On August 27, 2018, the Internal Revenue Service (IRS) announced that the Compliance Assurance Process (CAP) program will continue, with some modifications. As we previously discussed, the IRS began an assessment of the CAP program in August 2016 to determine if any recalibration was needed.
CAP is an IRS program that seeks to identify and resolve tax issues through open, cooperative, and transparent interaction between the IRS and Large Business and International (LB&I) taxpayers prior to the filing of a return. The goal of CAP is greater certainty of the treatment of tax positions sooner and with less administrative burden than conventional post-file audits. The program began in 2005, and became permanent in 2011. Several notable taxpayers publically disclose their involvement in the CAP program.
With shrinking IRS resources, taxpayers and practitioners alike were worried that the IRS would scrap the program, relegating CAP taxpayers to roll the dice with regular IRS audits. Luckily, the IRS has announced that the CAP program is here to stay, albeit it with some tweaks to its process.
LB&I taxpayers apply for CAP, and have to be accepted into the program. There are three phases for CAP: Pre-CAP (where the taxpayer and the IRS work to close out open tax years with the goal of getting on a real-time audit schedule); CAP phase (where the taxpayer demonstrates its ability to be transparent and work collaboratively with the IRS to resolve tax issues before they are put on the return); and CAP Maintenance (for the most compliant taxpayers and marked by reduced IRS audit involvement).
In the announcement, the IRS described some changes for the 2019 CAP application season:
- The application period will begin on October 1, 2018, for existing CAP taxpayers who meet the eligibility requirements (see FAQS), including “suitability criteria.”
- With the application, taxpayers will be required to provide a preliminary list of material issues for the year, including specified transfer pricing and research credit information. The list of issues will be used to focus the CAP audit as well as resource allocation.
- There will be enhanced requirements of effective and prompt communication of issues (e.g., strict deadlines, etc.). Disagreements will be sent to Appeals sooner to ensure a faster resolution.
- Taxpayers will provide a representation letter within 30 days of filing the return (e.g., representing that it took the agreed-to positions on the return).
- Some CAP Maintenance taxpayers with the lowest compliance risk will not be audited at all.
The announcement also indicated that the CAP program will be open to new taxpayers in the future. Additionally, the IRS may include issue-based resolutions as part of the CAP program.
Practice Point: The announcement is welcome news to CAP taxpayers, who universally praise the program. It remains to be seen what “suitability criteria” the IRS will use to determine whether a taxpayer will stay in the CAP program. Anecdotally, we have heard that IRS CAP teams have been intimating that taxpayers who take contrary tax positions may no longer be “suitable” for the CAP program. It would be unfortunate if the IRS uses the CAP program as a sword to force taxpayers to abandon their tax positions merely to stay in the program. If that occurs, we would expect taxpayers to be indifferent to being in CAP if the stakes are large enough. Seemingly, the IRS would want to know all of the tax positions that taxpayers are taking as gleaned during a CAP audit, instead of removing them from CAP and hoping to identify the issues during a standard, random audit. Indeed, in this new world of reduced resources, a smarter approach might be to use the CAP program to gather intelligence on the tax positions that the largest and most sophisticated taxpayers are taking and apply that learning to the pool of non-CAP taxpayers.