Compliance Assurance Process (CAP) - Frequently Asked Questions (FAQs)

Compliance Assurance Process (CAP) - Frequently Asked Questions (FAQs) The Compliance Assurance Process (CAP) is a method of identifying and resolving tax issues through open, cooperative, and transparent interaction between the Internal Revenue Service (IRS) and Large Business and International (LB&I) taxpayers (TPs) prior to the filing of a return. Through the CAP program, the taxpayer should achieve tax certainty sooner and with less administrative burden than conventional post-file examinations. # Question Answer 1. What's different about the permanent CAP program? The permanent CAP program features three distinct phases of participation available to TPs that meet program requirements as described below: Pre-CAP Phase: IRS and TP develop a plan to eliminate open years within a set timeframe. Provides TPs an opportunity to exhibit the transparency and cooperation required to be considered for the CAP program. TPs work with the IRS in the traditional post-file examination process to close ongoing, post-filing examinations of filed tax returns, with the ultimate goal of meeting the selection criteria and progressing to the CAP phase. CAP Phase: TP is required to be fully cooperative and transparent with significant managerial oversight. Requires TP to be fully cooperative and transparent during the pre-filing process by identifying transactions and issues within transactions and providing timely information to resolve those issues. Taxpayers that resolve all material issues with the IRS are assured prior to the filing of their tax returns that the IRS will accept their return if filed consistent with the resolutions agreed to by both parties. Compliance Maintenance Phase: IRS will adjust the level of review and time applied to each TP based on their unique factors. Features an adjusted level of review based on the TP's unique experience in CAP and history of compliance risk. Requires TPs to continue to maintain full transparency and disclosure of all material and significant transactions and issues. 2. Are Foreign Owned TPs eligible for CAP? 3. What are the eligibility criteria for the Pre- CAP phase? 4. What are the eligibility criteria for the CAP phase? Foreign-owned TPs that file 20Fs (Form 1120-F filers) are permitted to be in the CAP if they can provide documentation equivalent to the information that must be filed by US companies quarterly with the Securities and Exchange Commission (SEC). The TP must have assets of $10 million or more; The TP must be a publicly-held entity with a legal requirement to prepare and submit Forms 10K, 10Q, 8K or 20F or other disclosure type forms to the SEC or equivalent regulatory body or, if privately-held, agree to provide certified, audited financial statements or equivalent documentation on a quarterly basis; and The TP must not be under investigation by, or in litigation with, the IRS or other Federal or State agency that would limit the IRS access to current corporate tax records. The TP must have assets of $10 million or more. The TP must be a publicly-held entity with a legal requirement to prepare and submit Forms 10K, 10Q, 8K or 20F or other disclosure type forms to the SEC or equivalent regulatory body or, if privately-held, agree to provide certified, audited financial statements or equivalent documentation on a quarterly basis. The TP must not be under investigation by, or in litigation with, the IRS or other Federal or State agency that would limit the IRS access to current corporate tax records. If currently under examination, the TP must not have more than one filed return

that has not been closed in examination and one unfiled return for the year that has most recently ended, the return for which is not yet due. 5. What criteria will be utilized for a TP to be considered for the Compliance Maintenance phase? In coordination with the CAP team, the Director, Field Operations (DFO) will consider the following factors when evaluating a TP s eligibility for the Compliance Maintenance phase: Criteria for Consideration for Compliance Maintenance Considerations 1 TP maintains professional relationship and open, honest communication with the CAP team and consistency in tax department personnel. TP is transparent and cooperative and has fully disclosed all material and significant transactions. TP has good internal controls. Historically, TP has low risk transactions and limited controversy throughout the CAP. Open communication procedures were established between the IRS and the TP personnel and are adhered to. TP was proactive in advising the CAP team of major transactions that required significant resource planning prior to the completion date. TP responses to written and/or oral IDRs were given within the timeframe outlined in the requests and were complete. All TP personnel familiar with the transactions were made available to the team in a timely manner. There have been no changes in tax department personnel that would result in a significant learning curve. The assessments of TP transparency and cooperation in the prior CAP Year were optimal. TP has disclosed all transactions that have a material effect, along with their proposed tax positions, and identified the tax issues within the transactions. TP disclosed all material issues with regard to completed business transactions and no additional issues were identified by the CAP team during the post-file examination. TP provided M-3s or M-3 equivalents on a quarterly basis. A proven process is in place for disclosures that has worked unfailingly on prior CAP reviews. Minimal due diligence work is anticipated and the annual significant calculations have been reviewed with little to no changes during prior CAP Years. No issues have gone into post-file on prior CAP Years as a result of inadequate time to develop. No new issues have been discovered on the prior CAP Years when the return was filed. Additional Considerations: TP has minimal non-complex issues anticipated for the CAP Year (i.e. the TP is not considering any major new transactions during the year). Issues can be completed within 12-15 days per quarter. No domestic team members are needed and the review will require no more than 50-60 staff days for the AC during the pre-filing period. Specialist resources should be minimal (issues can be completed within 3-5 days per quarter).

