IRS Notice CP2000

Your Guide to IRS Notice CP2000

What to Expect If the IRS Adds Unreported Income to Your Tax Return

The IRS sends Notice CP2000 when the information reported on your tax return doesn’t match the information the agency received from other entities. For instance, you might receive an IRS CP2000 notice if the income you reported was different from what appeared on the W2 your employer sent to the IRS, or if you forget to include income that was reported to the IRS on 1099 forms. The IRS’s computer system automatically generates CP2000 notices when it finds discrepancies with its matching software. 

Did you receive a CP2000 notice in the mail from the IRS? This is one of the most common notices, as the IRS sends over six million of them out each year. Don’t panic. You have a few ways to respond based on whether you agree with the notice.

Getting an IRS notice is never fun, but you shouldn’t ignore this notice. Read it thoroughly and respond promptly. Here’s everything you need to know.

Key Takeaways

• What is a CP2000 IRS notice? This notice is automatically generated by the IRS to alert you of a discrepancy in income you reported and the records they received from other parties.
• Who receives CP2000 notices? You will usually receive this notice if you made a mistake in reporting your income, the IRS falsely flagged your return, or your tax preparer made a mistake.
• What should you do? If you agree, pay the new amount as soon as possible. If you disagree, use the included response form and craft a response with your tax expert’s help. If you don’t understand the notice, ask a tax attorney.
• What if the CP2000 shows unreported 1099 income? If the income is from self-employment, you may be able to claim expenses to offset the income. 
• What if you can’t afford to pay? Contact the IRS about your options, such as a IRS notice of deficiency payment plan or offer in compromise.
• What if I need spousal relief? The IRS may grant you spousal relief if your spouse, who you file jointly with, underreported their income and you weren’t aware of the mistake.
• What if you ignore the CP2000 notice? Respond within the deadline, which is usually 30 days from the date on the notice. Ask the IRS for an extension if you can’t meet that deadline.
• Will a CP2000 notice delay my refund? Not necessarily, but it may be delayed in some cases. Ask a tax expert what to do when you are owed a refund but haven’t received it.

What Is a CP2000 Notice?

The IRS CP2000, Notice of Underreported Income, is a notice that the IRS sends when there is a discrepancy between what you reported on your tax return and what other parties reported to the IRS. This notice is not a bill. It shows a “proposed amount due” based on the discrepancy in your tax return. It’s also not an audit notice.

Instead, this notice outlines the inaccuracy the IRS believes is in your return and tells you how the issue affected your tax due. In some cases, the mistake may reduce your tax bill, but in most cases, it increases your tax owed. If the notice leads to a bigger refund or a lower bill, don’t worry about it. Just wait until the IRS sends you a check.

The IRS gives you options to pay CP2000 online and get the matter resolved quickly if you agree with the changes. Visit www.irs.gov/cp2000. 

Carefully review the new proposed total tax amount, the payments you’ve already made, interest, and the proposed amount due, which all appear on the CP2000 notice. Check everything against your own records.

Why Did I Receive a CP2000?

You can receive an IRS CP2000 notice for a wide range of reasons. For instance, maybe your tax preparer forgot to include something in your tax return, or maybe they made a mistake when they reported your information. Perhaps you forgot to give your tax preparer a certain document. Maybe you moved and didn’t receive a tax document that had information you were supposed to report on your tax return.

It’s important to remember, however, that the IRS is not perfect. The agency can make mistakes. The IRS might have generated the notice because of a real discrepancy, but maybe you weren’t required to report the income. CP2000 notices are often correct, but not always.

Here’s an example: Imagine that you settled a credit card for less than you owed. Because you saved more than $600, the credit card company sent you a 1099-C showing the canceled liability. For most people, this is taxable income, but if you’re insolvent, you don’t have to report it. The IRS’s computers don’t know that you’re insolvent. They just know that they received a copy of the 1099-C from your credit card company and that you didn’t report the income on your tax return.

How the IRS Generates the CP 2000 Notices

When the IRS receives your tax return, it runs the return through an automated matching system. If this system finds a discrepancy, it flags your return with the 922 IRS code. Then, it generates a CP2000 after applying the 922 code to your account.

Another example is financial institutions that send tax documents to the IRS. Say that one of your banks sent a document about your mortgage interest. Then, when the IRS reviews your federal tax return, it notes that you reported a higher amount of mortgage interest as an itemized deduction.

In this case, you didn’t have any additional income, but there was still a discrepancy that if corrected would increase your balance due. Due to the differences in the tax records, the IRS automatically generates this statutory notice.

What to Do When You Receive a CP2000 Notice

Again, you shouldn’t ignore the IRS CP2000. But the actions you should take vary based on whether or not you agree with the proposed changes. Review everything carefully, including your income numbers and deductions. Did you earn the income the IRS is saying you didn’t include on your tax return? When you calculate everything again, do you get the same numbers you reported? Is the IRS’s proposed discrepancy accurate?

