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The IRS plans to announce the retooling of a popular real-time auditing program for large corporations that’s been under review for the last two years. But the program, once thought to be doomed, is here to stay—for now.
An Internal Revenue Service spokesperson confirmed the news in an Aug. 23 email to Bloomberg Tax. Under the program, participating corporations—such as General Dynamics Corp., Humana Inc., and CVS Health Corp., according to their annual filings with the Securities and Exchange Commission—work with a team of IRS auditors to ensure they comply with the tax code in the current year instead of getting audited years later.
Accountants, tax lawyers, and tax managers feared the end of the Compliance Assurance Process (CAP) program after the IRS froze it in 2016, announcing that it needed time to reassess CAP in light of the agency’s dwindling resources.
The program provides corporations with more and immediate certainty that they’ve followed the rules, especially in the wake of the 2017 tax law and its slew of tax ambiguities.
“A lot of people were worried the IRS was going to shut down the program,” said Kevin Spencer, a partner at McDermott Will & Emery LLP in Washington who specializes in tax controversy. “CFOs love CAP,” he said, because they can take comfort in knowing that by the time they submit their financial filings, the IRS has essentially approved their tax returns for that same year.
The IRS is “recalibrating” CAP, however, and intends to release more guidance on the changes next week, the spokesperson told Bloomberg Tax.
The program was open to companies with at least $10 million in assets that file quarterly financial statements, and those accepted were typically among the most compliant, practitioners said.
In total, according to the IRS, 174 companies participate, up from 17 when the program became permanent in 2011.
The IRS stopped taking applications two years ago and said it was conducting a “comprehensive assessment” of CAP. That announcement followed a 2013 report from the Treasury Department’s watchdog that found CAP audits consumed “substantially more staff hours than those under the traditional audit process” and brought in only about a third of the revenue per hour that regular audits did.
CAP companies can get a quick and early green light from the IRS on tax positions they decide to take amid uncertainty stemming from the tax overhaul and the absence of needed guidance, practitioners said.
But they aren’t the only ones who will benefit from the program, as CPAs and lawyers get to work on compliance with the 2017 law changes.
“The IRS gets to see those positions at the very same time they’re working on regulations” and therefore “is going to get a real-time view of how companies are trying to comply with the Tax Cuts and Jobs Act,” said Daniel Rosen, a partner at Baker McKenzie in New York and former IRS official, who focuses on tax litigation and controversies.
Rosen and others expect confusion clouding the tax law to spur a surge of tax litigation in the coming years—something they said would likely have been exacerbated by the elimination of CAP.
The benefits of tax certainty in such an uncertain environment are long-lasting, as resolving tax controversies can take as long as a decade, said Loren Opper, senior counsel at Miller, Canfield, Paddock and Stone, Plc, in Detroit.
“I like CAP—I like that you can work with the exam team on getting an issue resolved. That, along with the fact that you don’t have to worry about evidence becoming stale,” said Opper, former director of IRS audits, appeals and litigation at Ford Motor Co. That’s especially true, he added, since “the burden of proof is on the taxpayer.”
Practitioners weren’t sure what changes the IRS is likely to make to CAP, though they generally didn’t expect the agency to devote more of its already-slim resources to the program.
“My guess is that you will see a less aggressive expansion of the program than existed before the freeze, given the IRS’s apparent preference in recent years to conserve audit resources,” Jeff Paravano, managing partner at Baker & Hostetler LLP’s Washington office, said in an email.
Spencer suggested the agency could potentially narrow the focus of CAP to specific issues, close it to new applicants, or reduce the number of CAP taxpayers, but added that “it’s hard to say” what “recalibrating” will ultimately mean.
One potential change—and a likely reason for the freeze on applications—is a sort of “doubling up problem” for applicant companies that are already under audit for a previous year, or multiple previous years, and want the IRS to start additionally auditing them in real time as part of CAP, said Jean Pawlow, a partner and tax controversy litigator at Latham & Watkins LLP in Washington.
This has been “historically one of the main resource issues” for the IRS in getting more corporations to participate in CAP, Pawlow said, but those already participating argued that it’s no reason to shut down the program altogether.
IRS auditors “have a sort of hump to get over” when faced with applicants already under audit, she said. “I think they are going to and have been letting fewer new companies into the program.”
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