A CP2000 notice contains a “proposed amount due” and there is a possibility you will receive it. When the amount you reported on your tax return does not match the information that the IRS received from other sources such as your bank, employer, and other parties, an IRS CP2000 notice will be automatically triggered and will be sent by a computerized system. Normally, after the original return due date, the IRS matches return with information from third parties.
As a matter of fact, over 6 million CP2000 notices are sent yearly by the IRS. This notice will give you a chance to respond to your discrepancy and it will also propose a change to your tax payments or credits. You must respond to avoid future penalties and interests even if you will agree or not.
You should not panic since there is a possibility that you may not owe anything. What if you weren’t able to report the ROTH distribution you took? Maybe you are insolvent and can prove that you had a cancellation of debt (1099-C) but wasn’t able to report it.
This IRS CP2000 is neither an audit notice nor a bill. It can address two concerns: an overpayment or an underpayment, and an underpayment usually concerns us. An error caused by a third party, the IRS computer system, or even you are the possibility of the cause if there is a discrepancy. Normally, if the tax preparer forgot to include all the income, the taxpayer moved and did not get the document that the client of the tax preparer did not provide (such as 1099), are some of the reasons a CP2000 notice happens.
Before responding to the notice through a response form that the IRS sent, you should read it carefully to know whether you agree to the calculation or not. There are instructions included on what you should do if there is no response form attached to the notice you received. You are given 30 days from the date of the letter to respond to it and 60 days if you are out of the country. This means that you don’t have 30 days to mail it but within 30 days the response must be delivered. You can call the number provided on the notice if you can’t meet the deadline to ask for additional time to send a response. The IRS will send out a letter 3219A Notice of Deficiency if you will not respond.
Before concluding that the figure presented on the notice is correct, you must double-check your financial activity for the year cited.
If you agree to the CP2000 Notice:
There is a high chance that penalties and interest will keep on growing if you will be unable to pay immediately. You have options especially if the amount you owe is a huge one, consider discussing it with a tax pro.