preparation of the stub 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 TP.

34. If a CAP taxpayer owns interests in a partnership, can completed business transactions involving the partnership be worked in a real-time CAP environment?

Answer

If a CAP 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 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. However, if the partnership return is filed early, the partnership return can be examined and issues can be resolved before the CAP taxpayer files its Form 1120 U.S. Corporation Income Tax Return.

Note that CAP taxpayers that own an interest in a partnership may have adjustments on a closed CAP Year if the return of the partnership is selected for examination. TEFRA procedures may result in adjustments from the examination of the partnership return to flow through to the CAP taxpayer's return even if the CAP Year is closed. This typically occurs with CAP taxpayers that own a minority interest in a partnership and are unaware of significant transactions for the year that warrant examination.

35. When is a CAP Action Plan required and who is required to sign this document?

Answer

A CAP Action Plan (a.k.a. Transition Plan) is only required for the first year that a taxpayer enters CAP. The purpose of the CAP Action Plan is to establish timelines and action items needed to close the transition years. The CAP Action Plan identifies the activities and resources that the taxpayer and IRS will utilize to close the transition years. The CAP Action Plan should be completed after the opening conference when all the steps to close the transition years are discussed and the IRS and the taxpayer agree to the timeline and action items. The CAP Action Plan should be finalized and signed by the Territory Manager and DFO no later than April 30 of the CAP year for a calendar year Taxpayer (the date will be adjusted accordingly for fiscal year Taxpayers).

36. Does Rev. Proc. 94-69 apply to CAP taxpayers?

Answer

The procedures of Rev. Proc. 9469 are not applicable to CAP taxpayers. Rev. Proc. 94-69 sets forth special procedures for taxpayers that are subject to the Coordinated Examination Program (CEP) to show additional tax due or make adequate disclosure with respect to an item or a position to avoid imposition of an accuracy-related penalty. Under the Rev. Proc., for "CEP taxpayers," certain items disclosed in a written statement to the IRS within a 15-day time period after the start of an examination may not be subject to penalty. While the Coordinated Examination Program no longer exists, LB&I has traditionally applied the procedures set forth in Rev. Proc. 94-69 to its Coordinated Industry Case (CIC) taxpayers. Taxpayers in CAP, however, agree to work collaboratively with an IRS team to identify and resolve potential tax issues before the tax return is filed each year. With the major potential tax issues largely settled before filing, taxpayers are generally subject to shorter and narrower post-filing examinations rather than the traditional CIC examination. CAP 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. CAP taxpayers are able to achieve tax certainty sooner and with less administrative burden than in the traditional post-filing examination program. CAP taxpayers are expected to provide the IRS with adequate disclosure of their transactions and the tax consequences of those transactions within the CAP process. A CAP taxpayer who believes it needs to disclose in order to avoid an accuracy-related penalty must do so within the CAP process, as well as make the disclosure with its return, and cannot wait until 15 days after the start of a post-file review to disclose. For matters that are not known until after a return is filed, a CAP taxpayer may file an amended return.

37. Does the Information Document Request (IDR) Directive issued on February 28, 2014 apply to CAP taxpayers?

Answer

The requirements in Attachment 1 of the Directive issued on February 28, 2014 for issuing IDRs apply to the Pre-filing and post-filing phase 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 phase of CAP.

38. The February 28, 2014, Directive states that the process is mandatory and has no exceptions. Is the Directive going to be updated to provide an exception for CAP taxpayers?

Answer

The Directive will not be updated with regard to its application specifically to CAP cases.

39. Should the exam team issue a delinquency notice if the CAP taxpayer fails to meet IDR response dates during the Pre-filing phase?

Answer

The CAP Memorandum of Understanding requires timely, open, cooperative, and transparent interactions between the IRS and the CAP taxpayer. If the CAP taxpayer fails to respond to an IDR in a timely manner, the CAP team should discuss it with the taxpayer and elevate it to their management chain. If the taxpayer routinely misses deadlines then the CAP team and management should discuss whether the taxpayer should be terminated from CAP. A Delinquency Notice will not be issued in the Pre-filing phase of CAP.

40. Can a summons be issued to the taxpayer during the Pre-filing phase?

Answer

No. A summons cannot be issued if a return has not been filed.