Everything you Need to Know About Notice of Underreported Income

The IRS sends you an underreported notice when the information you gave on your tax return does not correspond with the information about your income in the files of the IRS. This notice is also called CP2000 notice.

The most important thing that taxpayers need to know is that notice of Underreported income is not actually a bill, but a proposal for you to make an adjustment to your income, credits, deductions, and payment. When the adjustment is made, it can lead to you paying additional tax, or getting a refund of the taxes you earlier paid.

The information contained in this notice includes taxes, and the type of penalty that you can possibly face for omitting to fill your income when filing your tax return. There are times that IRS will question the credits that was taken by you, and even deductions that is not in line with the information that you filed.

Notice of underreported income is actually generated by computer and is prone to errors. This is because the amount proposed might not be as much as that, and in some cases you might not even owe anything. The truth is that, a lot of taxpayers that receive underreported income notice (CP2000) don’t owe a dime. 

Most times this can be a simple mistake done when filing your tax returns like when you fill an amount that you suppose to fill in another line in a different line

How the IRS generates Notice of Underreported Income

The IRS generates your underreported income by comparing all your payment information and all the documents that they got from companies, your employer, banks and other income documents that you received payment with. Such document like form 1099, w-2, 1098, are compared to the credits, deductions and income that you reported when filing your income tax return.

How to respond when the IRS sends you an underreported income notice

• Don’t exercise any form of delay, immediately respond to the CP2000 notice send to you by the IRS.
• Carefully cross check the notice of underreported income that you received to see if it matches with the document of your tax return. Check if the mistake is from you or the IRS, and then honestly check if reported all the items listed in the CP2000 notice.
• After carefully checking, and find out that the mistake is from you, respond immediately in agreement to the IRS notice. And you do this by filling and signing the response form that comes in the CP2000 notice, and then you return it back to the IRS in the enclosed envelope
• If the CP2000 notice that was sent to you is not correct, that is the IRS made a mistake, respond to the notice by specifically letting them know that the CP2000 notice was wrong and that you don’t agree with it. At this it is point it is advisable not to sign, but to carefully explain in a written and signed document the reasons why you are not in agreement with the notice sent to you.
• You can legally challenge the penalties spelt out in CP2000 notice, but it is advisable to seek the professional advice of your tax preparer on this.

Information contained in the IRS CP 2000 notice

The information contained in the notice include things like the required changes that the IRS need you to make, the ways that you can respond to the CP2000 notice, and a phone number belonging to the IRS that you can call in case you need any guidance or assistance

• The CP2000 notice shows the amount you reported on your original or amended return.
• The CP2000 notice shows the amount reported to the IRS by the tax payer.
• The CP2000 notice shows some information such as, the name of the tax payer, identification number, the type of document issued (W-2, 1098, 1099), and the tax identification number of the person to whom the document was issued.
• The CP2000 notice shows the changes that the IRS proposes to the tax, credits, and/or payments.
• Proposes either an increase or decrease to your tax liability based on the tax payer documentation.
• The CP2000 notice also includes a response form, payment voucher, and an envelope.

Tax issues are a bit complicated, and it is advisable that when you receive an underreported income notice from the IRS not to panic, or consider it an indictment, but to take the notice to your tax preparer, and if you don’t have one, you should as a matter of urgency find a tax preparer who can help you to respond or contact the internal revenue service (IRS) on your behalf.