September 6, 2018 IRS announces changes to Compliance Assurance Program (CAP) On August 27, 2018, the IRS announced (IR-2018-174) changes to the Compliance Assurance Program (CAP) for the 2019 application season and future years. The changes are intended to continue and improve operation of the program in light of the IRS's limited resources. Background CAP is a cooperative pre-filing program available to certain large taxpayers that began as a pilot program in 2005 and was made permanent in 2011. It is intended to allow the IRS and taxpayers to reach agreement on the treatment of various tax issues before a return is filed. The program involves three phases: (1) pre-CAP, (2) CAP and (3) Compliance Maintenance. For details, see Tax Alert 2011-0591. Interested taxpayers must apply for the program and participants must apply annually to continue in the program each year. Currently, there are 169 taxpayers in the program. In August 2016, the IRS announced that it was suspending acceptance of new taxpayers into the CAP program while it assessed whether changes to the program were needed (see Tax Alert 2016-1487). Changes for 2019 The IRS is instituting various changes to the CAP for 2019, as described below. For the 2019 year, CAP is limited to current participants. It will be open more broadly in future years. To give current CAP participants more time to assess the changes, the IRS stated that it is shifting the application period for the 2019 season to October 1, 2018, through November 30, 2018. Preliminary list. As part of 2019 applications, taxpayers will have to provide a preliminary list of material issues for the year, including, if applicable, specified transfer pricing issue information and research credit information. The IRS will use this list as the starting point for discussions to reach an agreed issues list, which will be used to determine issues for review and to allocate resources. CAP resource allocation and availability. The IRS Large Business & International division (LB&I) will allocate resources to the CAP as part of its annual planning, and such allocations may determine the number of taxpayers in the program and what issues can be addressed. Additional communication and resolution requirements. Both taxpayers and LB&I will be subject to additional requirements with regard to communicating and resolving issues. As an example, the IRS stated that certain transfer pricing issues may be required to be resolved via the Advance Pricing Agreement program. In addition, LB&I will establish a 90-day goal for issue resolution, and disagreements on issues will be sent to Appeals "on a timelier basis." Representation letter and review timeframes. To promote timely resolution of each year's issues, taxpayers will be required to provide a representation letter within 30 days of return filling. The IRS will also be subject to timeframes for post-file review. Taxpayers and the IRS will jointly review progress and provide input for future years. Modification of Compliance Maintenance phase. The CAP Compliance Maintenance phase will be modified so that the lowest risk taxpayers may continue in the program without IRS review for a particular year. Changes for future years Additional changes to the CAP anticipated in future years include: — CAP will be opened to additional taxpayers that meet eligibility criteria and program requirements. — Taxpayers will be required to provide certification of a tax control framework. — LB&I will consider whether issue-based resolutions are appropriate as the program is expanded. — Additional modifications to the 2019 changes may be made in light of subsequent experience. Implications Generally, the IRS announcement is good news for taxpayers currently in CAP and those seeking entrance to CAP. The announced changes, including the requirement that CAP taxpayers provide an issue list with their annual application, signal the IRS's efforts to manage its resources more effectively. Resource considerations are also underpinning a potential requirement that CAP taxpayers with resource-intensive transfer pricing issues resolve those issues in the APA program. Additionally, the IRS announced that it will continue the CAP Maintenance program with a significant modification for some CAP Maintenance participants. It appears that certain CAP Maintenance participants will continue in the program without IRS review for a particular year and achieve the same level of certainty as in the past. This development is noteworthy as it signals the IRS's willingness to provide certainty to taxpayers based on filing history and past transparency. The announcement provides some preliminary insights on how LB&I may revise their strategic approach to tax enforcement in an environment of lower budgets and resources. Specifically, for future years, the IRS will require CAP applicants to certify their tax control frameworks. A tax control framework is generally defined as an organization's control function, aimed to allow the taxpayer to be fully aware and in control of all tax positions and issues, and to achieve the company's goals and objectives around tax. Using a review of a taxpayer's tax control framework to assess suitability for CAP is a notable addition to the current requirement of transparency. The announcement indicates additional information will be shared as available. ———————————————
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