Compliance Assurance Process (CAP) Permanency

CAP Permanency CAP Overview

CAP Overview: History Pilot program began in 2005 with 17 TPs For 2011, 140 TPs are anticipated CAP phase will be permanent in 2012 STRESS – The CAP phase will become permanent for CAP Years that begin in 2012. Pre-CAP is permanent now!

CAP Overview: What is CAP? LB&I compliance strategy Method of identifying and resolving tax issues in a real-time environment What is CAP? First and foremost, CAP is an IRS compliance strategy. It is a method of identifying and resolving tax issues. Under this method, participating taxpayers work collaboratively with the IRS to identify and resolve tax issues in a real-time environment before the tax return is filed

CAP Overview: Basic Requirements Open, cooperative, and transparent interaction between IRS and LB&I TPs TPs disclose completed business transactions and the tax issue within the transactions TPs must contemporaneously disclose the completed business transactions and the tax issues within the transactions as soon as the transactions are complete.

CAP Overview: IRS Benefits Quality work product Post cycle-time has decreased Emerging issues have been identified sooner

CAP Overview: TP Benefits Certainty Currency Potential to avoid amending state returns

CAP Permanency CAP Permanency Phases

CAP Permanency: Three Phases Pre-CAP CAP Compliance Maintenance

CAP Permanency Phases Compliance Maintenance Pre-CAP CAP Service and TP develop a plan to examine tax returns of the open years within a set timeframe TP is required to be fully cooperative and transparent Service may adjust the level of review work and time applied to each TP based on their unique factors 10

Pre-CAP Phase: Description Traditional post-file environment Audit conducted by a Team Coordinator (TC), not an Account Coordinator (AC) The Pre-CAP takes place in a traditional post-file environment and is conducted by a Team Coordinator, not an Account Coordinator.

Pre-CAP Phase: Description (2) TP can apply at any time TP and IRS develop action plan to close transition years Purpose is to prepare TP to meet CAP selection criteria A taxpayer can apply and be recommended for Pre-CAP at any time. In the Pre-CAP phase, the taxpayer and the IRS work together to develop an action plan to eliminate transition years within an agreed amount of time. The purpose of the Pre-CAP phase is to close all transition years except for one open and one unfiled year in order to assist the Taxpayer in qualifying for the CAP phase.

Pre-CAP Phase: Requirements TP works with exam team to develop action plan to prepare TP for CAP TP signs a Pre-CAP MOU TP exhibits transparency and cooperation needed to progress to CAP

Pre-CAP Phase: Requirements (2) TP agrees to identify issues within transactions TP agrees to provide information in a timely manner to resolve issues

CAP Phase: Description TP proactively provides all pertinent facts to develop material issues Transparency and cooperation reduces use of resources IRS conducts due diligence review as appropriate. Resource savings for both TP and IRS Due diligence means the IRS retains the right to review any item that may be on the return (i.e., LIFO, 861 allocation, etc.). Teams can review the prior year workpapers to approve the methodology used for the calculation.

CAP Phase: Requirements TP signs the CAP MOU TP exhibits transparency and cooperation TP identifies tax issues within completed business transactions TP meets CAP eligibility criteria

CAP Selection Criteria Must have assets of $10M or more Must be a publicly held entity Legal requirement to prepare and submit 10Ks, 10Qs, 8Ks, 20Fs and other disclosure type forms to the SEC or equivalent regulatory body Note: this includes the domestic subs of foreign parents.

CAP Selection Criteria (2) Privately held entities will be eligible if they are able to provide to the Service certified, audited financial statements or equivalent documentation on a quarterly basis

CAP Selection Criteria (3) Must not have more than two income tax returns under consideration by the Service. Must not be in litigation with the Service and not under investigation that would limit access to books. Must not have more than two income tax returns under consideration by the Service. This includes one unfiled year and one filed year under exam Must not be in litigation with the Service and not under investigation by the IRS or any federal or state agency which would limit access to current corporate tax records or could result in a material tax item

CAP Application Example 2008/12 Filed 2009/12 Filed 2010/12 Filed 2011/12 Filed 09/15/2012 2012/12 Unfiled 2013/12 CAP Year Pre-CAP Years Transition Years (Intervening Yrs.) The CAP Assumption: 2013 will be the first CAP Year - 1 filed and 1 unfiled return plus the CAP Year. This is the structure presumed to be as of 10/31 of the year preceding the CAP Year.

Compliance Maintenance Phase: Description Teams conduct reduced scope and depth review Level of review based on TP’s experience in CAP TP’s history of compliance and risk

Compliance Maintenance Phase: Description (2) Allows ACs to manage more than one CAP case TP can move between CAP and Compliance Maintenance depending on the number and complexity of transactions

Compliance Maintenance Phase: Requirements TP completed one CAP cycle through post-file TP maintains professional relationship with CAP team TP maintains consistency in tax department personnel The requirements to consider in evaluating a taxpayer’s eligibility for this new compliance maintenance phase include:

Compliance Maintenance Phase: Requirements (2) TP must continue to maintain full transparency and cooperation TP must disclose all material transactions and the tax issues within the transactions TP has good internal controls

Compliance Maintenance Phase: Requirements (3) Historically, throughout CAP: TP has low risk transactions TP has limited controversy TP has minimal non-complex issues anticipated for the CAP Year

CAP Program Information Resources – External Website External CAP website – See irs.gov Internal Revenue Manual MOUs FAQs

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