An IRS CP2000 notice is a form automatically generated by the IRS if it seems that the income you reported on your federal tax return doesn’t match the income reported on W-2 and 1099 forms issued by third parties, including employers and organizations you did business with.
When you are a W-2 employee, you will receive a W-2 tax form by the end of January of each year. A W-2 form shows your gross annual income and any federal, state, or other taxes withheld.
Independent contractors receive a similar form called a 1099-MISC. If you made more than $600 with any one entity in the tax year, your 1099 form shows your total annual earnings from that company or organization.
If you invest in stocks, you may receive a 1099-B Form: Proceeds From Broker and Barter Exchange Transactions from your stockbroker. A 1099-B shows income derived from the sale of stocks and investments. If you trade on a barter exchange, you may receive the same form showing barter income.
You will receive a 1099-C: Cancellation of Debt form if you had any debt canceled or forgiven within the tax year. For instance, if you work with a debt settlement company to reduce your total credit card debt, the forgiven debt is considered taxable income.
If the income reported on your W-2 and 1099 forms does not match your reported gross income on your IRS federal tax return, you will receive a CP2000 Notice of Proposed Adjustment for Underpayment.
A CP2000 notice may also be generated if the IRS computer algorithms determine that you took deductions or tax credits that don’t match other information filed under your Social Security Number, such as charitable donations or mortgage interest statements.
If the IRS determines that you did under-pay your income taxes, the late payment can accrue fees and penalties, resulting in mounting IRS tax debt. The best thing you can do if you receive a CP2000 Notice is to look into it right away.
Many taxpayers discover the CP2000 was incorrect and they don’t owe the IRS any money, after all.
Since CP2000 notices are automatically generated, they may not be correct.
Receiving any IRS notice can be scary. But not all are as bad as they seem at first glance. For instance, a CP2000 form, or Notice of Proposed Adjustment for Underpayment, requires you to take action to verify that you reported your income and deductions properly on your tax returns.
But it is not an immediate sign that you are in trouble with the IRS. You may not even owe additional taxes.
It’s important to know what to do when you receive a CP2000.
Because the IRS automatically generates CP2000 notices by computer, many are not correct.
Take these steps to quickly and effectively deal with a CP2000 notice to minimize tax penalties and ensure you are paying the right amount of taxes.
1. Gather all the information you need to determine if the CP2000 is accurate.
First, make sure you have all your 1099 and W-2 forms, as well as any information statements showing tax deductions or credits you qualified for during the prior tax year.
Cross-check your income statements against your tax return. Did you forget a 1099 or misread your W-2?
Sometimes, companies that file 1099s with the IRS may forget to mail them to the independent contractor. Forms can get lost in the mail. Even digital 1099s may not make it to their intended recipient’s inbox.
Cross-reference your 1099 forms to your bookkeeping records, bank statements, and any other places you track your 1099 income. If your records reflect income not shown on a 1099 form, reach out to the customer or client and tell them you’d like a copy of your 1099.
If you discover you did under-report income, you’ll need to calculate the total taxes, as well as penalties you owe.
Remember, if you under-reported income, you may have also under-reported tax deductions and expenses associated with that income. A tax accountant can help you calculate the total amount of tax debt you owe.
Act quickly, because the IRS provides a deadline on the CP2000, and failure to respond in time can result in additional penalties and IRS tax notices. You may also lose your right to file an appeal if you don’t respond within 30 days of receiving a CP2000 under-reporter inquiry.
2. Decide how best to respond to the IRS and submit your response.
You have three options when it comes to responding to a CP2000. You can agree, partially agree, or disagree with the information the IRS provided on the notice.
What Happens If You Agree to the Information on the CP2000?
If you agree, you could also be subject to a 20% accuracy penalty for misfiling your tax returns. If you would prefer to negotiate these penalties, do not check the box stating you “agree to all changes.”
On the other hand, if you indisputably made a mistake and left a 1099 form off your total reported income, you may have to pay the taxes due as well as the penalties.
You can always contact the IRS to negotiate an installment agreement if you can’t make the full payment at one time.
What Happens If You Partially Agree or Disagree with an IRS CP2000 Notice?
If you feel the information on your CP2000 notice is an error, submit the form along with materials supporting your stance. If you partially agree, you can attach a corrected – but not an amended – form showing revisions. The IRS will change your return if the agency discovers your information is correct.
You can also negotiate to have penalties and late fees waived in your response to the IRS.
If the IRS doesn’t agree with your explanation, you can file an appeal within 30 days of receiving the CP2000 Notice. Appeals conferences tend to include an informal phone call from an IRS representative, who may agree with your case. If the call goes well, you may be able to avoid court or a large tax bill.
3. Review past federal returns and state tax returns to ensure you didn’t make the same mistake.
If you agree with the notice of underreported income, it’s a good idea to go over the past few years of returns with a tax professional to amend those returns to reflect your income and deductions accurately. By being proactive, you may be able to avoid a 20% inaccuracy penalty and additional IRS notices.
If you forgot to report income on your federal return, double check your state tax return to make sure you didn’t make the same mistake there. A tax accountant can help you file amended state and federal tax returns that reflect the correct amount of taxes you owe.
4. Follow up with the IRS.
After about eight weeks, make a call to the IRS to ensure the problem has been resolved, your tax liability is accurately reflected on your returns, and you don’t owe the IRS any more money.
Receiving a CP2000 Notice of Proposed Adjustment for Underpayment is not the worst IRS notice to receive. You may have no reason to worry, at all.
If you kept accurate records of your earnings and deductions through the year, it should be easy to prove that you did not underreport your income.
Find a reliable and trustworthy network of tax professionals who can help you clarify the findings of an IRS CP2000 Notice right here at Solvable.