1 The considerations provided here are intended as guidance for use by the Director, Field Operations in determining whether a TP is suitable for participation in the Compliance Maintenance phase. 6. What benefits does the CAP program provide to TPs and the IRS? 7. What is the application process for the CAP? While CAP is not suitable for every TP, it can deliver significant benefits to TPs and the IRS: Resolves issues prior to filing and provides tax certainty sooner. Decreases overall cycle time. Allows real-time review of transactions and promotes voluntary compliance. Provides resource and time savings to both IRS and TPs. Complements current corporate governance and accountability. Potential to avoid the need for TPs to file amended state tax returns. Provides earlier identification of emerging issues. All CAP program phases require TPs to apply for participation. The Pre-filing and Technical Guidance (PFTG) group checks each application to ensure the applicant meets the eligibility criteria, and then forwards the application to the Industry Director. All final decisions regarding the acceptance of applicants into the CAP are made by the Operations Committee. Pre-CAP applications are accepted at any time, and the timeline for the Pre-CAP cycle is based on agreed-upon timeframes between the IRS and the TP to close transition years. The CAP applications must be received between September 1st and October 31st of the year immediately preceding the CAP Year. TPs must sign a Memorandum of Understanding (MOU) once accepted into the program. In addition, the IRS will provide necessary CAP training and orientation to TPs the first year they are accepted into the CAP phase. 8. What does participation in the Pre-CAP phase involve? Pre-CAP enables TPs to work with the IRS in the traditional post-file examination environment to develop an action plan that will prepare the TP for meeting the CAP eligibility criteria. The Pre-CAP examination process includes the following: Application: Potential Pre-CAP TPs will complete the required application for acceptance into the program at any time during the year. They will not have to reapply for Pre-CAP each year once they are accepted into this phase. MOU: Once accepted into Pre-CAP, TPs must sign an MOU that outlines their agreement to meet the program requirements. This MOU will be effective for the first Pre-CAP Year and will continue for all years until they can close their transition years and fulfill the CAP selection criteria. IRS Team Coordinator (TC): Pre-CAP TPs will be assigned an IRS TC who will facilitate compliance and serve as their IRS point of contact. Pre-CAP Action Plan: The TC and the TP will develop an action plan for the TP to close all transition years within a set timeframe. Disclosures: Pre-CAP TPs will make open, comprehensive, and prompt disclosures of the transactions, material issues within the transactions, and other tax return issues related to the positions taken on their filed tax returns. Progression to the CAP Phase: For a TP to be eligible for the CAP, all transition years must be closed except for one open, filed year and one unfiled year. A postclosing review must also be conducted. Termination or Withdrawal from Pre-CAP: If either party is unable or fails to comply with the responsibilities and obligations outlined in the MOU, the parties will invoke the Rules of Engagement (IRM Part 4.51.1) to resolve any disputes. If the Pre-CAP TP fails to address any areas of concern raised by the IRS, the TP will be terminated from Pre-CAP. 9. What does participation in the CAP phase involve? CAP requires TPs to work cooperatively and in a transparent manner with the IRS during the pre-filing review and involves the following activities:

Application: Potential CAP TPs will submit the required application for acceptance into the CAP phase annually between September 1st and October 31st. MOU: Once accepted into the CAP, TPs must sign an MOU that outlines their agreement to meet the program requirements. This MOU will be effective for that CAP Year only and TPs must sign a new MOU for each year they are accepted into the CAP. CAP AC: CAP TPs will be assigned an AC who will facilitate compliance and serve as their IRS point of contact. CAP Plan: The scope of the review and materiality thresholds will be documented in a CAP Plan that will be discussed and provided to the TP. Disclosures: CAP TPs will make open, comprehensive, and contemporaneous disclosures of their completed business transactions, proposed tax positions, the tax issues within the transactions and other material items or issues and pertinent facts regarding material items. o Items Subject to Review Regardless of Materiality Thresholds: Tax Shelters Listed Transactions (mandatory IDR issued in the CAP) Transactions of Interest Fraudulent Transactions LB&I Compliance Initiatives Industry Director and Operating Division Directives (go to website) Coordinated Issues Emerging Issues Acceptance Letter: The IRS will issue either a Full Acceptance Letter or a Partial Acceptance Letter prior to the TP filing the return. The type of letter issued will depend on whether all of the material items or issues have been resolved. CAP Conclusion and Post-filing