Did you receive an IRS CP2000 notice in the mail? The Internal Revenue Service (IRS) sends this letter if the information on your return differs from the information the agency received from third parties.
While a CP2000 notice may propose changes to the tax you owe, receiving this IRS letter is not a reason to panic. In this post, our legal team at Seattle Legal Services, PLLC, outlines the steps you should take if you disagree with the proposed changes. We also discuss your options if you agree with the changes but cannot afford the proposed amount due.
What Is a CP2000 Notice?
A CP2000 notice is a letter from the IRS’s automated under-reporter (AUR) unit. The IRS sends this letter when the AUR unit’s computer system detects a mismatch between:
- The income information on your federal tax return and
- The income information the IRS received from third parties, such as your employer or bank.
A CP2000 notice indicates that the IRS proposes a change to the tax, payments, or credits you reported in your original return. Additionally, this letter states that you have the opportunity to agree or disagree with the proposed change.
This letter contains a “summary of proposed changes” section that provides the amount you owe if the IRS’s information is correct.
A CP2000 notice is not a bill nor an audit notice, and the IRS has not assessed or charged you for the proposed amount. Because a computer system generated this notice, you are not dealing with a revenue officer. Also, a reasonable response to this notice is unlikely to trigger an audit or investigation, but your return may be subject to an examination.
First Step – Review the Proposed Changes
Once you receive a CP2000 notice, the first step is to check whether the proposed changes are correct. The notice features an explanation consisting of three columns:
- Shown on return
- As corrected by the IRS
- Difference
For example, suppose you did not report nonemployee compensation, but the IRS has a Form 1099-NEC on record reporting an income of $6,000. In that case, the “shown on return” column that corresponds to nonemployee compensation will show a zero amount. The “as corrected by IRS” and “Difference” columns will reflect the $6,000 you did not report.
Start by collecting and reviewing your past returns, W-2 statements, and 1099 forms that show income. You can also order your transcripts to view your payment history and calculate how much you owe. Check your records against the IRS’s explanation in the notice to determine why the discrepancy arose. You may also want to look at documentation of any gambling wins or losses in the reported tax year, as this may be the cause of your adjusted return.
Possible Reasons for a Discrepancy
Did you earn the income that the IRS claims you did not report? Sometimes, a third-party income report may be due to fraud or a mistake.
For example, suppose Taxpayer A’s payer issues a Form 1099-NEC and realizes that the compensation amount on the form is incorrect. Then, the entity issues another form without indicating that this form is a correction. As a result, the IRS has two 1099 forms on record, reporting a higher taxable income than A received and reported.
Also, before responding to the CP2000 notice, you need to determine if you failed to report the income the IRS claimed you did not report. However, if the IRS’s math is correct, and you failed to report the income on record, you can check for deductions to lower the proposed amount.
Ideally, you should consult a tax professional, especially if the CP2000 notice proposes a substantial amount. Schedule a consultation with us at Seattle Legal Services, PLLC, if you have received a CP2000 notice and do not know how to respond.
Responding to a CP2000 Notice
Responding to a CP2000 notice in time is crucial, regardless of whether you agree with the proposed changes. By responding to this letter in time, you can avoid the substantial understatement tax penalty that the IRS lists under the proposed changes.
The IRS typically includes a response form with the CP2000 notice you must complete and submit. If you did not receive a response form, you need to follow the instructions on the notice.
In most cases, recipients have 30 days from the letter’s date to respond to the CP2000 notice. If you do not respond to the notice, the IRS will issue a CP3219A Notice of Deficiency.
How you should respond to the notice depends on whether you agree to the proposed changes.
What To Do if You Agree With the Proposed Changes
If you agree with the changes that the CP2000 notice proposes, you must check the box stating your agreement. Then, you must complete and sign the response form in the appropriate place and mail it to the IRS with your payment. If you are married and filed the return jointly, your spouse must also sign the response form.
Your Options if You Cannot Afford the Additional Tax
The summary of proposed changes on a CP2000 notice may include a failure-to-file penalty or a substantial understatement tax penalty. While the first is 5%, the latter penalty is typically 20% of the tax you owe, increasing the liability significantly.
Even if you agree with the proposed changes, you can ask the IRS to remove the penalties from your balance. If you provide a reasonable explanation for underreporting your income, the IRS may grant your request for penalty abatement.
