Posted by Fletcher Accounting and Tax Service Inc.

3 Steps To Take When Responding to IRS CP2000 Notices

3 Steps To Take When Responding to IRS CP2000 Notices

The IRS sends a notice to taxpayers whose tax return doesn’t match their income information. The notice is called CP2000, also called an underreported inquiry. It basically notifies you of your taxes, and possibly penalties, you might need to pay for failing to report an income in your return. If the deductions or credits you claim does not match information statements filed under your Social Security Number, you are subject to being questioned by the IRS.

However, since CP2000 notices are generated by computers, you may not owe the full amount or in some cases, anything at all. It is common for taxpayers who receive a CP2000 to end up not having to pay anything.

But what would you do if you received an IRS CP2000 notice? You will have to go through a process, and you or your tax professional acting in your behalf will have to investigate the problem more and report back to the IRS within a certain period of time. If you do end up owing penalties, you’ll have to take care of that as well.

What Steps Can You Take Upon Receiving a CP2000 Notice?

1. Evaluate The Situation Before Responding

Since you have to validate whether or not you owe more taxes, it’s important for you to find out whether you made any mistakes in your tax return and what are those mistakes. This is what you will do:

  • The forms you get at tax time to report your income for the year (like W-2s and 1099s) are the information statements under your Social Security Number. Collect them and compare those statements with your tax return to find out whether you forgot to include any income of your return.
  • If you did forget to include an income, you’ll have to calculate any additional tax that you may owe properly. Your new tax calculation may also include additional deductions you weren’t able to include before.
  • Decide whether you agree, partially agree, or disagree with the CP2000 notice.

2. Send the CP2000 Response Form Back to the IRS

  • You have to send the CP2000 response form back to the IRS if you agree with the notice and can also request an installment agreement along with it if you believe you won’t be able to pay the full amount.
  • You need to compile and mail a response to the IRS with the necessary documents proving your position if you either partially agree or disagree with the CP2000 notice. Do not file an amended return, attached a corrected return instead to help clarify your position. The IRS will take care of correcting your return once they decide to accept your explanation.
  • Along with your response to the underreporter, you may also discuss any proposed penalties.
  • Look into appealing the decision of the IRS turns down your response.

The IRS examiner concludes no adjustment is needed if the taxpayer’s response provides sufficient information. A letter closing the case will be issued to you. However, if there is no response or the examiner is not satisfied with the response, the taxpayer will receive a statutory notice of deficiency (or 90-day letter) which results to a formal assessment of additional tax. The taxpayer will, therefore, have to pay the tax or file a petition to the U.S Tax Court.

3. Avoid Future Notices and Additional Penalties

  • You may call the IRS or study your transcripts to confirm that the IRS was able to fix your issue after about eight weeks from the time you sent your response.
  • Carefully check your information statements and determine whether you made similar mistakes in other years so that you can avoid penalties on more recent returns. It might even become necessary for you to file an amended return on these years to make sure you don’t get hit with the 20% accuracy penalty.
  • A lot of CP2000 notices never receive a response or the response does not provide an effective association with the account. There are a lot of opportunities for the process to get off tract from the moment the notice is sent which may complicate your case even more. Make sure you avoid it from happening by responding to the notice as soon as possible.

Compile all your information before filing for your future returns and request your information statements from the IRS. Although keep in mind that you won’t find all your Forms W-2 and 1099 on your wage and income transcripts until late May.

Fletcher Accounting and Tax Service Inc.
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