The Internal Revenue Service is conducting a pilot program, the Compliance
Assurance Process (CAP), for large business taxpayers. Under this pilot program,
the Service’s Large and Mid-size Business Division is working with large
business taxpayers to identify and resolve issues prior to the filing of a
tax return. The objective of the program is to reduce taxpayer burden and
uncertainty while assuring the Service of the accuracy of tax returns prior
to filing, thereby reducing or eliminating the need for post-filing examinations.
The CAP will reduce taxpayer burden through the contemporaneous exchange
of information about completed events and transactions that affect tax liability,
rather than through the traditional examination process. The CAP will also
foster compliance by helping the Service achieve its goal of shortening examination
cycles and increasing currency for taxpayers while enhancing the accurate,
efficient, and timely final resolution of increasingly complex corporate tax
issues. In addition, the program will assist in increasing audit coverage
by providing a more efficient use of audit resources. Finally, the program
will allow taxpayers to better manage tax reserves and ensure more precise
reporting of earnings on financial statements.
Several large business taxpayers volunteered to participate in the CAP
pilot program during the 2005 tax year. Upon its conclusion, the Service
will evaluate the pilot program, consider necessary adjustments, and determine
whether to make the program permanent.
The CAP requires extensive cooperation between the Service and participating
taxpayers. Throughout the tax year, these taxpayers are expected to engage
in full disclosure of information concerning their completed business transactions
and their proposed return treatment of all material issues. Participating
taxpayers that resolve all material issues will be assured, prior to the filing
of the tax return, that the Service will accept their tax return, if filed
consistent with the resolutions (described below), and that no post-filing
examination will be required. If all issues cannot be resolved prior to the
filing of the return, the program will identify the remaining items that will
need to be resolved through traditional examination processes.
Significant aspects of the CAP include:
-
Communication of information about completed transactions in a manner
that is timely and allows a meaningful analysis of material items affecting
the tax return;
-
The review of significant transactions immediately after completion,
while knowledgeable personnel and necessary records are most accessible;
-
The sharing of all relevant data and positions between the Service and
the taxpayer;
-
The early identification of compliance issues in need of resolution;
-
Access to and willingness to participate in issue resolution methods;
and
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Determination of return acceptance prior to filing.
The program does not include providing participating taxpayers with
guidance on or resolving prospective or incomplete transactions outside of
existing procedures.
The Service has assigned an Account Coordinator to each taxpayer participating
in the CAP pilot program. The Account Coordinator serves as the primary point
of contact with the Service for issue resolution. The Account Coordinator
will review the taxpayer’s audit history and prior tax issues and will
become familiar with relevant industry trends and current business practices
of the taxpayer. To ensure proper and accurate evaluation of all tax items,
the Account Coordinator will consult with Service specialists, Appeals personnel,
and Chief Counsel advisors. Similarly, participating taxpayers have designated
personnel to act as the primary contact for the Account Coordinator.
The Service has also asked the participating taxpayers, if relevant:
-
To provide an industry overview;
-
To prepare current organizational charts reflecting all related entities
and the flow of relevant information involving those entities;
-
To give financial performance information;
-
To outline any anticipated significant events that will affect reporting
for the tax year;
-
To give access to accounting records and systems; and
-
To make available the necessary resources for disclosure of requested
information.
All information provided to the Service in connection with the CAP concerning
the participating taxpayers’ tax liability and all closing agreements
entered into between the Service and the participating taxpayers are return
information protected from disclosure by the confidentiality provisions of
section 6103.
A standardized memorandum of understanding (MOU), which sets the ground
rules for the CAP, has been executed between each participating taxpayer and
the assigned Account Coordinator. The MOU defines specific objectives for
the program, sets parameters for the disclosure of information, describes
the methods of communication, and serves as a statement of the parties’
commitment to good-faith participation in the CAP. Adherence to the processes
established by the MOU is an integral part of resolving identified issues
and assuring the Service of the accuracy of the tax return. Failure to comply
with the terms of the MOU may result in removal of the taxpayer from the program.
The Account Coordinator and the taxpayer will work together during the
process to identify and resolve issues. As issues are resolved, the Account
Coordinator and the taxpayer will enter into Issue Resolution Agreements (IRAs)
recording the resolutions. When necessary, the parties may use existing issue
resolution processes, such as Fast Track Settlement (Rev. Proc. 2003-40, 2003-1
C.B. 1044). After the close of the tax year, the Account Coordinator will
incorporate the resolution of the identified issues in Form 906 closing agreement(s),
based on the completed IRAs. The CAP does not change or modify LMSB’s
current authorities to resolve cases.
If the taxpayer has fully complied with the terms of the MOU, and all
identified issues have been resolved through closing agreement(s), the Service
will provide the taxpayer with written confirmation that, subject to the completion
of a post-filing review, it will accept the taxpayer’s return if it
is filed consistent with the closing agreement(s).
If the taxpayer has fully complied with the terms of the MOU, but the
Service and the taxpayer cannot resolve all identified issues prior to filing
the tax return, the Service will provide the taxpayer with written confirmation
that, subject to the completion of a post-filing review, it will accept the
taxpayer’s return as to the resolved issues if the return is filed consistent
with the closing agreement(s).
Once the taxpayer files the return, the Service and the taxpayer will
participate in a joint post-filing review to confirm that all resolved issues
were reported as agreed. It is expected that this post-filing review will
be completed within 90 days of the filing of the return. If the post-filing
review reveals that the return is not consistent with the terms of the closing
agreement(s), or reveals that there are items on the return presenting material
issues that were not adequately disclosed, the Service will examine all inconsistent
or inadequately disclosed issues through the traditional examination process.
The taxpayer will retain access to all available Appeals proceedings with
respect to any traditional examination that is conducted.
Although the CAP is not subject to the restrictions in section 7605(b),
the Service will only reopen the year after the post-filing review has occurred
and any traditional examination of inconsistent or inadequately disclosed
issues has concluded if the circumstances set out in section 5 of Rev. Proc.
2005-32, 2005-23 I.R.B. 1206, apply.
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