Exam: The IRS and TP will conduct a joint postfiling exam to verify that all items or issues were reported and disclosed as agreed and there were no new items or issues on the return that were not disclosed: o If the items or issues were reported as agreed and no new items or issues were discovered, the IRS will issue a No Change Letter to conclude the exam. o If the items or issues were not reported as agreed, an issue focused examination will be conducted for those items or issues and normal postfile procedures will be followed. o If new items or issues are identified on the return, an issue focused examination will be conducted for those items or issues and normal postfile procedures will be followed. o If a Partial Acceptance Letter was issued to the TP, those items or issues identified on the letter will continue to be worked in the post-file environment and normal post-file procedures will be followed. o The team will make a recommendation for TP continuance in the CAP for the following year. Termination or Withdrawal from the CAP: If either party is unable or fails to comply with the responsibilities and obligations outlined in the MOU, the parties will invoke the Rules of Engagement (IRM Part 4.51.1) to resolve any disputes and the TP may be terminated from the program. If at any time the TP determines it cannot comply with the MOU requirements, the TP may submit a written request to withdraw from the CAP and the IRS will issue a Termination Letter. 10. What does participation in the Compliance Maintenance phase involve? If CAP TPs have consistently demonstrated transparency and full disclosure, the IRS may, at its discretion, adjust the level of review based on the TP s unique factors such as the complexity and number of issues, and the TP s history of compliance, cooperation and transparency in the CAP. To be considered, TPs also must have completed one CAP cycle through post-file review. Compliance Maintenance is the same as the CAP phase except the level of review is continually evaluated and adjusted based on each TP s individual circumstances. The IRS may move TPs between the CAP and Compliance Maintenance phases at any time.

11. How can TPs submit applications for Pre- CAP? The applications will be available on the CAP home page and should be submitted by one of the following methods: Mail to the following address: Internal Revenue Service ATTN: LB&I: PFTG: Pre-CAP Mint Building 1111 Constitution Ave, NW Washington, DC 20224 Facsimile transmission to the attention of LB&I: PFTG: Pre-CAP at 202-283-8313 (not a toll-free call). Pre-CAP applications are accepted at any time and must only be submitted once for the duration of the TP s involvement in Pre-CAP. 12. How can TPs submit applications for the CAP? The applications will be available on the CAP home page and should be submitted annually between September 1 and October 31 by one of the following methods: Mail to the following address: Internal Revenue Service ATTN: LB&I: PFTG: CAP Mint Building 1111 Constitution Ave, NW Washington, DC 20224 Facsimile transmission to the attention of LB&I: PFTG: CAP at 202-283-8313 (not a toll-free call). 13. What is the CAP AC s role? The AC builds cooperative and collaborative relationships with their assigned TP. The AC will work with the TP, team member(s), and specialist(s) throughout the CAP Year to identify and resolve tax-related issues and ensure the filing of a compliant return. The AC s specific roles include the following: Ensure TP understands the expectations and requirements of the CAP and the MOU through discussions and training. Prepare exam plan, quarterly risk analyses, and 10k review, incorporating specialist plans and analyses. Provide input regarding TP cooperation and transparency assessments. Complete Issue Resolution Agreements (IRAs), Closing Agreement Form(s) 906, and issue the Acceptance Letters as well as obtain the TPs Post-filing Representation Letter. Conduct post-filing exam and follow normal post-filing procedures to close the case. 14. What is the CAP Team Manager s (TM) role? 15. What is the Pre-CAP Team Coordinator's (TC's) role? 16. What is the Territory Manager's (TTM's) role? Obtain team support for recommendations to accept/reject the CAP applications and forward to Territory Manager (TTM). Deliver decision to TP of CAP acceptance/rejection. Ensure TP understands the expectations and requirements of the CAP and the MOU through discussions and training. Attend the Opening Conference and support training. Prepare the quarterly assessments of TP cooperation and transparency. Work with TP to develop an action plan for the TP to close all transition years within a set timeframe. Ensure TP understands the expectations and requirements of the MOU and Pre- CAP/CAP through discussions and trainings (inviting all involved parties). Provide input regarding the assessments of TP s cooperation and transparency. Sign acceptance/rejection letter to TP. Attend Opening Conference for initial year of CAP and support other training and meetings as necessary. Ensure MOU has been signed by TP and DFO and original returned to the TM. Ensure signed copy of MOU has been returned to the TP. Review and approve exam plan and mid-cycle risk analysis.

