IRS announces acceptance of 2025 CAP applications and expanded eligibility criteria

In brief

What happened?

The IRS on August 15 released IR-2024-211 announcing the opening of the application period for the 2025 Compliance Assurance Process (CAP) program. The application period will run from September 4 to October 31. The IRS will inform applicants whether they have been accepted into the program in February 2025.

Why is it relevant?

IR-2024-211 also provides detailed information on revisions to the CAP program for the 2025 cycle, including:

• Expanding the scope of the program to include domestic and foreign privately held C-corporations,
• Providing an exception from the maximum number of years that can be open for Inflation Reduction Act (IRA) issues,
• Requiring the use of a new form to increase information gathering for cross-border activities, and
• Making permanent the Bridge Plus phase.

Action to consider

As the IRS is increasing post-file audits, some companies may want to consider whether the CAP program could be the right fit for them. Companies that may be interested in applying to CAP for 2025 or future cycles should take action to understand the information necessary to apply. 

Highlights and updates for CAP 2025 application period

IR-2024-211 outlines the following highlights and updates for the 2025 CAP application period.

Maintaining open year eligibility criteria

For the 2025 CAP cycle, the IRS is continuing the open year eligibility criteria of allowing only one open filed return and one open unfiled return on the first day of the CAP applicant’s tax year. There are several exceptions to this requirement, including the newly added exception for outstanding issues arising from certain IRA provisions (discussed below).

Eligibility requirements for new applicants

To be eligible for participation in the CAP program, new applicants under examination can have no more than three years open for examination on the first day of their tax year. The examination team would determine (and the accepted applicant would concur by signing the CAP Memorandum of Understanding) that it is feasible for these open years to close from the examination group no later than 12 months after the first day of the applicant’s tax year for continued eligibility.

Expanding eligibility criteria to include privately held C-corporations

For the 2025 CAP season, the IRS will begin accepting applications from domestic and foreign privately held C-corporations. The CAP program previously was open only to US publicly held C-corporations with US Generally Accepted Accounting Principles (GAAP) audited financial statements.

Privately held applicants must submit audited financial statements prepared in accordance with GAAP, International Financial Reporting Standards (IFRS), or another permissible method, as deemed appropriate by the IRS. The audited financial statements must be specific to the taxpayer applying to the CAP program, meaning that related entity or parent audited financial statements will not be allowed. 

Observation: While not included in this round of changes, note that the IRS has asked for public comment about whether there would be interest in allowing partnerships into the CAP program. 

Adding IRA exception to one year eligibility criteria

Given the complexity of the IRA’s addition to the tax code of the corporate alternative minimum tax, the stock repurchase excise tax, and clean energy credits, the IRS is adding a new exception to the closed / open year eligibility requirement (discussed above), such that a tax year that remains open only because of an outstanding IRA tax issue will not be counted as an open filed return on the first day of the applicant’s CAP year for purposes of the CAP eligibility return criterion. The IRS anticipates that review of these issues initially may extend beyond the CAP timelines.

Observation: While this allows more flexibility, many companies are anxious for certainty on these issues, so this is mixed news for some companies in the CAP program.

Adding new Form 14234-E Cross Border Activities Questionnaire (CBAQ)

In response to the complexity of international tax issues that CAP teams and taxpayers have had to consider in recent years, the IRS is requiring submission of Form 14234-E CBAQ to help (1) taxpayers address the complexities of specified international issues and (2) CAP review teams focus on the issues that merit attention in the review and resolution process. A draft version of the CBAQ was shared last year.

New applicants for the 2025 CAP cycle will be required to submit Form 14234-E CBAQ in addition to other existing forms addressing the research credit, transfer pricing, materials issues, and tax control frameworks. Returning applicants will submit the form on a specified schedule, 90 days after the end of the prior tax year, and simultaneously with the tax return filing. An interim CBAQ also must be submitted within 30 days after the completion of any material transaction or activity identified in the CBAQ. 

Making Bridge Plus phase permanent

The IRS is making the Bridge Plus phase of CAP permanent starting with the 2025 CAP cycle. Bridge Plus is reserved for taxpayers whose risk of noncompliance does not support the continued use of IRS compliance resources. Companies in Bridge Plus do not engage with an IRS exam team throughout the year.

Bridge Plus taxpayers must provide a book-to-tax reconciliation, credit utilization, and other supporting documentation shortly after finalizing their audited financial statements. The IRS will risk-assess the submitted documents to determine if the taxpayer is suitable for Bridge Plus.

Taxpayers accepted into Bridge Plus must submit a draft return 30 days before the filing of their return with the IRS. The IRS will review the draft return for consistency with the taxpayer's previously submitted documentation. If the draft return is consistent with the documentation previously provided, the taxpayer will be instructed to file the tax return. If the filed return is consistent with previously submitted documentation, the IRS will issue an appropriate acceptance letter to the taxpayer.