How the IRS’s Compliance Assurance Process reviews transactions on post-closing, pre-filing basis: A practical guide for taxpayers

The IRS Compliance Assurance Process (CAP) is designed to give large corporate taxpayers a chance to identify, develop, and, where possible, resolve material federal income tax issues before the return is filed. In that sense, CAP is supposed to replace the traditional sequence of filing first and auditing later with a more contemporaneous process built on disclosure, regular communication, and real-time issue development. For taxpayers engaged in significant transactions, however, CAP does not operate as a pre-clearance program. The IRS generally does not provide binding advice on proposed deals. Instead, CAP most often scrutinizes large transactions after the transaction has closed but before the return is filed, when the relevant pre-closing facts are fixed and the parties can evaluate the tax treatment on a completed record.¹ 

That post-closing, pre-filing feature makes CAP especially important for acquisitions, internal restructurings, refinancings, significant accounting method changes, large deductions, and other transactions that may materially affect the taxpayer’s current-year liability. In those settings, the taxpayer must move quickly. CAP generally expects written disclosure of a material issue either within 30 days after the transaction is completed or when it otherwise affects the federal income tax liability, with a further expectation that the disclosure be completed within 90 days if all supporting information is not yet available.² If the taxpayer waits too long, the issue may remain unresolved through filing and turn into a traditional post-filing examination, defeating much of the practical value of CAP.

CAP Application and Eligibility Overview

Taxpayers must meet the following criteria to apply for CAP: 

• Have assets of $10 million or more; 
• Be one of the following business types:
  • US publicly traded C corporation with certain reporting and disclosure requirements; 
  • A privately held US C corporation that agrees to provide the IRS with certain financial statements; 
  • A partnership that was accepted into the CAP Program since 2020 that agrees to provide certain financial statements to the IRS; 
• Not be under investigation or in litigation with the IRS or another government agency that would limit the IRS’s access to certain tax records; 
• Have no more than three tax years open for examination by the IRS on the first day of the applicant’s tax year. 

To apply for CAP, the taxpayer must complete the application available on the IRS’s website and submit it in the required format and within the required deadlines on the same. The IRS will then notify the taxpayer if it is accepted and selected for one of the three phases of the program, which include CAP, Compliance Maintenance, and Bridge Plus. The taxpayer will then be required to sign the annual CAP Memorandum of Understanding (MOU). 

CAP Is Collaborative, but It Is Not a Pre-Approval Process

CAP is voluntary in the sense that taxpayers apply to participate and must be accepted into the program, but once a taxpayer signs the CAP MOU, the program imposes concrete expectations on both sides. The taxpayer must disclose material issues timely, provide information on an open and transparent basis, and work with the CAP team to develop the factual and legal record. The IRS, in turn, is expected to identify and work with the taxpayer on issues in real time, use informal information requests where possible, and attempt to resolve all issues before the taxpayer files its return.³

For significant transactions, the most important practical point is that CAP generally begins serious substantive review once the deal is done. The IRS CAP FAQs state that CAP is not intended to provide tax advice on prospective or incomplete transactions, because the tax treatment of those transactions may still depend on events that have not yet occurred.⁴ That means the critical CAP window for a major transaction usually begins on the closing date, not the signing date.

Once a transaction closes, the taxpayer typically provides a written disclosure package to the CAP team. That package should describe the transaction steps, the relevant historical and surrounding facts, the taxpayer’s proposed tax treatment, the authorities supporting that treatment, and the key supporting documents.⁵ The Account Coordinator then works with the taxpayer and the IRS team to determine how the issue will be developed, whether it will be placed on the CAP issues list, and what additional information will be needed.⁶ Although CAP allows the IRS to issue formal Information Document Requests, the program assumes that informal requests, calls, and meetings will usually drive the process.⁷ 

This framework often feels less like an audit in the ordinary sense and more like an accelerated technical review, but, importantly, it remains an examination function. The IRS is evaluating whether it agrees with the taxpayer’s reporting position, and if it does not, CAP provides the Service with a mechanism to document its disagreement and carry the issue into post-filing procedures with a headstart on the examination.

