Getting a notice from the IRS means that the agency believes that you left the income off your tax return. It doesn’t mean that a taxpayer has to agree with the IRS every time the agency sends a CP2000 notice. In some cases, the system makes a mistake.
That’s why it’s crucial to take a closer look at the letter and even ask for the help of a specialist. This article explains what a CP2000 notice is, how to deal with the letter, and what to do if you disagree.
What is a CP2000 Notice?
When a taxpayer’s tax return doesn’t match the income information IRS receives from forms W-2 and 1099, the individual receives a CP2000 notice. The CP2000 notice is also called an underreported inquiry.
The notice includes proposed taxes to pay and potential penalties for failing to inform the IRS about the taxpayer’s income during the tax year. The IRS form always contains a response form, so it’s more convenient for a taxpayer to fill and send the form back. The notice comes with a W2 or 1099 that the taxpayer forgot to include in some cases.
The IRS can also send a notice that questions deductions or credits a taxpayer wants to claim, but they don’t match the information filed under a taxpayer’s Social Security Number.
Note one crucial fact — the Automated Under-Reporter (AUR) Control System of the IRS may send a false notice. When the AUR detects a mismatch, it automatically sends the notice, but the system doesn’t check if there was any mistake. A taxpayer may have correctly filed tax forms, or the system miscalculated how much the taxpayer owes, or the penalty is unfair, etc.
In this case, a taxpayer can complete and return a response form that provides the IRS with an explanation of why they disagree. To prove a point, the taxpayer must include the documentation that proves there was a miscalculation by AUR. But more on that in the further sections of the article.
In what Cases do You Receive a CP2000 Notice?
Any taxpayer can receive a CP2000 notice from the IRS if the system detects a mismatch between the information given by a taxpayer and the one IRS has in the system. Here are the most common cases when a taxpayer receives a notice.
Self-Employed Individual’s Mistake
If someone is self-employed, they still need to file for taxes. It’s important to submit all required forms on time, especially when working with different companies as a contractor. It means that this taxpayer receives 1099 forms from these companies and has to file for taxes according to these forms.
For example, the taxpayer received a 1099 form of $20,000 from a certain company but forgot to include 1099 when filing taxes. The IRS will send a CP2000 indicating the proposed real balance, potential penalties to cover the mistake, and interest.
Wrong 1099 or a W2 Issuer Mistake
It’s possible that the company may send a form to the IRS with a mistake. For example, an employee has been working in a certain company for many years. The payroll department made a mistake and sent the W2 form that claims this employee has earned $50,000 more than they made in reality. As a result, the IRS sends the CP2000 notice to the employee since the system detects the mismatch.
A similar situation can happen to self-employed individuals working as contractors. But in that case, they receive a correct form, whereas the IRS gets a form with a mistake.
Wage Earner’s Mistake
If a taxpayer has a full-time job and has several part-time jobs, it’s important to file W2 forms stating income from all part-time jobs.
For example, the taxpayer had three part-time jobs during a tax year. They filed two W2 forms on their tax return and forgot to include the W2 form for a third part-time job. As a result, the system detects a mismatch and sends a CP2000 notice. This notice includes the W2 to fill and send back to the IRS while also crediting taxes paid by the taxpayer.
Stock Sale Owner’s Mistake
When selling shares in any company and gaining profit, then the IRS considers this sale as an income. For example, a taxpayer had shares in a company of a total amount of $20,000. Then the taxpayer sells these shares, each for $3.
When purchasing shares, the taxpayer paid only $1 per each. So, selling the stock for $3 per share means that the taxpayer has earned $40,000. If the taxpayer fails to include a stock sale that earned $40,000, the IRS sends a CP2000. Except that this CP2000 notice includes the total income on the tax return — $60,000.
What to do with a CP2000 Notice?
It’s common to receive a letter from the IRS with a notice. As mentioned, it may be a mistake, so don’t panic. Here is what you should do:
- Read the notice. The IRS sends a detailed letter explaining why a taxpayer has received the notice. Read carefully the information attached to a letter to see if it’s correct.
- Complete the notice response form. A taxpayer must respond whether they agree or disagree. The response form usually explains what actions to do. If the letter doesn’t have a response form, then it has instructions on what to do and how to send a response.
- Return the response. The IRS recognizes two ways of returning the form: by mail or faxing. The letter includes the return address and the tax number for the taxpayer’s convenience.
Taxpayers must follow different instructions depending on their agreement or disagreement. Note, it’s easy to resolve the issue by responding as soon as possible. But delaying or ignoring the notice may lead to the IRS charging you with more penalties.
Agree with the IRS
If a taxpayer believes that the IRS is correct and agrees with the federal agency, then they should sign and send the letter to the IRS as soon as possible. The IRS then sends an updated tax bill.
The CP2000 notice often comes with a response letter to fill and proposed actions to do (submitting more forms, paying penalties, etc.). Make sure you keep a copy of the notice in records.
If a taxpayer can’t immediately pay the full amount, it’s possible to create a short-term payment plan or opt for a long-term installment agreement with the IRS. Note, taxpayers should repay short-term payments for 180 days or less, whereas installment agreements suggest monthly payments.
Disagree with the IRS
If a taxpayer detects an error and disagrees with the IRS, they should immediately complete and return the response form indicating their disagreement. Add a signed statement explaining the reason for disagreement. A taxpayer must add documentation that supports the disagreement statement.
The letter from the IRS contains a phone number to contact the IRS agent, so you can use it to talk about the notice. It is possible to resolve the issue over the phone, but only if the mistake doesn’t affect the tax total. If dealing with the IRS agency seems intimidating, contact the tax advisor.
How to Avoid Getting a CP2000 Notice from the IRS?
You can take several simple actions to avoid receiving notices in the future:
- Keep all financial records.
- Always include all income on the tax return.
- File for tax returns only upon receiving all forms with income statements.
- Check income forms you receive from third-party companies or an employer.
By properly keeping financial statements and showing all changes, you can avoid trouble. Always double-check the information on the tax return before sending the form to the IRS.
Author: Charles Lutwidge