How to respond to an IRS notice or CP2000 letter

Receiving a letter from the IRS can cause your heart to race a bit. But most IRS letters aren’t emergencies. There are numerous questions on numbers that do not match. One of the most common CP2000 letters is the CP2000. The meaning of these letters, what to look at first, how to know if it’s correct, and how to agree and disagree properly are detailed below in this blog. 

What is an IRS notice and why might you receive a CP2000 letter?

An IRS notice is an official letter the IRS mails to tell you something about your tax account. May ask a question, request data, explain a change or display a balance due. So, what is a CP2000 notice? It’s a letter containing the message that the amount of income or the amount of payments you report on your tax return doesn’t match the amount you reported to the IRS by your employers, banks, or other payers. The IRS then suggests modifications to your tax. CP2000 is not a final tax bill and it is not an audit. This is an offer you can accept or reject.

Common Mistakes to be Avoided 

• Balance due (CP14): Tax that has not been paid in full, on time.

• Math errors (CP11 or CP12): The IRS has corrected an error in your return.

• To verify you actually filed the return (Letter 5071C): The IRS wants to be sure the return was actually filed.
• Unfiled return (CP59): The IRS doesn’t have a record of a tax return that it is expecting.
• Credit review: For credits (such as the Earned income Tax Credit), the IRS requires proof.
• Refund was reduced and/or extended for additional review: Your refund was lowered and/or extended for an additional review.
• Estimated payments: Payments that were claimed that don’t match IRS payments.
• Multiple returns – 2 persons claimed the same child on their returns.

What’s the first thing you should do if you receive an IRS notice or CP2000 letter?

Take a moment to breathe and read the entire letter slowly. Be sure it is a real notice – look at the notice number in the top or bottom right corner and compare it to the IRS website. Then, take a look at what the IRS is requesting of you. In some letters, there is only information to be passed on, and in other letters, there is a need for a reply. The IRS tax notice response process generally begins with one simple action: knowing exactly what the letter contains before calling, paying, or sending anything to the IRS. Even if you believe that the IRS made a mistake, don’t ignore it.

Finding the Response Deadline, Tax Year, and Documents Mentioned in the Notice

• IRS notice response deadline 
• Tax year: Determine which tax year the letter references as this is commonly the previous year’s letter.
• Employers, banks or brokers: Record each of their names.
• List amounts: Record each dollar amount that is listed by the IRS.
• Proposed totals: Calculate the additional tax, penalties and interest due.
• Contact information: Record the phone and fax numbers on the letter.
• Make copies: Scan or copy all pages and keep them in a safe place.
• Try to remind yourself: Make a reminder a week before the deadline.

How to find out if the IRS is right about missing or underreporting income?

First, collect all the tax forms you got for that year, as well as a copy of the return you filed. Next, check each of the items the IRS lists under income with what you reported. Occasionally, the IRS is correct, and the good old taxman simply forgot it. Other times, it is reported on another line, counted twice or it is someone else’s income. With stock sales, the IRS may not be aware of the amount you paid for the stock which can make it appear that you made much more money than you actually did. The most crucial step in your response is to carefully check your reply.

Checking W-2s, 1099s, Bank Records and Your Original Tax Return

Put documents next to each other and tackle them one by one. Employ a basic checklist: the name of the person that paid the money, the amount that the form contains, and the line on your return that reported the amount. The bank statements will help to determine if the funds were earned or if the funds were expended in some other manner, for example, if they were transferred to your account, if they were a gift, or if they were a loan. If the form that was sent is incorrect, you should contact the payer and request a corrected form, provide explanation and supporting documentation.

This may take some time and one of the advantages of hiring a professional tax advisor is that they will identify mismatches quickly.

What Should You Do if You Agree With the Proposed Changes in a CP2000 Letter?

Accepting the IRS additional tax assessment in the letter includes accepting any interest and penalties that are applied to the unpaid tax. It’s possible to shut down the topic quickly by agreeing. Payments can be made in full or a payment plan can be requested if it is difficult to pay in full. The interest rate continues to increase until the amount due is paid back so it is better to do this early on to keep the total amount of interest low. Typically, you don’t need to file an amended federal return for the items in the letter. Partial agreement is also possible if only some items are correct.

Filling in the Response Form and what happens after you agree

• Mark the box: If you agree with all of the proposed changes, check the box.
• If you filed a joint tax return, both spouses must sign and date the CP2000 response form.
• Option to pay in installments, online, or by check.
• Mail or fax to the address or number: Return the form by the above address or number.
• State return – You may also have to update your state return.
• The next step: IRS adjusts your account, notifies you of the new balance in a letter.
• Refund impact: This balance is frequently the source of questions about IRS Tax Refund: Everything You Need to Know as the possibility of future refunds exists.

What Can You Do If the IRS is Wrong in a CP2000 Letter?

If you think the IRS is incorrect then you’re entitled to disagree. Check the box that indicates you disagree, to a certain extent or in entirety, and submit a signed letter/draft that provides why. Your response will be reviewed by the IRS, which may accept it, seek additional information or retain the change. The IRS Independent Office of Appeals also offers a review. If that doesn’t resolve the disagreement, the IRS may issue a formal notice that will provide you with 90 days to appeal to the Tax Court. However the 90 day tax court deadline applies to statutory notice of deficiency, not to the original CP2000 letter. Keeping things under control, structured and clear allows the IRS to see your side.

Constructing a clear explanation with supporting evidence

A strong explanation is brief, uncomplicated, and supported by evidence. For each item that you disagree with, write one paragraph with the name of the person who paid and the amount they paid. Do NOT attach originals of corrected forms, brokerage cost records, bank statements, or letters from payers. Write your name, name of the tax year and your Social Security number on each page. Make sure all the pages are numbered to prevent them from being lost. Remember, don’t overuse words or use emotional language – it’s facts that count. If it’s complex or a business problem, seek professional assistance. 

Conclusion

IRS letters can be intimidating, but they typically are an opportunity to provide clarification about your numbers. Review each page and then check your notes, then respond before the time limit expires. Use a professional to assist with large or confusing numbers. H&M Tax Group is a local tax advisory group which can assist individuals and business owners with accurate and confident responses to IRS letters.