The Post-Closing CAP Process in Practice

A useful way to understand CAP is to view it as a sequence of stages.

• First, the transaction closes. At that point, the taxpayer usually knows the core legal issues even if every supporting schedule, valuation, or invoice is not yet final. In a corporate acquisition, for example, the likely CAP issues may include the treatment of deal-based fees, whether certain costs must be capitalized, purchase price allocation, debt issuance costs, deductibility of restructuring charges, and the tax consequences of post-closing integration steps.
• Second, the taxpayer makes a timely written disclosure. CAP generally expects disclosure within 30 days, even if supplemental information follows later.⁸ The practical lesson is straightforward: taxpayers should not wait for the perfect file. They should disclose early, identify the core issues, and then supplement.
• Third, the IRS develops the issue. Depending on the transaction, the CAP team will usually ask for agreements, board materials, fund flow documents, memoranda, valuations, accounting analyses, invoices, and workpapers. Discussions often follow in waves. The first wave focuses on facts. The second focuses on legal theories. The third often tests whether the disagreement is substantive or merely requires the parties to clarify technical points. 
• Fourth, the IRS attempts to reach an issue-level conclusion. CAP uses Issue Resolution Agreements (IRAs) to memorialize completed issues. If the IRS agrees with the taxpayer’s position, the IRS may issue a simplified IRA. If the IRS disagrees, or if a closing agreement is needed, the IRS may issue a more detailed IRA with an attached Form 886-A explanation, the same form used in an audit.⁹ Importantly, the taxpayer does not have to agree to the IRS’s position merely because the IRS has written it down in an IRA.¹⁰ Instead, the taxpayer may respond in writing, set out the facts and legal arguments supporting its position, and preserve the dispute for the next stage.
• Fifth, if the issue remains unresolved, CAP may move to Fast Track Settlement. The CAP MOU and CAP guidance contemplate that if an eligible issue remains unagreed after 90 days from full disclosure, subject to extensions, the IRS may offer Fast Track Settlement (FTS).¹¹ FTS is designed to bring Appeals into the dispute earlier as a mediator or facilitator while the case is still in Exam. If FTS succeeds, the issue is resolved without waiting for general review by the Appeals Office. If it fails, the taxpayer still retains traditional Appeals rights.¹²
• Finally, after the return is filed, the CAP team verifies that agreed issues were reported consistently with the parties’ resolution and determines whether unresolved issues require normal post-filing treatment. The taxpayer must submit the required post-filing representation, and the parties conduct a joint review of the filed return and issue dispositions.¹³ If issues remain unagreed, the IRS may continue the matter as a traditional examination issue, including through a Notice of Proposed Adjustment on Form 5701, another form that is frequently used in a normal audit.¹⁴

Hypothetical CAP Timeline for a Taxable Acquisition

Below is an example of a calendar-year public corporation already in CAP, proceeding under a hypothetical timeline as follows. This timeline is illustrative only. In practice, the IRS may have difficulty adhering to strict timelines due to resource constraints, competing priorities, or the complexity of the issues under review, and taxpayers should expect that actual CAP timelines may extend beyond the periods described below. 

