The IRS has announced it is accepting CAP applications for the 2022 tax year, and detailed some updates. The Compliance Assurance Process (CAP) was developed by the Large Business and International (LB&I) Division of the IRS to improve federal tax compliance of large corporate taxpayers by employing real-time issue resolution tools and techniques.
Through CAP, the IRS and the taxpayer work together to resolve issues before filing tax returns. A successful CAP gives the IRS an acceptable level of assurance as to the accuracy of the tax return and shortens the length of the post filing examination.
CAP, essentially, is like having a pre-return audit for tax compliance, relying on a review of quarterly and annual financial statements.
Continuation of the modification of the “Open Year” Criteria
Historically, CAP eligibility was limited to taxpayers with no more than “one filed and one unfiled return open” on the first day of the applicant’s CAP year, though there were several exceptions (eg, pending Advance Pricing Agreement resolution, Competent Authority Assistance, etc.).
For the 2021 CAP Year, the IRS modified the requirement of “one filed” to allow “two filed” open returns, and this modification continues for the 2022 CAP year. This expanded eligibility offers more flexibility for CAP taxpayers, many of whom continue to struggle post-COVID. The IRS expects this requirement will revert to “one filed and one unfiled return open” for the 2023 CAP year.
Tax Control Framework (TCF) Questionnaire
For the 2022 CAP year, new CAP applicants are required to provide a TCF Questionnaire with the application.
For returning CAP taxpayers, internal controls over the tax function will be discussed and reviewed, and a questionnaire will be needed if there are any material changes during the course of the CAP year – such as a major reorganisation, acquisition, or outsourcing any part of the tax function.
Requirement for US GAAP Audited Financial Statements
CAP eligibility for 2020 was limited to U.S. publicly traded taxpayers required to prepare financial statements using US GAAP, though privately-held or foreign-owned taxpayers were given the opportunity to access the program if they provided financial statements in US GAAP.
This US GAAP eligibility requirement remains for the 2022 CAP year. However, the IRS will continue to assess this going forward and invites suggestions on viable alternatives in bridging and reconciling the disclosure gap between US GAAP and non-US GAAP reporting.
Local Knowledge – International Coverage
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