September 21, 2022
LB&I accepting new applicants for the 2023 CAP program
The IRS's Large Business and International division (LB&I) announced (IR-2022-158) that it is currently accepting new applications for its Compliance Assurance Process (CAP) program for tax year 2023. The application period is September 15, 2022 through November 15, 2022. The IRS will notify accepted applicants in February 2023.
The main update for the 2023 CAP application period is a return to the regular open-year criteria, which requires that applicants do not have more than one filed return and one unfiled return open on the first day of the applicant's CAP year.
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 CAP Program currently has three phases: (1) the CAP Phase (when the IRS and taxpayer resolve all or most tax positions before filing a tax return); (2) the Compliance Maintenance (CM) Phase (when the IRS, at its discretion, adjusts the level of review of the tax year based on the complexity and number of issues); and (3) the Bridge Phase (when the IRS will not accept any taxpayer disclosures, review any issues or provide any assurances).
The general eligibility requirements for applicants remain largely unchanged from last year's program (see Tax Alert 2021-1566). To be eligible for the 2023 CAP program, applicants must: (1) have assets of $10 million or more; (2) be a US publicly traded corporation that is legally required to submit SEC Forms 10-K, 10-Q and 8K; and (3) 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. Returning CAP participants that do not meet the second requirement may be grandfathered into the program if they commit to provide the IRS with financial statements prepared in accordance with US GAAP.
Changes in the 2023 CAP program
The 2023 CAP program has made some changes to previous requirements.
Return to pre-pandemic open-year criteria
Taxpayers currently in CAP cannot have more than one filed return and one unfiled return open on the first day of the applicant's CAP year, which reverts the program back to its pre-pandemic requirement.
Revised Eligibility Criteria for new applicants
The IRS is permitting new applicants for the 2023 CAP program that are currently under examination to have no more than three tax years open for examination on the first day of the applicant's CAP year. The examination team and applicant will determine that the examination team will close these open years no later than 12 months after the first day of the applicant's CAP year, if accepted.
As foreshadowed in the 2022 CAP year materials, the IRS has reverted to the pre-pandemic rules for open years by only permitting current CAP taxpayers to have one filed and one unfiled open return (for the past two years the IRS had allowed taxpayers to have up to two filed open returns and one unfiled open return). The IRS added some flexibility for new applicants that are under audit, however, by allowing more years to be open as long as the examination team determines and the taxpayer concurs that the open years will close from examination within 12 months of the first day of the applicant's CAP year. This should provide flexibility to new applicants and broaden the pool of taxpayers eligible to join the program.
With respect to the requirement that applicants must be US publicly traded corporations, the IRS said again it "will continue to assess" the requirement that all new CAP program applicants be publicly traded and legally required to submit SEC Forms 10-K, 10-Q and 8K, and "invites suggestions on viable alternatives."
As in prior years, the timeline to submit CAP program applications is relatively tight. Interested taxpayers should take note of the November 15, 2022 deadline to ensure consideration for admission into the program.