The IRS Large Business and International Division said it has considered the effects of the coronavirus pandemic in modifying its compliance assurance process program for 2021 and will open the program to applicants in September.
In an August 27 news release (IR-2020-193), the IRS said it has modified the CAP eligibility criterion that limits the number of open years taxpayers may have to qualify for the program, which allows taxpayers to resolve issues before filing a tax return.
The IRS elaborated on the CAP updates and changes for 2021 in an accompanying website post, which explained that applicants may have two filed open returns on the first day of the 2021 CAP year rather than one under the 2020 program.
“This expanded eligibility requirement offers more flexibility for CAP taxpayers in a year in which many have faced unprecedented circumstances in their operations or unexpected impacts to their tax posture,” the website post says.
On an August 18 webinar, LB&I Deputy Commissioner Nikole Flax signaled that changes to CAP were coming to provide flexibility to prevent the effects of COVID-19 from jeopardizing participants’ eligibility to continue in the program. For example, Flax said that some taxpayers could be in loss positions now that they haven’t been in before, or they might “need to file preliminary returns to address issues.”
The CAP program provides real-time issue resolution for taxpayers, relying on cooperative and transparent interactions between companies and the IRS to work toward resolution of all or most tax positions before returns are filed. It provides taxpayers and the IRS an opportunity to agree on the treatment of completed transactions, saving taxpayers time and providing certainty on critical tax issues. CAP taxpayers are historically compliant and represent the lowest compliance risk.
New applicants must have assets of $10 million or more, be a U.S. publicly traded corporation that’s required to file SEC financial statements, and “not be under investigation by, or in litigation with, any government agency that would limit the IRS’s access to current tax records,” the release notes.
The application period for the 2021 CAP program will run from September 1 through November 13, and applicants will be notified if they’ve been accepted into the program in February, according to the release.
The CAP prefile audit program — which reopened to new applicants last year, after a multiyear hiatus, and now has about 150 taxpayers — will generally be similar to last year with the expectation that new taxpayers will enter the program and some will leave, Flax said on the webinar. She added that LB&I “will continue to watch how the program is operating and make adjustments” as needed.
Tax-Related Internal Controls
New applicants must submit a “Tax Control Framework Questionnaire” with their application, as was required of taxpayers in 2020.
The questionnaire requires taxpayers to describe their tax governance process and the system of internal controls that ensures accurate and complete federal income tax returns, information reporting, tax reporting data, and other tax-related disclosures.
“The responses received were reviewed by CAP teams and leadership and found to be very helpful in providing a full picture of the range of tax controls across the CAP taxpayer population,” according to the IRS website post.
Returning CAP taxpayers, however, aren’t required to complete the form for 2021, but instead will discuss their internal controls over their tax function at the opening conference with the IRS. If there have been any material changes since their prior responses, taxpayers must submit an updated questionnaire.
“Likewise, all taxpayers who have material changes to their tax function during the course of the CAP year, such as a major reorganization, have been acquired or decide to outsource any part of their tax function will be required to update the questionnaire,” the IRS said.
Bridge Phase Capped
Selected participants in the CAP program that have been in the maintenance phase may enter the “bridge phase,” during which the IRS doesn’t conduct an audit of the taxpayer except under limited circumstances.
LB&I assesses whether it’s worth allocating resources to audit specific taxpayers based on past experience and their current tax posture, according to Flax.
Bridge phase participation was limited to one year in 2019, but the IRS allowed for consecutive years beginning in 2020 without setting a maximum time period, according to previously posted questions and answers.
The IRS website post says that beginning in 2021, taxpayers can remain in the bridge phase for two consecutive years, which means they “will ordinarily be in the CAP or Compliance Maintenance phase for the subsequent year (assuming they are accepted into the program for this year).”
GAAP Statements Still Required
For the 2020 CAP year, LB&I established firm eligibility and suitability criteria that taxpayers had to satisfy and said that taxpayers not meeting those requirements wouldn’t be allowed to remain in the program, subject to some exceptions.
For example, taxpayers must provide U.S. audited financial statements prepared under generally accepted accounting principles to enter the program.
According to the IRS’s website post, the agency stands firm on that requirement for 2021 but “will continue to assess this requirement going forward and invites suggestions on viable alternatives in bridging and reconciling the disclosure gap between U.S. GAAP and non-U.S. GAAP reporting.”
The IRS pointed out that “existing CAP taxpayers who are privately-held or foreign-owned were given the opportunity to remain in the program if they made the commitment to provide financial statements prepared in accordance with U.S. GAAP.” While some taxpayers made that commitment and remained in the program, others that couldn’t became ineligible to participate in CAP, the IRS said.