Large Business and International Examination Process Changes

By Kathy Petronchak, CPA, and Jim McNiff, J.D., Washington, DC

Editor: Valrie Chambers, Ph.D., CPA

Practice & Procedures

While the IRS continues to increase its enforcement activities and the number of examinations each year, the Large Business and International (LB&I) Division has focused on improving the quality, efficiency, and effectiveness of the overall compliance and examination process for LB&I taxpayers. Two initiatives that stem from these efforts are the quality examination process (QEP) and the compliance assurance process (CAP). Both offer eligible taxpayers an opportunity to have a greater role in examination planning and to conserve resources in the process.

The Quality Examination Process

Most LB&I tax returns are complex, and their examinations are often time-consuming and involve many challenging issues. To make the examination process more efficient and to improve communications between examiners and taxpayers, the IRS updated the Internal Revenue Manual (IRM Section 4.46) to provide the QEP guidelines for administering quality examinations of LB&I returns.

QEP: A Three-Phase Process

The QEP guidelines provide for three distinct phases of the examination process. The first phase—planning—focuses on preexamination activities and is designed to develop an effective examination plan that the taxpayer and the IRS agree upon. Prior to meeting with the taxpayer, the examination team reviews all available public and internal IRS information concerning the taxpayer to perform a risk analysis and to identify potential issues to be examined. During this phase, the taxpayer and the exam team meet to discuss aspects such as timelines, transparency, taxpayer roles and responsibilities, the potential for involvement of technical specialists and counsel, and an overview of alternative dispute resolution options. At this initial meeting, the taxpayer provides an overview of its business operations, recordkeeping procedures, and financial statement and tax return preparations, as well as a discussion of any unusual events that occurred during the examination period. The exam team and the taxpayer should finalize and agree to a plan that will govern the examination.

Phase two of the QEP is the execution stage, during which an emphasis is placed on continuous dialogue. The exam team is responsible for keeping the taxpayer informed of any changes in the scope of the examination and any need to consult with a specialist or counsel, or to perform any new risk analyses. During this phase, the exam team explains the issues selected for examination and asks the taxpayer to brief it on the facts of each issue identified. Additionally, the taxpayer is responsible for responding to all information document requests in the manner and time frame agreed upon in the exam plan. More important, the QEP provides for ongoing discussions and meetings to review the progress made in executing the plan or causes for delay.

During the final stage of the QEP, the resolution phase, the exam team is responsible for reaching agreement with the taxpayer on the facts of the issues developed for consideration. The exam team should discuss with the taxpayer any proposed adjustments and allow the taxpayer to confirm the facts and clarify its position. The guidelines also encourage using issue resolution strategies (e.g., fast track, early referrals to Appeals) at this point to resolve unagreed issues.

CAP: Beyond Post-Filing Examinations

On March 31, 2011, the IRS announced that it was expanding and making permanent the CAP pilot program. CAP is intended to reduce taxpayer uncertainty by working with taxpayers to identify and resolve issues as they arise prior to filing a tax return. In addition to conserving resources previously spent on the post-examination process and improving clarity for returns as the taxpayer files them, CAP also gives taxpayers certainty and clarity for purposes of financial statement reporting.

The CAP program is open to both public and nonpublic entities that have regularly audited financial statements or equivalent documentation and assets of $10 million or more. While the eligibility requirements are the same for public and nonpublic entities, the documentation may be different for nonpublic entities that do not make the same filings as public companies. For nonpublic entities, the IRS has agreed to review certified audited financial statements or equivalent documentation but has not elaborated on what it means by “equivalent documentation.”

The Three Phases of CAP

Once a taxpayer has submitted an application, the IRS determines whether to admit a taxpayer to the initial phase, known as pre-CAP. (The “Pre-CAP and CAP Application” and other CAP resources are available on the IRS website.) In this phase, the taxpayer works with a team of auditors to address unexamined open years and resolve any issues relating to those years. For example, if a taxpayer applies to pre-CAP in 2012 and has completed an examination of the 2008 tax year, the taxpayer will work with a team of IRS agents to review the 2009, 2010, and 2011 tax years on a post-filing basis in pre-CAP. Taxpayers with multiple unexamined years should expect to be in pre-CAP longer to address all the unexamined periods.

In the second phase of the program, the taxpayer and the IRS work together on the next applicable tax return the taxpayer will file, to address issues on a pre-filing basis. The process is similar to pre-CAP, where transparency and a willingness to work through issues are key. However, because the taxpayer has established a working relationship with the IRS, this stage should not be as time-consuming and burdensome. Also, similar to QEP, during pre-CAP and CAP some of the same alternative dispute resolution tools can help resolve issues more quickly.

The final phase is CAP maintenance, the most attractive aspect for many taxpayers. During it, the IRS reduces its level of review of the taxpayer. The IRS reviews taxpayer-provided quarterly audited financial statements and details of any significant tax-related transactions or business developments in the current year. During this stage, taxpayers should need fewer resources than usual in the post-examination process.


The QEP and CAP initiatives are intended to give LB&I taxpayers greater consistency and clarity and reduce burdens associated with IRS examinations. Therefore, LB&I taxpayers and their representatives should welcome and become familiar with these programs.

This item contains general information only and Deloitte is not, by means of this item, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This item is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this item.

Copyright © 2011 Deloitte Development LLC. All rights reserved.


Valrie Chambers is a professor of accounting at Texas A&M University–Corpus Christi in Corpus Christi, TX. Kathy Petronchak and Jim McNiff are with Deloitte Tax LLP in Washington, DC. Ms. Petronchak is chair and Prof. Chambers is a member of the AICPA Tax Division’s IRS Practice and Procedures Committee. For more information about this column, contact Prof. Chambers at

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