• On July 15, 2026, it closes a $3.8 billion taxable asset acquisition of a target business. The acquisition is financed with new debt, includes a substantial investment banker success fee, and is followed by a post-closing integration plan under which certain acquired entities are merged or liquidated.
• Within two weeks of closing, the taxpayer’s internal tax department identifies several likely CAP issues: the treatment of banker fees under Treas. Reg. § 1.263(a)-5, the treatment of legal and accounting fees, the deductibility or capitalization of certain integration costs, allocation of purchase price among tangible and intangible assets, and the treatment of debt issuance costs and financing fees. 
• By August 14, 2026, within 30 days of closing, the taxpayer submits a written CAP disclosure package describing the transaction and attaching the purchase agreement, financing documents, board materials, a transaction-step chart, and a preliminary legal analysis.¹⁵
• The CAP team responds with follow-up questions. Over the next six weeks, the taxpayer provides invoices, fee engagement letters, accounting memoranda, valuation materials, and written analyses showing why certain costs should be deductible and why others have been capitalized. 
• By October 13, 2026, 90 days from the closing date, the taxpayer has completed its supplemental disclosure, effectively giving the IRS a full record for CAP review.
• The IRS then develops the issue over the next 90 days. The parties hold calls in November and December. 
• By January 2027, the IRS agrees with the taxpayer’s treatment of debt issuance costs and certain legal fees but disputes a portion of the banker success fee and some integration-related expenses. The IRS believes a larger portion must be capitalized as facilitative costs. The taxpayer disagrees and submits a written response explaining why part of the fee is allocable to activities that are not inherently facilitative and therefore may be deductible under the regulations.
• At this point, the CAP team drafts an IRA reflecting agreement on some issues and disagreement on others. The taxpayer signs the agreed portions but not the disputed portion. Because the success fee issue remains unresolved more than 90 days after full disclosure, the IRS offers FTS. 
• In February 2027, the parties enter FTS. Appeals participates, helps narrow things to the real dispute, and pressures both sides to quantify the issue and address litigation hazards. If FTS produces a compromise, the matter ends before filing. If not, the issue remains open.
• Assume FTS fails. The taxpayer files its 2026 return on extension in September 2027, reporting the transaction consistently with its own position. 
• Within 30 days after filing, it delivers the required post-filing representation and walks the CAP team through the filed return.¹⁶
• The IRS then issues a partial acceptance as to resolved issues and continues the disputed success fee issue as a post-filing examination matter. 
• Eventually, the IRS issues a Form 5701 proposing an adjustment. From there, the taxpayer may pursue ordinary Appeals procedures, and if Appeals fails, the taxpayer may litigate in the same manner as any other federal income tax controversy.

Taxpayer Options When the IRS Disagrees

A common misunderstanding is that CAP forces agreement or leaves the taxpayer with no meaningful path forward. That is not correct. CAP changes the timing and format of the dispute, but it does not eliminate the taxpayer’s procedural rights.

If the taxpayer disagrees with the IRS’s treatment of a transaction, the first step is usually a written response to the CAP team’s stated position. In practice, that response matters a great deal. It becomes the first detailed articulation of the taxpayer’s factual and legal theory and often sets the framework for FTS, Appeals, and later litigation.

If disagreement persists, FTS may be available. Rev. Proc. 2003-40 and later IRS guidance make clear that FTS is voluntary and is intended to provide an expedited resolution mechanism during examination.¹⁷

If the issue remains unresolved after filing, the taxpayer may request review by the Appeals Office through the usual administrative channels.¹⁸

If Appeals fails, litigation remains available. The IRS typically issues a Notice of Deficiency giving the taxpayer the opportunity to petition the Tax Court within the period prescribed by I.R.C. Section 6213(a), which is normally 90 days.¹⁹ Alternatively, if the taxpayer pays the asserted tax and files a refund claim that is denied or not acted upon, the taxpayer may sue for refund in a US district court or the US Court of Federal Claims.²⁰ 

Opting Out of CAP: Withdrawal Rights and Practical Considerations

A taxpayer may withdraw from CAP if it determines that it cannot or will not continue to comply with the program’s expectations. The IRS may also initiate removal of a taxpayer from CAP if, in the IRS's judgment, the taxpayer has failed to meet the program's requirements for cooperation, transparency, or timely disclosure, as set forth in the MOU. The CAP MOU and IRS FAQs contemplate a written notice of withdrawal by the taxpayer, followed by a termination letter from the IRS.²¹ Once that happens, the taxpayer generally returns to a traditional post-filing examination environment.

