Compliance Assurance Process (CAP) - Frequently Asked Questions (FAQs)
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.
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1. |
What's different about the permanent CAP program? |
The permanent CAP program features three distinct phases of participation available to TPs that meet program requirements as described below:
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2. |
Are Foreign Owned TPs eligible for CAP? |
Foreign-owned TPs that file 20Fs (Form 1120-F 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). |
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3. |
What are the eligibility criteria for the Pre-CAP phase? |
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4. |
What are the eligibility criteria for the CAP phase? |
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5. |
What criteria will be utilized for a TP to be considered for the Compliance Maintenance phase? |
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: Considerations1
1The considerations provided here are intended as guidance for use by the Director, Field Operations in determining whether a TP is suitable for participation in the Compliance Maintenance phase. |
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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:
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7. |
What is the application process for the CAP? |
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. |
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8. |
What does participation in the Pre-CAP phase involve? |
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:
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9. |
What does participation in the CAP phase involve? |
CAP requires TPs to work cooperatively and in a transparent manner with the IRS during the pre-filing review and involves the following activities:
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10. |
What does participation in the Compliance Maintenance phase involve? |
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 one 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. The IRS may move TPs between the CAP and Compliance Maintenance phases at any time. |
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11. |
How can TPs submit applications for Pre-CAP? |
The applications will be available on the CAP home page and should be submitted by one of the following methods:
Pre-CAP applications are accepted at any time and must only be submitted once for the duration of the TP’s involvement in Pre-CAP. |
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12. |
How can TPs submit applications for the CAP? |
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:
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13. |
What is the CAP AC’s role? |
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:
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14. |
What is the CAP Team Manager’s (TM) role? |
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15. |
What is the Pre-CAP Team Coordinator's (TC's) role? |
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16. |
What is the Territory Manager's (TTM's) role? |
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17. |
What is the Director of Field Operations' (DFO’s) role? |
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18. |
How are issues identified in CAP? |
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:
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19. |
How are issues developed in the CAP? |
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. |
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20. |
How are issues resolved in the CAP? |
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. |
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21. |
Does the CAP put the IRS in the business of providing tax opinions? |
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. |
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22. |
How will the CAP affect the Appeals process? |
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. |
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23. |
Can the Fast Track Settlement process be used in the CAP? |
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. |
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24. |
How do the new Uncertain Tax Position (UTP) requirements impact the CAP? |
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. |
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25. |
Why is the CAP a valuable tool for LB&I? |
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. |
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26. |
How can I learn more about the CAP? |
The IRS LB&I Division manages the CAP. For additional information about the program, please visit the CAP home page. |
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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? |
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. (a) A TP acquires all of the stock of another corporation and plans to make a section 338(a) election to treat the stock acquisition as an asset acquisition. A step within the transaction the TP must disclose is the allocation of purchase price to the assets acquired and the amount of investment banker fees capitalized. The taxpayer must then provide a detailed explanation of how the acquisition is expected to be treated for tax purposes, e.g., the allocation of the purchase price to the assets acquired and the amount of investment banker fees capitalized. (b) A corporation which at one time was a wholly-owned subsidiary of the TP, liquidates. The TP’s proposed return position is to recognize a loss on the liquidation pursuant to section 331. A step within the transaction the TP must disclose is how it reduced its stock ownership in the corporation to below 80 percent prior to the liquidation. The TP must then provide a detailed explanation of how it determined the amount of its loss on the liquidation. (c) A TP acquires an oil and gas interest and as a result plans to deduct intangible drilling costs. A step within the transaction that TP must disclose is that the TP acquired a working interest in an oil and gas lease. The taxpayer must then provide a detailed explanation of how the acquisition is expected to be treated for tax purposes, e.g., a description of the deduction of any intangible drilling costs. Disclosing steps within the transaction does not mean that the TP is required to disclose the various alternatives and related tax implementations it might have contemplated when structuring the business transaction. Further, taxpayers need not disclose potential challenges to their proposed reporting positions, hazards of litigation, and risk assessments of any uncertainties. Additionally, a material tax item within a transaction may or may not be subject to accounting reserves for book purposes under Accounting Standards Codification Subtopic (ASC) 740 and ASC 740-10. |
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28. |
Do TPs waive any rights as a result of entering into a CAP MOU? | 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. | |||||||||
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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? | 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. | |||||||||
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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? |
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. |
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31. |
What do materiality thresholds mean in a CAP review? How are they used? |
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. |
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32. |
Can changes be made to the Pre-CAP or CAP MOUs? |
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. |
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33. |
How are stub period returns for corporate acquisitions and dispositions handled in CAP? |
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. |
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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? |
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. |
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35. |
When is a CAP Action Plan required and who is required to sign this document? |
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). |
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36. |
Does Rev. Proc. 94-69 apply to CAP taxpayers?
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The procedures of Rev. Proc. 94-69 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. |
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