IRS CP2000 Notice – What It Means & What To Do
Table of Contents
- Introduction
- What to Do When You Receive CP2000
- How to Determine Agreement or Disagreement with CP2000
- What Happens Next
- Tips to Avoid CP2000
- When to Call a Tax Pro
Your day was going just fine until you got home from work, checked your mail, and found the IRS sent you a CP2000 notice containing a “proposed amount due.” Mail from the IRS is almost never good, but this is one of the few cases where it might be. Let's dive into what it is, what it means, and your options from here.
What is a CP2000 notice?
An IRS CP2000 notice is automatically triggered and sent by a computerized system when the amount you report on your tax return does not match the information the IRS receives from other sources such as your employer, bank, and other third parties (shown on IRS wage and Income transcript). The IRS matches returns with information from third parties normally after the original return due date.
In fact, the IRS sends over 6 million CP2000 notices yearly. This notice informs you of the discrepancy and proposes a change to your tax payments or credits and gives you an opportunity to respond. You may or may not agree with the IRS, but you must respond to avoid penalties and interest.
Don’t panic. You may not owe anything at all. For example, what if you took a ROTH distribution but did not report it? Maybe you had a cancellation of liability (1099-C) you did not report but you are insolvent and can prove that.
An IRS CP2000 notice is not a bill, and it’s not an audit notice. Theoretically, it could address either an overpayment or an underpayment, but of course, it is the underpayments that concern us the most. If there is a discrepancy, it could be caused by an error by you, a third party, or even the IRS computer system. In many cases, a CP2000 notice happens because the tax preparer forgot to include the income, the client of the tax preparer didn’t provide the income document (.e.g. 1099), or the taxpayer moved and did not get the document.
What to Do When You Receive a CP2000 Notice from the IRS
Read the notice carefully and determine if you agree with the IRS calculation and then respond. Usually, the IRS will include a response form. If they do not include a response firm, they will include instructions on what you should do. Either way, you must respond within the time the notice indicates, usually 30 days from the date of the letter (not the date you received it) or 60 days if you were out of the country. That means the response must be delivered to the IRS within 30 days, it does not mean you have 30 days to mail it. If you can’t meet the deadline, call the number on the notice to ask for additional time to send a response. If you do not respond, the IRS will send out letter 3219A Notice of Deficiency.
Key Takeaways
- Understanding the CP2000 Notice: The CP2000 is simply to indicate a mismatch between your tax return and data from third parties. This could be an underpayment or overpayment, but essentially, the key point is to notify you of the discrepancy to start the process of resolving it.
- Response Strategy: It's crucial to review your records and decide whether to agree with or dispute the IRS's adjustments. Whether you agree or disagree with their decision, there are steps to be taken in either case.
- Next Steps After Responding: The IRS may require additional information or adjust your tax liability based on your response. You usually won't need to file another return, instead just agreeing or disagreeing with the given response and going from there.
- Consulting a Tax Professional: If the notice's implications are complex or significant, professional advice is recommended, and a tax professional should be the one to give you this advice.
What Documents You'll Need to Assess Agreement
To ensure you’re properly equipped for your tax professional appointment or your call with the IRS, these are the documents that will help you make your case.
- Copy of IRS Notice
- Any Materials Already Sent to the IRS
- The Tax Return Being Disputed
- Tax Returns From Prior Year and Following Year
- Relevant Deductions or Expenses Related to the Item
- Previous CP2000 Notices
How to Determine Whether You Agree with the CP2000 Notice
You will want to double-check your financial activity for the year cited before you conclude whether the figure on the notice is correct.
- As always with tax matters, collect and organize relevant documents including pertinent past tax returns, your W-2s, and your 1099s. Did you forget to include any income? Are your credits and deductions accurate?
- You may want to order a transcript of your return from the IRS by following instructions on the IRS website or calling 800-908-9946. You can obtain a copy of your return by completing and sending Form 4506-T, Request for Transcript of Tax Return to the IRS. Alternatively, you can have a licensed tax professional using this site to do this for you.
- If the information you initially used to determine your taxes is different from what you come up with after reviewing your documents, you or your tax preparer should calculate your taxes to see if the tax due amount listed on the CP2000 is correct.
What to Do if You Agree with the CP2000 Notice
- If you agree with the notice, check the box indicating agreement, sign the form and send your response to the IRS with payment (if applicable) using the envelope the IRS provides.
- If a form was not included, follow the instructions on the notice.
- Alternatively, you can fax the completed form to the number indicated in the notice. If you choose to fax, include your name, social security number, and tax year on each page.
- If you are married and filed jointly, both you and your spouse must sign the notice.
What to Do if You Agree but Cannot Pay the Entire Amount
You may agree with the amount indicated on the IRS CP2000 notice but find you are unable to pay. Penalties and interest will likely keep growing if you do not pay immediately. However, you have options. If the amount you owe is a large one, you may want to discuss the following options with a tax professional.
- Request a monthly installment agreement
- Send a completed Form 9465, Installment Agreement Request when you send your response to the CP2000 Notice or
- Visit the IRS website to learn how to apply online for a payment plan.