Review TMs quarterly assessments of the TP cooperation and transparency. Assess the CAP team s adherence to the CAP policies/procedures. 17. What is the Director of Field Operations' (DFO s) role? 18. How are issues identified in CAP? Obtain team recommendations of TPs and accept/reject CAP applications; forward to Specialist DFO to obtain their acceptance/rejection of the TP. Approve and sign MOU then forward to TTM. Manage Form(s) 906, sign and return to TTM. Assess TTM s adherence to CAP policies/procedures. Support the CAP team as needed. Cooperation and transparency by both the TP and the IRS are critical to successful identification of issues in the CAP. Issues and items are identified in a number of ways: TPs should inform the IRS of all material items and issues immediately upon completion of business transactions. The IRS will review all internal and external sources (i.e. SEC documents) for any information related to the TP. The IRS will conduct a review of quarterly books and records supplied by the TP. 19. How are issues developed in the CAP? 20. How are issues resolved in the CAP? CAP allows the IRS to review a completed business transaction in real-time while the necessary specialists, experts and records are available. The TP should invite their experts to participate in the process to ensure all pertinent information is gathered and considered as issues are disclosed and developed. Issue resolution is structured to provide timely specialist and Counsel support throughout the process. If for some reason resolution cannot be reached in the pre-filing environment, the IRS will issue a Partial Acceptance Letter and allow the resolution process to continue in a post-filing audit. All of LB&I issue management tools remain available to the CAP team and TPs throughout the pre-filing and post-filing activities. For example, specialists, technical advisors and Counsel will be valuable members of the CAP team which will result in earlier recognition of emerging issues and quickly elevate the need for issuance of published guidance. 21. Does the CAP put the IRS in the business of providing tax opinions? 22. How will the CAP affect the Appeals process? 23. Can the Fast Track Settlement process be used in the CAP? 24. How do the new Uncertain Tax Position (UTP) requirements impact the CAP? 25. Why is the CAP a valuable tool for LB&I? 26. How can I learn more about the CAP? No. ACs are responsible for reviewing completed business transactions only and the resulting impact on book to tax transactions. While the AC will not be rendering an opinion on pre-transactional events, they will work with TPs to ensure appropriate tax treatment of completed transactions before the tax return is filed. Appeals is committed to concurrent participation and involvement in CAP issue resolution discussions. In accelerating these discussions to a pre-filing environment, LB&I anticipates the CAP will reduce the need for post-filing dispute resolution processes. All Appeals rights will remain available to the TP. Yes. Fast Track continues to be available as an ADR (alternate dispute resolution) tool during the CAP on an issue by issue basis both during pre-filing and post-filing. Once the TP elects Fast Track in pre-filing, it cannot be used for the same issue during post-file. All TPs subject to the new UTP reporting requirements will be required to submit Schedule UTP with their tax returns (the CAP does not exempt any TP from these requirements). Although it is acceptable for TPs to voluntarily provide UTPs during pre-filing stages of the CAP, it is not a requirement as TPs should already be providing the tax issue associated with each material transaction that is disclosed. The real-time review of material transactions with the necessary records, specialists and experts will serve to resolve issues, enhancing federal tax compliance (accuracy and correctness of the tax return) prior to filing, thus potentially eliminating the need for a postfiling examination. Real-time review of material transactions enables the IRS to address and resolve current tax year issues sooner. The IRS LB&I Division manages the CAP. For additional information about the program, please visit the CAP home page. Page Last Reviewed or Updated: March 31, 2011