IRS has two categories of traditional audits for large corporations: Coordinated Industry Cases (CIC) and Industry Cases (IC). CAP includes both CICs and ICs, with the majority being CICs (about 88 percent). The distinction between CIC and IC is based on criteria such as the amount of gross assets, amount of gross receipts, number of operating entities, multiple industry status, total foreign asset amounts, and amount of foreign taxes paid. All corporations that are designated as CICs are audited every year by a team of IRS staff while corporations that are designated as ICs are not held to the same requirement. Before IRS created CAP, large corporations waited about 50 months on average from the time a tax return was filed to IRS closing of the traditional audit under CIC. This did not include additional time after the audits were closed to resolve any appeals of the audit results—a process that usually took another 2 or 3 years. Therefore, obtaining certainty about the status of tax issues reported on the tax return for a given tax year may have taken 6 or 7 years—if not longer. This created significant burdens and problems for taxpayers and IRS. As already noted, taxpayers had to reflect uncertainty about their tax liability on their financial statements. This meant that taxpayers had to put aside reserves in a provisional account meant for changes in taxes owed after an audit. Large corporation tax officials we spoke to said that when corporations have a large reserve, it lowers their expected profits. In addition, IRS might not become aware of emerging tax issues associated with new types of business transactions or products for years. Traditional audits of large corporations still take years, as shown in figure 1. IRS launched CAP in March 2005 as a pilot program to assess its viability as an alternative approach to large corporate tax administration. For the pilot, IRS selected voluntary, corporate taxpayers based on factors including their working relationship with IRS, a history of not taking aggressive tax positions, and not having major tax litigation under way. IRS created pre-filing and post-filing stages for CAP. In pre-filing, a taxpayer works with the CAP team to resolve issues of tax controversy and to determine the appropriate tax treatment of completed transactions before filing the tax return. CAP requires contemporaneous exchange of information about a taxpayer’s completed transactions and other events that may affect tax liability. In post-filing, the CAP audit team reviews the tax return to confirm adherence to agreements on how tax issues should be reported. In exchange for increased cooperation and transparency, the taxpayer may attain tax certainty sooner and with less administrative burden, compared to traditional post-filing audits. After 6 years of experience with the CAP pilot, IRS management decided to make CAP permanent in March 2011. IRS had received positive feedback from taxpayers and employees on the CAP pilot, indicating they wanted CAP to continue. Officials who had worked at IRS told us that IRS did exploratory research on the pilot’s impacts on timeliness as well as on other areas. In making CAP permanent, IRS created three phases by adding the Pre- CAP and Compliance Maintenance phases to the existing CAP phase. To avoid confusion, we will refer to the entire CAP program (all three phases) as CAP to distinguish it from the CAP phase defined below. Pre-CAP phase: To enter CAP, all audits for prior tax years must be resolved. The large corporate taxpayer and IRS work together in the traditional post-file audit process to close audits of tax returns filed for previous tax years within agreed upon time frames. Closing these audits can take significant time if, as suggested by figure 1, audits are open for many tax years. CAP phase: The large corporate taxpayer and IRS work to identify tax issues and resolve how they are to be reported for the current tax year in the pre-filing stage. IRS then confirms these issues are reported as agreed upon during the post-filing review. Compliance Maintenance phase: Large corporate taxpayers who continue to meet the CAP phase eligibility requirements and expectations may progress to Compliance Maintenance after at least 1 year in the CAP phase. Taxpayers must continue to be compliant and transparent in filing tax returns and pose no new tax compliance risks. IRS intends to spend less time examining these returns when filed as well as significantly reducing the scope and depth of the pre-filing review. IRS’s guidance explains that the criteria for considering a taxpayer for Compliance Maintenance include the complexity and number of issues, and the taxpayer’s history of CAP compliance, cooperation, and transparency. Taxpayers are expected to continue disclosing completed business transactions, information on material items and issues that occur during the CAP year, and their proposed tax positions on these disclosed items. The Internal Revenue Manual states that taxpayers can be removed from Compliance Maintenance depending on the complexity, number of issues, or other factors. Not every large corporation is eligible for CAP. Table 1 shows the criteria for each phase. Taxpayers must sign a memorandum of understanding (MOU) that outlines their agreement to meet the CAP