That does not mean the IRS automatically prevails on the disputed issue. It does mean the taxpayer loses the main benefit of CAP: real-time engagement before filing. The dispute then proceeds in the more familiar but often slower world of ordinary audit, proposed adjustments, Appeals, and potential litigation. In that setting, the IRS may issue proposed adjustments through standard post-filing procedures, including Form 5701 and later formal examination notices.²²

The IRS may also terminate a taxpayer involuntarily if the taxpayer fails to meet CAP expectations regarding cooperation and transparency, as provided in the MOU. In that case, the likely result is a return to traditional examination.²³

Eversheds Sutherland Observation: For taxpayers with significant transactions, CAP offers an important opportunity to narrow or resolve issues before filing, offering potential certainty on a faster timeline than a typical post-filing audit. That certainty can carry meaningful financial statement benefits as well: where the IRS agrees with the taxpayer's position through a CAP resolution, the taxpayer may be able to avoid or reduce the need to establish reserves for uncertain tax positions and reduce disclosure obligations on its financial statements. The most effective CAP participants identify potential transaction issues before closing, prepare a disclosure package immediately after closing, and develop the factual record while the transaction team and documents are still accessible. When disagreement emerges, taxpayers should treat CAP submissions with the same care they would in an IRS Audit, Appeals protest, or litigation, keeping in mind that anything provided will almost certainly be used by the IRS in a later dispute if there is disagreement between the taxpayer and the IRS. CAP can reduce uncertainty and compress the path to resolution, but it does not eliminate the need for disciplined issue development, strategic use of FTS and Appeals, and readiness to litigate if necessary.

__________

If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.

_{1 See Internal Revenue Serv., Compliance Assurance Process (CAP): Frequently Asked Questions (2025); Internal Revenue Serv., 2025 CAP Memorandum of Understanding §§ II, IV (2025); I.R.M. 4.51.8.
2 2025 CAP Memorandum of Understanding § IV.A; I.R.M. 4.51.8.4.
3 2025 CAP Memorandum of Understanding §§ II-IV; I.R.M. 4.51.8.1, 4.51.8.4.
4 Internal Revenue Serv., Compliance Assurance Process (CAP): Frequently Asked Questions (2025).
5 2025 CAP Memorandum of Understanding § IV.A.
6 I.R.M. 4.51.8.4.
7 I.R.M. 4.51.8.4.5.
8 2025 CAP Memorandum of Understanding § IV.A.
9 2025 CAP Memorandum of Understanding § IV.C; I.R.M. 4.51.8.4.7.
10 I.R.M. 4.51.8.4.7.
11 2025 CAP Memorandum of Understanding § IV.B; I.R.M. 8.26.8; Rev. Proc. 2003-40, 2003-1 C.B. 1044; Announcement 2025-6, 2025-7 I.R.B. 1.
12 Internal Revenue Serv., Compliance Assurance Process (CAP): Frequently Asked Questions (2025); I.R.M. 8.26.8.
13 2025 CAP Memorandum of Understanding § V; I.R.M. 4.51.8.4.8.
14 I.R.M. 4.51.8.4.7.
15 2025 CAP Memorandum of Understanding § IV.A.
16 2025 CAP Memorandum of Understanding § V.
17 Rev. Proc. 2003-40, 2003-1 C.B. 1044; Announcement 2025-6, 2025-7 I.R.B. 1. CAP guidance specifically confirms that taxpayers retain traditional Appeals rights if FTS does not resolve the issue. Internal Revenue Serv., Compliance Assurance Process (CAP): Frequently Asked Questions (2025).
18 See Internal Revenue Serv., Preparing a Request for Appeals (2025); Internal Revenue Serv., What To Expect From the Independent Office of Appeals (2025). Appeals then evaluates the issue under ordinary hazards-of-litigation principles.
19 I.R.C. § 6213(a).
20 I.R.C. § 7422(a); 28 U.S.C. § 1346(a)(1).
21 2025 CAP Memorandum of Understanding § VI; Internal Revenue Serv., Compliance Assurance Process (CAP): Frequently Asked Questions (2025).
22 I.R.M. 4.51.8.4.7.
23 2025 CAP Memorandum of Understanding § VI; I.R.M. 4.51.8.4.9.}