The IRS CP2000 comes with a response form that explains what you should do if you receive this notice. If you don’t get the CP2000 form for your response, you will generally need to write the IRS a letter. You will create your response based on what you find in your research and review.

A tax professional can help you figure out how to respond to the CP2000 or any other IRS notice. In the meantime, the following sections outline how you should respond based on your situation.

What to Do if You Disagree With IRS Notice CP2000

If you disagree with the proposed changes to your income tax return, contact the IRS by the deadline on the notice. Typically, this is one month after the notice was generated. So, by the time you receive the notice, you may have less than a month to respond.

Again, you can respond using the response form that came with your letter. Or you can draft a signed statement explaining why you disagree with the changes. Also, include a copy of the notice and any schedules from your tax return that relate to the proposed changes.

Work with a tax professional on this issue, who can provide a CP2000 response letter template and help you craft the right document.

What to Do if You Disagree With Changes on the IRS CP2000

In some cases, you may agree with some of the changes outlined on the notice and disagree with others. Again, send in that response form or a signed statement to the IRS explaining what you agree and disagree with. You should also include an amended tax return that details how the changes affect your return.

Write “for reference only” on the top of the amended tax return. At this point, you aren’t really refiling your return. You’re simply illustrating how the changes that you believe are correct affect your return.

What to Do if You Agree With the Changes on the CP2000

If you agree with the changes proposed on the notice, you can just wait until the IRS sends the CP2000 notice of deficiency. Then, you can pay the bill. However, it’s important to note that when the IRS makes changes to your tax return, it also assesses interest and penalties on the additional taxes due, back dated to the original due date.

Even if you agree with the changes, you should still reach out and ask for a penalty waiver, but keep in mind that the IRS won’t remove the interest. However, if the agency removes penalties, they will remove interest that accrued based on those penalties.

To request a penalty waiver, send the IRS a letter explaining why you didn’t report the additional income. Include a copy of your CP notice and IRS Form 843 (Claim for Refund and Request for Abatement). Generally, the IRS is willing to abate penalties if you have reasonable cause or if it’s the first time you’ve incurred penalties and you have good tax compliance from the last few years.

What to Do if You Agree But Can’t Afford to Pay

Usually, when you receive an IRS CP2000 notice, you aren’t expecting another tax bill. You already filed your tax return, paid the balance, and moved on with your life. Getting a CP2000 notice out of the blue often means you have a tax bill that you haven’t budgeted for.

Luckily, the IRS offers a lot of options for people who can’t afford to pay their tax bills in full. In particular, you may want to do one of the following:

Request a monthly payment plan

If you want to make payments through a IRS notice of deficiency payment plan, include a copy of Form 9465 (Installment Agreement Request) when you respond to your IRS notice CP2000. You can also set up a payment plan online, but you won’t be able to do this until the proposed amount becomes a tax assessment — that is, after the deadline to respond to the letter has passed.

Request currently not collectible status

If you can’t afford to pay the bill, you can ask the IRS to label your account as currently not collectible. There is no specific form to make this request. You just need to reach out to the IRS and let them know about your situation. 

However, this isn’t a permanent resolution. Your tax bill will continue to exist, and it will also continue to accrue interest. The IRS will review your situation every few years, and if your finances improve, the agency will demand payment.

Apply for an offer in compromise (OIC)

The OIC program lets you settle your tax bill for less than you owe. You can either make a single lump-sum payment or make payments over a two-year term. You have to prove that your offer is the most you can afford to pay. This program requires a long application with detailed information about your assets, debts, expenses, and income or payment information.

Look into a partial payment agreement

The partial payment installment agreement is a hybrid between the OIC and the installment agreement. Like an installment agreement, this option lets you make monthly payments on your tax debt, but like the OIC, it also lets you pay off your tax debt for less than you owe. Basically, you make the highest payments that you can afford until the collection statute expiration date. Then, the IRS forgives the remaining amount.

What to Do if the CP200 Includes Self-Employment Income

Say you earned self-employment or freelancer income, but you forgot to report your 1099 or you didn’t know you had to. In this case, the IRS will send you a CP2000 showing the unreported income and the additional tax you owe. However, at this point, you may be able to offset the income with business expenses. 

Here’s an example. Let’s say you drove for a ride share company and they sent the 1099 to the IRS. You can claim expenses related to milage and other costs incurred while you were working. To do this, you will generally need to amend your original tax return and include a Schedule C to report the income and expenses. 

How to Deal With an Accuracy-Related Penalty

Typically, the IRS will add late payment penalties to your bill, but in some cases, the IRS will assess an accuracy-related penalty. This can happen if you under-reported your tax due by the greater of 10% or $5,000. This penalty is generally 20% of the unreported tax. 

You can ask for relief for this penalty. Alternatively, as explained above, if you are dealing with unreported self-employment income, your expenses may reduce the tax due to the extent that you no longer qualify to incur this penalty.