requirements. For Pre-CAP, the MOU will be effective for the first Pre-CAP year and continue until audits of tax returns for all transition years are closed and the CAP phase selection criteria are fulfilled. For the CAP phase, the MOU applies to a single tax year known as the CAP year. For Compliance Maintenance, the CAP phase MOU is used. To continue in the CAP and Compliance Maintenance phases, taxpayers must reapply and execute a new MOU for each CAP year. Of about 60,000 large corporate taxpayers considered for audit in fiscal year 2012, 161 were in CAP. Figure 2 shows the growth of CAP since its inception in 2005. CAP taxpayers work with team and account coordinators who serve as the primary IRS representative for all federal tax matters. In the Pre-CAP phase, taxpayers work with an assigned team coordinator; in the CAP phase or Compliance Maintenance phase, taxpayers work with an assigned account coordinator. Other IRS team members include IRS examiners, the team manager, the territory manager, and the Director of Field Operations, as well as various IRS specialists (as needed) who offer technical knowledge about tax issues and large corporations. CAP work on a tax return may be concluded in one of three ways: 1. Full Acceptance Letter—IRS provides the taxpayer with a full acceptance letter if the pre-filing stage concludes with a taxpayer fully complying with the MOU and with resolutions of all identified items and issues through factual clarification, closing agreement(s), issue resolution agreement(s), or a combination of these. The letter constitutes written confirmation that IRS will accept the taxpayer’s return if it is filed consistent with those resolutions and no additional items or issues are discovered during the post-filing review that were not previously disclosed. 2. Partial Acceptance Letter—IRS provides the taxpayer with a partial acceptance letter if the pre-filing stage concludes with a taxpayer fully complying with the MOU, but IRS and the taxpayer cannot resolve all identified items or issues before the tax return is filed. The letter constitutes written confirmation that IRS will accept the taxpayer’s return for the resolved items and issues if the post-filing review shows the return is filed consistent with the agreement(s). 3. Termination Letter—IRS can issue a termination letter at any time, which results in the case being withdrawn from CAP and transferred to a traditional post-filing examination. This can happen for several reasons, including the taxpayer: not adhering to information document request (IDR) response times, not responding to IDRs, or not providing complete IDR responses; not engaging in meaningful or good-faith issue resolution discussions; failing to thoroughly disclose prior, concurrent, and ongoing transactions; failing to disclose a tax shelter or listed transaction; failing to disclose an investigation or litigation that limits access by the IRS to current corporate records; or not adhering to any other MOU commitment(s). Two other new reporting requirements, one financial and one tax, have been introduced since the 2005 pilot and may reinforce CAP. The first, Financial Accounting Standards Board Interpretation Number 48, Accounting for Uncertainty in Income Taxes, implemented in June 2006, requires public and private corporations subject to the U.S. Generally Accepted Accounting Principles to disclose uncertain tax positions. Several of the tax experts we spoke to said this gives IRS an additional source for verifying the completeness of the disclosures that corporations make in the CAP phase. The second, Schedule UTP, Uncertain Tax Position Statement, has a similar disclosure purpose. IRS implemented it in 2010 as required reporting by taxpayers that have assets equaling or exceeding $50 million. Along with their tax returns, these taxpayers are to disclose information on the Schedule UTP about tax positions that may affect federal income tax liabilities or are included in audited financial statements. According to the August 2011 UTP guidance and procedures for CAP, CAP teams should compare the list of taxpayer disclosures made to them during the CAP year to the issues identified on the Schedule UTP to verify that the disclosures match. IRS envisioned that CAP would yield significant benefits to participating taxpayers and IRS by resolving tax issues in a pre-filing environment. IRS’s vision is reflected in the following seven CAP goals: ensure taxpayer compliance; reduce overall examination time; increase currency for taxpayers (e.g., working on the unfiled return for the most recent tax year during the CAP pre-filing stage); enhance the accurate, efficient, and timely resolution of complex tax issues; increase audit coverage by providing more efficient use of resources; reduce taxpayer administrative burden; and increase certainty for taxpayers. IRS account coordinators for CAP cases, other IRS officials, and non-IRS officials (such as corporate tax experts and large corporation tax officials) told us what they believe the benefits of CAP are if its goals are achieved. Because the goals are not all mutually exclusive, some benefits can be perceived as relating to more than one goal. Ensure taxpayer compliance: IRS and non-IRS officials indicated that compliance may be higher under CAP.