Tax News Update    Email this document    Print this document  

The IRS's Large Business and International division (LB&I) is accepting new applications for its Compliance Assurance Process (CAP) program for tax year 2020. This is the first time that new applications have been solicited since the IRS announced in August 2016 that it would no longer admit new taxpayers into the program.

Background

CAP, a cooperative pre-filing program available to certain large taxpayers, 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.

In August 2018, LB&I announced certain changes to CAP for the 2019 filing season and future years (see Tax Alert 2018-1759).

Application period

The application period runs from September 16, 2019 to October 31, 2019. LB&I will notify applicants if they are accepted into the program around January 31, 2020. Acceptance is at the LB&I's sole discretion; however, applicants denied admittance into the program will be advised why they were not accepted.

Program eligibility

To be eligible for CAP, new taxpayers must:

• Have assets of $10 million or more
• Be a US publicly traded C corporation that is legally required to submit SEC Forms 10-K, 10-Q, and 8K
• Not be 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.

In addition, taxpayers currently under examination must not have more than one filed return and one unfiled return open on the first day of the 2020 CAP year. For 2020, the IRS expanded the list of open-year exceptions and developed a process for new applicants that are currently under examination.

Interested taxpayers may apply for the program using the newly updated Form 14234, which includes attachments requiring detailed information on (i) the taxpayer's research credit history; (ii) material cross-border transactions between the taxpayer and foreign related parties; (iii) the taxpayer's governance processes and internal controls related to tax; and (iv) the taxpayer's initial issues list. Accepted taxpayers must also sign a CAP Memorandum of Understanding (MOU) describing the applicable processes and procedures and the taxpayer's expectation of the program.

Implications

For taxpayers that have been seeking entrance into CAP, the LB&I announcement represents a long-awaited re-opening of the program after a multi-year freeze on new applications. The changes to the program are consistent with the IRS's August 2018 announcement regarding the 2019 CAP year and the expectations for future years. The addition of Form 14234-D, Tax Control Framework Questionnaire, to the application package also highlights the IRS's continuing focus on transparency and selecting relatively low-risk taxpayers for the program.

Taxpayers have a relatively short timeframe — just a month and a half — to submit their applications. Given the significant detail required on research credits, transfer pricing, and tax controls, would-be applicants need to act quickly to meet the October 31, 2019 submission deadline. New applicants should also be aware that, if accepted into the program, any unexamined return with an open statute of limitations will be risk-assessed as part of the taxpayer's first CAP year and may ultimately be examined.

———————————————