Tax Preparation, Tax Audits
Three times a year the IRS matches up income, expenses, and credits on filed tax returns with information returns filed (i.e. Forms W-2, 1099, 1098, 5498, etc.). If there is a discrepancy, the IRS can issue a CP2000 notice proposing additional taxes, penalties, and interest.
What do you need to know about CP2000 notices?
CP2000 notices are not audits. However, just like audits, they propose additional tax, penalties, and interest based on taxpayer’s filed information statements (W-2s, 1099s, etc.) with the IRS.
CP2000 notices may include penalties. The most common penalty is a 20% accuracy penalty. Taxpayers can contest this penalty if they have cause- even if they agree to the added tax.
You can ask for a “do-over.” If the taxpayer misses the deadline and the additional tax is assessed, they can ask for “CP2000 reconsideration” to undo the assessment.
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BACKGROUND ON CP2000 UNDERREPORTER INQUIRIES
How often does it happen? In 2018, the IRS issued 3 million CP2000 notices to the 153 million taxpayers who filed an individual return.
How long does it take to resolve? 1- 6 months. One complete and timely response in the right format will facilitate quick resolution. The IRS can ask for additional time if they are backlogged with many CP2000 responses.
Most likely solution(s) for CP2000 notices
Response to disagree, in whole or in part, with the notice: A timely filed, complete CP2000 response to the IRS. This response should include the taxpayer’s corrected tax return if the taxpayer is computing a new tax due. This response should also dispute any penalties and request an IRS appeal should the IRS tax examiner disagree with the response.
Response to agree with the notice: Response and payment to the IRS for the balance owed.
Other potential solutions to CP2000 notices
CP2000 reconsideration: If a taxpayer missed the CP2000 deadline, they could request reconsideration by following CP2000 reconsideration procedures.
CP2000 appeal: If the IRS disagrees with the CP2000 response and the taxpayer timely requested an appeal, the taxpayer can request an IRS appeals officer to review the disagreement.
Offer in compromise- doubt as to liability: Taxpayers can request that the IRS formally reconsider the CP2000 through an Offer in compromise- doubt as to liability (Form 656-L). This request is very similar to a CP2000 reconsideration request.
STEPS TO RESOLVE A CP2000 UNDERREPORTER
Here are the steps to follow when a taxpayer gets a CP2000 notice:
Review the CP2000 letter: analyze the year and items that the IRS says were omitted. Many times, taxpayers find that information statements were filed incorrectly or that someone was using their SSN for employment.
Gather your original tax return documents for the year in question: gather the tax file for the CP2000 year in question.
Compare the missing information statements on the CP2000 to your version: review the accuracy of IRS information returns reported on the CP2000.
Do your own matching: taxpayers may want to get their IRS wage and income transcript for the year and match the information statements to the return. This reconciliation will identify any discrepancies. Now you can gather other information to prepare a corrected return if needed.
If you disagree with the tax, prepare a corrected return and supporting schedules/documents: the corrected return can be used with your response. The corrected return will compute the correct tax and allow for deductions.
If you disagree with the penalty, prepare your position on why you disagree: protest the penalties by providing the IRS reasons why you made a reasonable attempt to report all items correctly on the return. Reliance on a tax pro and tax software, lack of information returns needed to file, and ignorance of the tax law are common arguments against the accuracy penalty.
If you agree with the adjustment, respond to the IRS with your agreement and payment method: use the response form and, if a payment plan is needed, a Form 9465 to request an installment agreement. Also, the taxpayer can make full payment with the response form agreeing to the assessment.
If you disagree in whole or in part, prepare your complete response and send to the IRS: respond using a cover letter explaining the disagreement(s), the CP2000 response form, documents that support your disagreement, and a copy of the original and corrected returns. In this response, the taxpayer should always request an appeal if the IRS disagrees with the response.
Monitor notices for status, agreement, and assessment (if applicable): the IRS is likely to request more time if they cannot reply to your response within 30 days. IF there are more questions, the IRS can issue another CP2000. If the IRS agrees, they will send an adjustment notice or a CP2005 no-change notice (whichever is applicable). Taxpayers can also call the IRS to get a status update (be prepared for long wait times) if they do not hear from the IRS within 30 days.
Appeal any disagreement: if the IRS disagrees with the response and the taxpayer timely appeals, the taxpayer can receive an appeal hearing to review their case.
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