LB&I announces updates to 2024 CAP program

The IRS’s Large Business and International (LB&I) Division announced updates to the Compliance Assurance Process (CAP) program for tax year 2024 and beyond (News Release IR-2023-164).

Program updates include (1) replacing the Bridge phase with Bridge Plus and (2) a new Form 14234-E, Cross-Border Activities Questionnaire, to cover specific international issues.

The application period for the 2024 CAP program ran from Sept. 6, 2023, to Oct. 31, 2023. The IRS will notify applicants if they are accepted into the program in February 2024.

Background

The CAP program is a cooperative prefiling program available to certain large taxpayers; the IRS launched it as a pilot program in 2005 and made it permanent in 2011. The program allows taxpayers to reach agreement with the IRS on the treatment of various tax issues before filing a return. To be eligible for the 2024 CAP program, applicants must:

• Have assets of $10 million or more;
• Be a U.S. publicly traded corporation that is legally required to submit SEC Forms 10-K, 10-Q, and 8K; and
• Not be under investigation by, or in litigation with, the IRS or any other government agency that would limit the IRS’s access to current tax records.

The IRS may allow returning CAP participants that do not meet the second requirement to remain in the program if they commit to provide the IRS with financial statements prepared in accordance with U.S. GAAP.

Current CAP participants must not have more than one filed return and one unfiled return open on the first day of the applicant’s CAP year. New applicants may have no more than three tax years open on the first day of the applicant’s tax year (and they must agree that the open years will close no later than 12 months after the first day of their tax year).

CAP phases

The CAP program has three phases in addition to the Bridge Plus “pilot phase” (when the IRS reviews eligible taxpayers’ returns for compliance before they file) launched in April 2023; these are as follows:

• The CAP phase (when the IRS and taxpayer resolve all or most tax positions before filing a tax return);
• The Compliance Maintenance (CM) phase (when the IRS, at its discretion, adjusts the level of review of the tax year based on the complexity and number of issues); and
• The Bridge phase (when the IRS will not accept any taxpayer disclosures, review any issues, or provide any assurances).

Bridge and Bridge Plus phases

The Bridge phase was developed in 2019 for taxpayers whose risk of noncompliance did not warrant continuous use of LB&I examination resources. Participants could remain in the Bridge phase for two consecutive years, returning to the CAP phase or CM phase for the subsequent tax year.

In 2023, the IRS added the Bridge Plus phase in response to taxpayer feedback that placement in the Bridge phase (which allows no IRS review or assurances) left taxpayers uncertain about their filing positions. Taxpayers wishing to participate in Bridge Plus are required to submit book-to-tax reconciliations, credit utilization documentation, and other supporting documentation after finalizing their audited financial statements. The IRS then conducts a risk assessment of these documents to determine the taxpayer’s suitability for Bridge Plus. If accepted into Bridge Plus, the taxpayer must submit a draft return 30 days before filing the tax return; if the IRS finds that the draft return is consistent with the earlier submission, it instructs the taxpayer to file a return. The IRS will then issue a full acceptance letter to the taxpayer, provided that the filed return also comports with earlier submissions.

Changes to the CAP program

The CAP program has made some changes for 2024 and beyond.

Bridge Plus phase: The IRS stated that of the taxpayers it invited to be considered for the Bridge Plus phase, about half accepted. “Due to positive feedback, both internally and externally,” the IRS continued, “the quality of taxpayer submissions, and taxpayer cooperation,” it will continue the Bridge Plus phase and issue Bridge Plus invitations for 2023 in early 2024.

The IRS said it is planning to replace the Bridge phase with the Bridge Plus phase for tax year 2024, meaning that participation will be mandatory. “This will be a significant change to the program and taxpayers are welcome to submit comments to the IRS concerning this change to LBI.CAP.Bridge.Plus@ IRS.gov,” the IRS said. Because the Bridge Plus process does not begin until the taxpayer’s tax year has ended, the IRS expects that, for taxpayers using a calendar year end, the 2024 Bridge Plus will start in spring 2025.

Cross-Border Activities Questionnaire: In its efforts to identify research credit and transfer pricing issues — as well as the resources and timing needed to address them — the IRS has been gathering information from taxpayers using Forms 14234-A, CAP Research Credit Questionnaire, and 14234-B, Material Intercompany Transactions Template.

Having had success with those forms, the IRS developed Form 14234-E, Cross-Border Activities Questionnaire, to address specific international issues. This new form is in draft status; therefore, Form 14234-E will not be required for the 2024 CAP cycle but will be required for the 2025 CAP cycle. The IRS seeks feedback on the draft form and requests that comments be submitted to LBI.IRS. CAP.program@IRS.gov by Jan. 31.

Implications

The significant changes to the CAP program display the IRS’s continued commitment to enhancing the program consistent with its intent. Bridge Plus will provide the certainty that many taxpayers complained the Bridge phase lacked. The new Form 14234-E builds on the success of the IRS’s current forms that gather research credit and transfer pricing information up front, which allows the IRS to better identify issues that merit attention and issues that do not warrant the expenditure of IRS resources.

Editor Notes

Susan Minasian Grais, CPA, J.D., LL.M., is a managing director at Ernst & Young LLP in Washington, D.C.

For additional information about these items, contact Grais at susan.grais@ey.com.

Contributors are members of or associated with Ernst & Young LLP.