Real-Time Corporate Tax Audits and Their Impact on Financial Reporting

By Cleaveland, M. Catherine; Epps, Kathryn K. et al. | The CPA Journal, January 2010 | Go to article overview

Real-Time Corporate Tax Audits and Their Impact on Financial Reporting


Cleaveland, M. Catherine, Epps, Kathryn K., Bradley, Cassie F., The CPA Journal


The IRS is testing a program that may represent the future of corporate audits. Since 2005, the ERS has piloted the Compliance Assurance Process (C AP) program in its Emarge and Mid-Size Business Division. The CAP program is a simultaneous auditing process that aims to significantly reduce, or even eliminate, audit procedures after the corporate tax filing date. Tax professionals should understand how the CAP program works, its advantages and disadvantages, and the likelihood of its expansion as the ERS determines die future of real-time corporate auditing.

How Does CAP Work?

Currently, the ERS invites individual corporations to participate in the CAP program. If a corporation accepts, it signs a memorandum of understanding (MOU) that establishes die materiality thresholds and methods of communication to be used during the program. Ef, during the course of the CAP cycle, the corporation does not comply with the guidelines set forth in die MOU, it may be removed from the program. Once an MOU has been established, the ERS assigns an account coordinator to the corporation who serves thereafter as the corporation's primary IRS contact and oversees the CAP cycle. The account coordinator familiarizes himself with the corporation's recent transactions via news reports, SEC filings, and annual reports. Combining this information with data provided by die corporation, the coordinator conducts a taxpayer risk analysis.

Throughout the tax year, the corporation and the account coordinator work toward an agreement regarding the tax treatment of material issues such as transfer pricing, foreign earnings repatriation, research and development tax credits, and acquisitions. These material issues may be brought to the attention of the account coordinator by the corporation, by the CAP team, or via transaction review. If an agreement on the tax treatment of a material issue is reached, die account coordinator records it in an issue resolution agreement. If die corporation and the coordinator cannot agree on a material issue, they can utilize the ERS resolution processes currently in place, such as the Fast Track Settlement (FTS) program.

At the conclusion of the tax year, the account coordinator completes Form 906, Closing Agreement on Final Determination Covering Specific Matters, which details the material issues and their resolved tax treatments. Assuming that the corporation adhered to the guidelines of the MOU and the identified material issues have all been resolved, the IRS will issue the corporation a "full acceptance" letter. Alternatively, if the corporation has adhered to the guidelines of the MOU, but an agreement has not been reached on all material issues, the IRS will issue a "partial acceptance" letter. In both scenarios, the tax return, when filed, should not contain any material information that was not disclosed during the CAP cycle. A full acceptance letter indicates that the tax return will be accepted when filed if the tax treatment of the identified material issues corresponds to the closing agreements in Form 906 and if the tax return does not contain information that was not disclosed during die CAP cycle.

When the corporation files its tax return, the account coordinator will perform a post-filing examination. The goal is for this review to be completed within 90 days. The purposes of the post-filing examination are to ensure that the corporation's treatment of the resolved material issues on die tax return is consistent with the closing agreements in Form 906 and that die tax return does not contain material issues which were not properly disclosed during the CAP cycle. If these conditions are met, then the IRS will issue a "no change" letter, concluding the examination. On die otiier hand, if the tax return is inconsistent with the closing agreements or contains items materially affecting the corporation's tax liability dial were not properly disclosed during the CAP cycle, the ERS will examine tiiose items. …

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