How to Get Spousal Relief Related to a CP2000 Notice

What if you get a CP2000 notice and the proposed changes are due exclusively to your spouse, former spouse, or late spouse? In that case, you may want to look into innocent spouse relief. 

Here’s an example: Say that you filed a tax return with your spouse, and you fully believed that your spouse reported all of their income.

A few months later, however, the IRS sends you a CP2000 notice, which includes information from a 1099-NEC. Your spouse earned additional income, but they never told you about it. As a result, you are now facing an unexpected tax bill.

Generally, when you file a joint tax return with your spouse, you are both liable for the tax due regardless of who earned the income related to the tax liability. However, in cases where your spouse hid income from you and you had no reason to know about the income, you can apply for innocent spouse relief.

There are several types of innocent spouse relief, and with some options, you can only apply if you are divorced or your spouse has died. In other cases, you may be able to apply even if you’re still married.

Generally, if you receive a response form with this IRS notice, it won’t outline how to request innocent spouse relief. To get help when the changes on the CP2000 notice are your spouse, ex-spouse, or late spouse’s fault, you should reach out to a tax professional. The innocent spouse program can be extremely complicated to navigate on your own, and the IRS takes a lot of details into account to determine whether or not you should be liable.

What to Do if the Changes on the CP2000 Are Due to Identity Theft

What if the changes on the IRS CP2000 notice are due to identity theft? For instance, this might happen if someone stole your Social Security number and used it to work, and then, an income document with your details was sent to the IRS. 

Again, look at the response form for instructions on how to respond to this IRS letter. If the response form doesn’t have the advice you need, contact a tax professional and send Form 14039 (Identity Theft Affidavit) to the IRS.

What If You Don’t Understand the Changes on the CP2000 Notice?

IRS notices can be very confusing. If you receive a CP2000 notice and you don’t understand what it means, you are not alone. These letters and their response forms are overwhelming and stressful to many taxpayers.

If you don’t understand your CP2000 notice, send a copy of the notice to the person who prepared your tax return. They may be able to explain what’s happening. However, you also need to be careful — especially if you use a tax preparer who’s not a CPA or an enrolled agent. They may have made the mistake that created the issue in the first place. This is why it may be best to talk to a tax attorney about the issue.

If you did your tax return on your own or if you want a more experienced opinion than your tax preparer can provide, you should reach out to a tax professional such as a CPA, an enrolled agent, or even a tax attorney. These professionals have advanced knowledge of the tax law, and they can help you figure out why you received this notice and how to resolve the issue promptly.

What If You Ignore IRS CP2000?

If you don’t respond, the IRS will finalize the proposed changes and once the taxes have been formally assessed against you, the agency can start to collect them with or without your cooperation.

The IRS may also issue a notice of deficiency if you respond and the IRS doesn’t agree with your argument. To disagree with this notice, you must appeal to the Tax Court. You have a limited amount of time to appeal, and the process can be complicated. You should always contact a tax professional to help you through this process.

How Long Do You Have to Respond to the CP2000?

You have 30 days from the date on the notice to respond. Again, remember that this is the date that the notice was generated, not the date that you received the notice. If you are at a foreign address, the IRS typically gives you 60 days to respond.

The IRS wants to receive the response in this time frame. Typically, the IRS requires your tax documents to be postmarked by the due date, but make sure you give yourself plenty of time to comply and respond as soon as possible.

If you cannot respond by the deadline, contact the IRS. Generally, if you call and talk with someone, they’ll automatically extend your deadline by another month. Don’t call the IRS’s general number unless you’re willing to deal with a complex phone tree. Instead, call the IRS CP 2000 phone number that is printed on your notice.

How to Pay Your CP2000 IRS Notice

If you agree with the changes outlined on the CP2000 notice, you can use the notice response form to make a payment. You can also pay the CP2000 online. Again, however, you may not be able to make an online payment until the proposed changes are final.

How Do I Check the Status of My CP2000 Notice?

You can always contact the IRS for updates on your CP2000 form or letter that you responded with by calling the IRS at the number on your original notice. The agency should be able to provide an update on whether they received your response and what your status is. If you’re not sure, talk to a tax attorney for assistance.

Will CP2000 Delay My Refund?

Another common taxpayer question is whether receiving a CP2000 notice will delay their refund for that year. The answer can depend. Sometimes, this notice could create a delay, but because the IRS’s system is automated, you may still get your refund outlined in your original tax return before you even get the CP2000 notice. 

However, your tax bill could change because of the CP2000 notice. So, pay close attention to all information provided on your notice, and follow the instructions carefully. If you’re still not sure what the CP2000 notice means for your tax refund and liability, talk to a tax attorney about your options.

Get Help With Your CP2000 Notice

Getting a CP2000 notice can be confusing and scary. Luckily, you don’t have to deal with this on your own. We can help. At the W Tax Group, we have extensive experience helping taxpayers with a wide range of tax issues. Give us a call today. We can start with a free consultation and help you find the best path forward for your situation.