LMSB's Compliance Assurance Program (CAP): one year later.

• Author: Nolan, Deborah M.
• Position: Large and Mid-Size Business Division

LMSB Overview

The Large and Mid-Size Business Division is one of four primary operating divisions of the IRS and serves corporations, subchapter S corporations, and partnerships with assets greater than $10 million. LMSB taxpayers include the nation's largest corporate employers, many with workforces numbering in the hundreds of thousands. LMSB taxpayers conduct their businesses in an increasingly global environment, routinely dealing with highly intricate legal, accounting, and tax law issues. Their tax returns tend to be complex and voluminous, and LMSB's examinations of those returns can take months or years to complete. LMSB's business operations are structured to support the IRS's overall goals of improving taxpayer service, enhancing enforcement of tax laws, and modernizing the agency through its people, processes, and technologies.

Within LMSB, the goal of improving service to taxpayers generally means completing audit work faster and more efficiently; achieving high standards of performance," ensuring that personnel are well trained and equipped to do their jobs; and reducing administrative burdens placed on taxpayers to the greatest extent possible. The goal of enhancing enforcement means identifying and addressing areas of high compliance risk through examinations and other means; it also means encouraging non-compliant taxpayers to follow the law and meet their tax obligations. The modernization goal generally means finding ways to streamline the tools, systems, and processes LMSB employees use every day to do their jobs.

LMSB tracks its ongoing performance through a variety of business measures and indicators, including taxpayer and employee satisfaction, and examination coverage, timeliness, duration, and quality.

In March 2005, the Internal Revenue Service's Large and Mid-Size Business (LMSB) division launched a small pilot program to assess the viability of a new, alternative approach to large corporate tax administration. This approach--known as the Compliance Assurance Process (CAP)--has attracted growing interest, particularly from corporate taxpayers intrigued about its potential to simplify and streamline corporate tax examinations.

The CAP approach is structured to leverage new corporate governance and financial reporting requirements imposed by the Sarbanes-Oxley Act of 2002. Under CAP, a taxpayer works cooperatively with LMSB revenue agents in a pre-filing environment to resolve issues of tax controversy and to determine the proper tax treatment of completed transactions. The taxpayer provides information to the IRS about completed transactions and events that may affect the taxpayer's tax liability. In exchange for increased cooperation and transparency, the taxpayer enjoys the possibility of achieving tax certainty sooner--and with less administrative burden--than has previously been possible through conventional post-filing examinations. The IRS also benefits from CAP, in terms of reduced resource burdens and the ability to identify emerging taxpayer issues and compliance risks more readily.

Seventeen corporations volunteered to participate in the 2005 CAP pilot, and all have signalled their desire to continue through a second tax cycle in the 2006 CAP pilot. While it is too early to assess CAP's long-term viability, early program results are encouraging. In the coming year, LMSB hopes to add roughly 20 more large corporate taxpayers to the pilot.

Why CAP? Why Now?

It is no secret that traditional post-filing examinations for large corporations tend to be time-consuming and resource-intensive, for taxpayers and the IRS alike. Such examinations necessarily require a retrospective accounting of a taxpayer's prior business decisions, completed transactions, and tax behaviors. Typical post-filing examinations begin months or even years after the tax return filing; once underway, they can take years to complete. Depending on how far in the past an examination focuses, administrative and financial burdens on taxpayers can be significant.

Throughout the examination process, LMSB revenue agents issue data requests to taxpayers for more detailed information pertaining to various items on their tax returns. Taxpayers often have to sift through years of old financial and tax records in an effort to provide the requested information or to reconstruct the circumstances leading up to particular business decisions and transactions.

Perhaps equally significant, when issues under examination remain unresolved for extended periods, taxpayers may be obliged to maintain tax reserves on their books in...