The IRS announced the opening of an application period for the Compliance Assurance Process program for 2023. The application period began on Sept. 15 and will end on Nov. 15, 2022.
On September 15, 2022, the IRS announced the opening of an application period for the Compliance Assurance Process (CAP) program for 2023. The CAP program facilitates real-time issue resolution during the current tax year and generally results in an agreed examination report prior to the filing of the return for that year. The application period began on Sept. 15 and will end on Nov. 15, 2022. According to the release, the IRS will inform applicants if they are accepted into the program in February 2023.
Eligibility for the CAP Program
Eligibility for the CAP program is limited to corporations that:
- Have assets of $10 million or more,
- Are U.S. publicly traded corporations with a legal requirement to prepare and submit Securities & Exchange Commission (SEC) Forms 10-K, 10-Q, and 8-K, and
- Are not under investigation by, or in litigation with the IRS or any other government agency that would limit the IRS’s access to current tax records.
Background and benefits of the CAP Program
The IRS instituted the CAP program in 2005 as a pilot program and made it permanent in 2011. The program employs real-time issue resolution to improve federal tax compliance by resolving issues prior to the filing of a tax return. The IRS and the taxpayer review transactions during the tax year with the intent to reach an agreement on how the transactions should be treated before they are reported on a tax return. CAP requires the taxpayer to openly and contemporaneously exchange information related to major transactions that affect its federal tax liability, as well as to discuss its proposed treatment of such transactions on its return.
For the taxpayer, the benefits of being in the CAP program include early certainty surrounding its material tax return positions and the elimination of lengthy and expensive post-filing examinations. Among other benefits, this permits the taxpayer to avoid having to set up financial statement reserves. For the IRS, the advantages include the achievement of an acceptable level of assurance regarding the accuracy of the taxpayer’s filed tax return and the conservation of resources that would be required of a typical post-filing examination. The program also provides the IRS insight into emerging trends and issues, potentially affording the IRS advance notice of issues requiring either guidance or tailored enforcement action.
Eligibility for the CAP Program
To participate in the CAP, taxpayers must adhere to CAP program limits on the number of open years. The general eligibility and suitability criteria specify that if currently under examination, the taxpayer must not have more than one filed return and one unfiled return open on the first day of an applicant’s CAP year. For a new applicant currently under examination, to be eligible for participation in the CAP program, the current cycle must be closed and the subsequent cycle not started on the first day of the applicant’s CAP year.
The forms that must accompany a CAP application elicit information about the taxpayer’s internal controls and require a preliminary list of material issues. This list will be the starting point for finalizing an agreed issues list, which will list the issues that will be reviewed during the tax year. The materiality threshold is jointly negotiated between the taxpayer and the IRS. Materiality thresholds are transactional dollar amounts above which a completed transaction will be disclosed by the taxpayer and reviewed as part of the CAP process.
If the taxpayer has transfer pricing or is claiming a research credit in 2022, they must also supply specified information concerning those topics as part of their application. For the research credit, the taxpayer must complete and submit the CAP Research Credit Questionnaire; for transfer pricing, the taxpayer must submit the Material Intercompany Transactions Template, also known as the MITT. Templates for each of these documents may be found on the IRS's CAP webpage. The MITT requires taxpayers to report information on related-party transactions from Forms 5471, 5472, 8865, and 8858, as well as section 6662 documentation, based on the taxpayer’s last filed tax return before the commencement of the CAP year.
New CAP applicants are directed to email an application to the CAP program mailbox. If the taxpayer meets the eligibility and suitability criteria, the application is forwarded to the Large Business & International (LB&I) compliance practice area director with jurisdiction over the taxpayer for an evaluation of the application. The IRS’s acceptance of a CAP application is communicated to the taxpayer in writing by the territory manager assigned to the taxpayer. Taxpayers whose applications are not approved are given the reasons why the application was not accepted into the program.