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IRS Continues Eased Compliance Program Eligibility Requirement

Posted on Aug. 24, 2021

The IRS Large Business and International Division will continue to provide flexibility for its 2022 compliance assurance process program regarding the open-year criteria and will begin accepting applicants in September. 

In an August 23 press release, the IRS said the CAP eligibility criteria modified amid the COVID-19 pandemic that allows two filed open returns rather than one will continue to apply for the 2022 program. The CAP program allows taxpayers to resolve issues before filing their tax returns. 

The IRS elaborated on the CAP updates and changes for 2022 in an accompanying website post, which explains that applicants currently under examination can’t have more than two filed returns and one unfiled return open on the first day of the applicant’s CAP year. 

“This expanded eligibility requirement offers more flexibility for CAP taxpayers in a year in which many continue to face unprecedented circumstances in their operations or unexpected impacts to their tax posture,” the IRS said. But for the 2023 CAP year, the IRS expects to return to the historical open-year eligibility criteria of one filed and one unfiled return, according to the website post. 

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. 

Getting in the Door 

New applicants must have assets of $10 million or more, be U.S. publicly traded corporations that are 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. 

For purposes of the open-year criteria, a return is treated as closed if it was closed in examination or qualifies for one of several exceptions, including returns placed by LB&I in suspense for specific reasons, such as pending advance pricing agreement resolution or competent authority assistance. 

For the 2022 CAP program, the IRS said the exceptions for treating a return as closed remain unchanged, except it is eliminating the section 965 exception that applied to 2017 returns that remained open only because of an income inclusion issue under that provision. 

The application period for the new CAP year will run from September 1 through November 1, and applicants will be notified in February 2022 whether they’ve been accepted into the program, according to the release. 

Tax-Related Internal Controls 

New applicants are still required to submit a “Tax Control Framework Questionnaire” with their applications. 

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. 

Returning CAP taxpayers aren’t required to complete the form, 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. 

Audited GAAP Financial Statements 

Beginning with the 2020 CAP year, LB&I established firm eligibility and suitability criteria that taxpayers have to satisfy to remain in the program, subject to some exceptions. 

For example, taxpayers have had to provide U.S.-audited financial statements prepared under generally accepted accounting principles to enter the program. That requirement continues for the 2022 CAP year, the website post notes, explaining that “without a tax return, CAP relies on the review of quarterly and annual financial statements to identify and verify that the correct material tax issues are being reviewed.” 

Existing CAP taxpayers that are privately held or foreign-owned and have committed to providing U.S. GAAP financial statements have remained in the program. Those taxpayers unable to make that commitment are no longer eligible for the CAP program, the IRS said. 

The IRS reiterated that it “will continue to assess this requirement going forward and invites suggestions on viable alternatives in bridging and reconciling the disclosure gap between US GAAP and non-US GAAP reporting.”

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