If you do not have the assets or income to afford the proposed amount in the CP2000 notice, conventional tax resolution options may be available, including the following:
Offer in Compromise
An offer in compromise is a tax settlement that the IRS may grant if it believes that you cannot repay the tax liability before the debt expires. This form of tax relief involves paying a lump sum you can afford, and the IRS forgives the portion of the debt you do not pay.
A small percentage of taxpayers who submit an offer in compromise are successful. Partnering with a reputable tax professional is crucial if you want the IRS to accept your OIC proposal.
Currently Not Collectible Status
You may qualify for financial hardship if your income is insufficient to cover living expenses under the IRS’s standards. In this case, your account is not collectible, which means the IRS cannot levy your bank account, garnish your wages, or take other collection action against you. The IRS may write off the liability if the debt expires while your account is currently not collectible.
Monthly Installment Agreement
Under a monthly installment agreement, you can make monthly payments towards your tax debt, making this liability more manageable. To apply for an installment agreement, complete and include Form 9465 (Installment Agreement Request) when responding to the CP2000 notice.
What To Do if You Disagree With the Proposed Changes
If you do not agree with the changes, you can check the relevant box on the response form (I don’t agree with some or all of the changes). Then, you need to return the response form and include a signed statement explaining why you disagree with the proposed changes. You must also include copies of supporting statements, such as your W-2 or Form 1099.
If you agree with some of the changes but not others, your letter should list the items you dispute. You should also include all supporting documentation. For example, if a third party submitted an inaccurate record to the IRS, contact them and request the correct information. Then, include a copy of the form or statement in your response.
The IRS’s Response to a CP2000 Disagreement
If you disagree or partially agree with the proposed changes, the IRS will assess your explanation and supporting documents. If the agency accepts your explanation, it will send you a letter stating that they have put the matter to bed.
However, if the IRS disagrees with your explanation, you will receive a letter CP3219A (Statutory Notice of Deficiency). If you receive this letter, the IRS plans to bill your account for the proposed amount, and you have 90 days to respond.
Your options upon receiving this notice include:
- Signing and returning the letter to the IRS, accepting the liability
- Filing a petition with the Tax Court and contesting the tax change
- Working with the IRS to resolve the matter before the 90-day period expires
Sometimes, the IRS partially accepts taxpayers’ responses to a CP2000 notice. If that happens, you will receive another CP2000 notice containing the updated proposed amount in this case.
Upon responding to the CP2000 notice with your explanation, you can expect to wait up to eight weeks for a response from the IRS. If you do not receive any correspondence from the IRS, contact them and request an update.
Do Not Ignore the CP2000 Notice
When the IRS sends you a CP2000 notice, the agency allows you to review the discrepancy and explain why you disagree with the notice.
However, if you ignore this notice and do not respond within 30 days from the date of the letter, the IRS will issue a Statutory Notice of Deficiency and a bill for the proposed amount. Additionally, you will need to pay the understatement penalty, and interest will continue accruing on the amount you owe.
Once you receive a Notice of Deficiency, you will likely have 90 days to file a petition in Tax Court and contest the bill. However, in most cases, responding to the CP2000 notice is the quickest and most straightforward way to clear up the matter.
Frequently Asked Questions
Do I need to file an amended return?
The IRS does not require an amended return in response to a CP2000 notice. However, filing a Form 1040-X amended return is necessary if the CP2000 notice is correct and you want to report additional income, expenses, or credits.
How can I avoid receiving a CP2000 notice in the future?
You can avoid receiving a CP2000 notice by maintaining complete financial records and waiting for all your income statements before filing a return. Upon receiving tax records from third parties, such as your bank or employer, review them carefully to ensure they are accurate and that you report your income correctly.
I suspect someone stole my identity. What should I do?
If you believe someone used your identity to claim expenses, resulting in inaccurate information on the CP2000 notice, you must file Form 14039 (Identity Theft Affidavit).
Seek Legal Assistance in Dealing With a CP2000 Notice
A CP2000 notice is generally less severe than an audit or tax bill. That said, navigating this communication with the IRS may require professional input, especially if the proposed amount is high or you have a complex tax situation.
At Seattle Legal Services, PLLC, our team has the knowledge and experience to take control of the matter and achieve the best possible outcome. If you have received a CP2000 notice, we will determine the cause for the discrepancy and help you deal with the unexpected tax bill. In the event of a tax debt increase, we can also explore tax relief options that may be available.
Do not let a mistake, fraudulent activity, or administrative issues affect your financial security and peace of mind. Please schedule a consultation with our Seattle tax attorney today.