The IRS's Large Business and International division (LB&I) has announced (IR-2024-211) that it is currently accepting new applications for its Compliance Assurance Process (CAP) program for tax year 2025. The application period runs from September 4, 2024 to October 31, 2024.

The updates to the program include: (1) allowing privately-held C corporations, including foreign-owned, to apply to the program, (2) making the Bridge Plus Phase permanent, (3) requiring the new Form 14234-E, Cross-Border Activities Questionnaire (CBAQ), to cover specific international issues, and (4) excepting taxpayers with certain Inflation Reduction Act (IRA) issues from the limit on open tax years.

The IRS will notify participants in February 2025 if they are accepted into the program.

Requirements for 2025 CAP program

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 generally allows the IRS and taxpayers to agree on the treatment of various tax issues before a return is filed. To be eligible for the 2025 CAP program, applicants must:

• Have assets of $10 million or more
• 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
• Be:
• A US publicly traded corporation that is legally required to submit SEC Forms 10-K, 10-Q and 8K
• A privately-held C corporation (including foreign-owned) with audited financial statements prepared in accordance with US Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), or another permissible method, as deemed appropriate by the IRS
  or
• A partnership that was accepted into CAP since 2020 with the same financial statement requirements

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. New applicants can have no more than three tax years open on the first day of the applicant's tax year (and they must agree that the open years will close no later than 12 months after the first day of its tax year).

CAP phases

The CAP Program, for 2025, will have 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 Plus phase, which becomes permanent with the 2025 CAP cycle (when the IRS reviews eligible taxpayers' returns for compliance before they file).

The Bridge phase was developed in 2019 for taxpayers whose risk of noncompliance did not warrant continuous use of LB&I examination resources. Applicants could remain in the Bridge phase for two consecutive years and then return to the CAP phase or Compliance Maintenance phase for the subsequent tax year. In 2023, the IRS added the Bridge Plus phase in response to taxpayer feedback that placement in the Bridge phase did not allow IRS review or assurances (see Tax Alert 2023-0301), which provided taxpayers certainty around their filing positions. Following a successful pilot, the IRS retired the Bridge phase and made Bridge Plus permanent for the 2025 CAP cycle.

Updates for the 2025 CAP program

The 2025 CAP program has made some changes to previous requirements.

Eligibility criteria

Starting with the 2025 CAP cycle, the IRS will accept applications from privately-held C corporations, including those that are foreign-owned. Privately-held applicants must submit audited financial statements that are specific to the taxpayer (not of a related entity and/or parent) and have been prepared in accordance with US GAAP, International Financial Reporting Standards (IFRS) or another permissible standard.

Inflation Reduction Act

As for the 2024 CAP cycle, 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 and new applicants can have no more than three tax years open on the first day of the applicant's tax year.

For the 2025 CAP cycle, a tax year that remains open only because of an outstanding IRA tax issue (such as the corporate alternative minimum tax, the excise tax on stock buy-backs and several clean energy credits) will not be considered an open filed return on the first day of the applicant's CAP year.

Form 14234-E, Cross-Border Activities Questionnaire (CBAQ)

The new CBAQ is required for the 2025 CAP cycle.

The IRS has been using the CAP Research Credit Questionnaire (CRCQ) and the Material Intercompany Transactions Template (MITT) to gather information from taxpayers at the beginning of the CAP process, and the resource and timing needed to address these issues. The new CBAQ was developed to address more specific international issues.

New applicants for the 2025 cycle must submit the CBAQ as part of their documentation. Returning applicants must submit the CBAQ 90 days after the prior tax year-end and at the same time as the tax return filing. An interim CBAQ must be submitted within 30 days after any material transaction or activity identified in the CBAQ as completed.

Bridge Plus phase

The IRS made Bridge Plus permanent for the 2025 CAP cycle. Taxpayers in Bridge Plus must submit book-to-tax reconciliations, credit utilization and other supporting documentation after finalizing their audited financial statements. The IRS then conducts a risk assessment of the documents. The taxpayer must submit a draft return 30 days before filing the tax return. The IRS will review the return for consistency with previously filed documentation. If consistent, the taxpayer will be instructed to file the return and then issued a full acceptance letter for the filed return.

Implications

Consistent with the IRA Strategic Operating Plan, the IRS is expanding the accessibility of CAP, one of its prefiling and tax certainty programs. The changes for the 2025 CAP cycle broaden the group of taxpayers that are eligible for the program, add flexibility to the open-year return rule for novel issues, and provide certainty to program participants through Bridge Plus. The addition of the CBAQ should also help identify issues up front that require attention versus those that do not, allowing both taxpayers and the IRS to better plan for sufficient resources in the CAP cycle.