What Is the IRS Compliance Assurance Process?

The Compliance Assurance Process (CAP) is a voluntary program from the Internal Revenue Service (IRS) for certain large corporate taxpayers. Administered by the IRS’s Large Business and International (LB&I) division, CAP functions as a cooperative, real-time audit. The program’s goal is to provide tax certainty by identifying and resolving potential tax disputes before a company files its federal income tax return. This pre-filing approach reduces the time spent on traditional post-filing examinations and helps prevent lengthy audits.

CAP Program Tiers and Eligibility

Participation in the CAP program is available to U.S. publicly traded and privately held C-corporations under the jurisdiction of the LB&I division. A primary eligibility requirement is that the corporation must have total assets of at least $10 million. A company also cannot be under an investigation by another government agency that would limit the IRS’s access to its financial records.

The program is structured into several tiers based on a taxpayer’s experience and risk profile. New entrants begin with the Pre-CAP phase, which functions as a trial period for both the taxpayer and the IRS to assess the cooperative relationship. Once completed, a taxpayer moves into the standard CAP tier for the ongoing, real-time audit process. For lower-risk taxpayers with a history of compliance, the IRS offers the Bridge Plus phase, a permanent option for 2025 that involves a less intensive review process.

To maintain eligibility, strict rules apply to open tax years. New applicants can have no more than three tax years open for examination on the first day of their tax year. For current participants, the rule is stricter: no more than one filed return and one unfiled return can be open at the start of the CAP year. This requirement ensures that past tax years are resolved promptly, allowing the IRS and the taxpayer to focus on the current year’s return.

Required Information and Disclosures

Successful participation in CAP requires comprehensive documentation and transparent disclosure. A company must provide the IRS with significant financial and tax-related information, including audited financial statements and tax accrual workpapers that detail its analysis of uncertain tax positions. For privately held companies, financial statements can be prepared under U.S. Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).

A core part of the program involves “Required Disclosures,” where participants must proactively inform the IRS of all transactions and tax positions with a material effect on their federal income tax liability. This includes significant intercompany transactions, claims for the research and development tax credit, and other complex tax positions.

The formal application is submitted using Form 14234, Application for the Compliance Assurance Process. This form requires extensive details about the company’s structure, financial standing, and tax history. The full application package also includes several supplemental forms:

• Form 14234-A for the research credit
• Form 14234-B for material intercompany transactions
• Form 14234-C for an initial list of expected tax issues
• Form 14234-D (Tax Control Framework Questionnaire)
• Form 14234-E (CAP Cross Border Activities Questionnaire)

The CAP Examination Process

The formal CAP examination begins with the submission of the completed application package, which occurs between September and October for the upcoming tax year. The IRS reviews the application and the taxpayer’s history, and by February of the following year, formally notifies applicants in writing whether they have been accepted or rejected.

Upon acceptance, an opening conference brings together the taxpayer’s tax team and the assigned IRS examination team. During this meeting, the parties establish the ground rules for the engagement, including a detailed examination plan, milestones, and communication protocols. A Memorandum of Understanding (MOU) is signed by both parties, outlining the mutual commitments and expectations for the CAP year.

The program consists of ongoing review cycles. On a quarterly basis, the taxpayer submits documentation for material transactions and other required disclosures to the IRS team. The IRS reviews this information in near real-time, raising questions and identifying potential tax issues as they arise. This process allows for the prompt resolution of issues long before the tax return is filed.

When a potential tax issue is identified, a formal resolution process is initiated where the taxpayer and the IRS work to reach an agreement on the appropriate tax treatment. This process is carefully documented using specific forms designed to track the issue and the final resolution. Once all material issues for the tax year have been resolved, the examination phase concludes, and the IRS issues a full or partial Letter of Assurance confirming it will accept the tax return as filed for the resolved issues.

Post-Assurance and Program Maintenance

Receiving the Letter of Assurance marks the successful completion of the CAP examination for a specific tax year. The taxpayer’s main responsibility is to file its final corporate income tax return precisely in accordance with the terms agreed upon during the CAP process. Any deviation from the resolved positions would invalidate the assurance and could jeopardize the company’s standing in the program.

Continued participation in the program is not automatic and requires an ongoing commitment to transparency and cooperation. Each year, the company must reapply, and the IRS evaluates its performance from the prior year. A failure to maintain open communication or to provide complete and accurate information can result in being removed from the program.