New Bern, Morehead City and Beaufort Tax Attorney
Understanding IRS Notices- CP2000
Did you know that the Internal Revenue Service (IRS) uses a matching program to make sure that you have included all income on your individual income tax return? Third parties such as employers, mortgage companies, and banks are required by IRS rules and regulations to submit tax forms such as W-2’s, 1098’s, and 1099’s not only to individual taxpayers but to the IRS as well. The IRS is currently using a software program to insure that information reported by taxpayers on their tax returns matches the information provided by third parties on these various forms. If a discrepancy is identified then the taxpayer will undoubtedly receive a CP2000 notice concerning proposed changes to his/her income tax return complete with applicable penalties and interest.
There are several important things that taxpayers should know about the CP2000 notice. First, in order to determine if the correspondence you have received from the IRS is, in fact, a CP2000 notice, all you need to do is look in the upper right hand corner of the letter next to the word Notice. If you see CP2000 then you know that the IRS computers have identified a potential discrepancy between your tax return and the information reported by third parties. Also, in the upper right hand corner you will see the date of the notice. The CP2000 notice allows for a short thirty (30) day response time. Please be aware that the IRS generally will allow for an additional thirty (30) day extension, but as with any IRS notice, a timely response is extremely important.
Next, look in the middle section of the first page of the letter. There you will see a “Summary of proposed changes” including the Tax you owe, penalties, and interest. The remaining pages of the notice explain in detail what was shown on your return and then a “corrected” amount by the IRS. The notice will specifically list the W-2, 1098, or 1099 in question and how it was or was not accounted for on the return.
Upon receipt of a CP2000 notice, the first step to take is to find your income tax return for the year in question. This way, you can compare what the IRS claims was shown on your return to your actual return. Next, look at the W-2, 1098, or 1099’s that the IRS is asserting that you failed to include on your return. See if these documents coincide with occupations, investments, or accounts that you, in fact, have. If you believe that the IRS has made some error with the proposed assessment then I suggest reaching out to a tax professional immediately. As with any computer software program, mistakes are constantly made. I have had experience dealing with taxpayer’s CP2000 notices where the IRS simply erred in entering in the information under the wrong social security number. Other instances of mistake have occurred where the IRS did not take into account the taxpayer’s adjusted basis for securities that were sold or the taxpayer included the income on the return but included it on the wrong line. If a mistake has been made by the IRS then it is important that it be dealt with through an appropriate written response putting the taxpayer’s best arguments forward. The bottom line is that you should never simply pay any IRS bill without ensuring that you, in fact, owe the tax.
If on the other hand, a mistake was made on your return, do not panic. A taxpayer can simply agree to the proposed changes without filing an amended tax return and make the necessary payment. If you cannot afford to make the payment in full, there are various payment options including an installment payment agreement, which we can apply for through an online tool. There is also the possibility of First Time Penalty Abatement (please see my prior blog post on this topic) if necessary.
In conclusion, whether the taxpayer agrees or disagrees with the CP2000 notice it needs to be dealt with timely and effectively.
If you receive a CP2000 notice or any other IRS correspondence, please do not hesitate to contact Andrew G. Foster at Harvell and Collins, P.A.