- Request Currently Not Collectible Status if you are unable to pay the IRS anything currently. The IRS will revisit this later to see if your financial situation has changed. Interest will continue to accrue
- Seek an agreement that permits you to pay less than you owe either in a lump sum payment or in monthly payments. The application for such an agreement is called an Offer in Compromise. The IRS may accept an Offer in Compromise if they think the amount you suggest is the most they can hope to collect within a reasonable amount of time. Most Offers in Compromise are rejected, but if you would like to pursue this option, you will vastly improve your chances of acceptance by consulting an experienced tax professional who can advise you if you qualify and how much to offer.
Disagree or Partially Agree
- If you disagree (even partially) with the CP2000 notice, check the “I do not agree” box on the response form, sign it, and send it back to the IRS with documentation supporting your position. Send photocopies rather than originals. The more thorough you are, the more likely you will be to persuade the IRS.
- You may send the response in the envelope provided or a larger envelope. The notice will also give you a fax number. If you choose to fax your response, include your name, social security number, and tax year on each page.
- Contact the IRS or your tax professional if you have any questions. You will find the correct IRS contact information on the notice.
- If you believe a business or person has inaccurately reported information that affects your taxes, contact them immediately and ask them to send a corrected statement. Include a copy (hang onto the original) with your response to the IRS.
- You may include a corrected return with your response if you think it will help explain your position. However, do not file an amended return. More on that in a moment.
- Your notice may indicate that you owe penalties. You can argue against this in your response as well.
- If you are married and filed jointly, both you and your spouse must sign the notice.
In addition to these steps, the IRS recommends that you
- Check your other returns to see if they contain the same mistake (assuming there was a mistake).
- Keep a copy of the notice for your files.
- If you would like your tax professional or someone else to help you with this notice, complete section 3 (authorization) on the response form to authorize your representative to deal with the IRS on your behalf. You can also use Form 2848, Power of Attorney, and Declaration of Representative.
- Correct the copy of your tax return that you kept for your records.
When you disagree with a CP2000 notice, it's important to clearly express your disagreement, provide thorough supporting documentation, and ensure all communication includes necessary identification details. Engaging with the IRS or a tax professional for guidance, correcting inaccuracies with third parties, and considering the inclusion of a corrected return (not an amended return) to support your case are key steps. If you’re feeling less than 100% confident in undertaking any of the steps above, it’s best to contact a tax professional.
A thorough and well-documented response may result in the IRS accepting your explanation and making no changes to your tax liability. The IRS might request additional information to further understand your position. In some cases, disagreements could lead to adjustments in the proposed tax due, penalties, or the need for further clarification. It's vital to prepare for these possibilities by ensuring your response is clear, comprehensive, and supported by relevant documentation.
Discrepancy Due to Identify Theft
If you believe that the information on the IRS CP2000 notice is incorrect because someone is using your name and social security, file a Form 14039, Identity Theft Affidavit. You can find more information on the IRS identity theft information web page.
No Need to Amend Your Return (Usually)
Do not file an amended tax return for the tax year on the notice. The IRS will make corrections on your return if they agree with your response to the CP2000 notice. You may, however, want to file amended tax returns for previous years if you made the same type of error on other returns.
There is an exception. If you need to adjust additional items such as credits or additional income, that are not addressed on your CP2000 notice, you should amend your return. If you do this, write “CP2000” on top of the amended return and attach it behind your completed CP2000 notice response form.
Some tax professionals recommend submitting this, but others disagree, and the answer is often contextual. If you're not sure, we'd recommend talking to a tax professional.
What Happens After You Respond to Your CP2000 Notice
The IRS Accepts Your Explanation
Once the IRS receives your response and supporting documentation that you disagree with the CP2000 notice, they review it. If they accept your explanation, they will send you a letter telling you that the issue has been resolved.
The IRS Partially Accepts Your Explanation
If some but not all of the discrepancies have been resolved, the IRS will send you a CP2000 notice with a new proposed tax calculation. You must respond to this one in the same manner as the first.
The IRS Does Not Accept Your Explanation
If you do not respond or if the IRS does not agree with your response, it will send you a CP3219A, Statutory Notice of Deficiency. This letter informs you of the tax change the IRS plans to make. You can sign that you agree and return the form, or you can opt to appeal in Tax Court. You may also try to work further with the IRS during the statutory notice timeframe.
How Long to Wait After Responding
If you do not hear from the IRS within eight weeks after submitting your response, contact them.
Beware of Tax Scams
The IRS constantly warns of con artists who pose as the IRS to try to scam taxpayers out of money by sending fake letters and other tactics. If you have any doubt that the CP2000 Notice you received is legitimate, you can get more information by reading the IRS article Understanding Your CP2000 Notice or by contacting your tax professional.
Tips to Avoid Getting an IRS CP2000 Notice
The IRS recommends avoiding future problems by
- Keeping complete financial and tax records
- Not filing tax returns until you have all income statements
- Double-checking tax records you get from third parties such as your employer and your bank
- Including all your income on your tax return
- Correctly reporting income, expenses, and deductions
- Filing an amended tax return when you receive new and relevant information that affects your taxes
Another Great Tip to Avoid IRS CP2000 Notices
Work with a licensed tax professional who does tax resolution work. Some tax professionals can predict CP2000 notices up to 6 months before the IRS sends them. They can do this by utilizing software that can help them quickly scan account transcripts for issues. How? The IRS inserts flags into a taxpayer’s account transcript showing that a taxpayer filed a tax return with unreported income. They use Code 922. The IRS sends a CP2000 notice six months after they add code 922 to the account transcript. Therefore, a taxpayer or their representative can prepare an amended tax return before the IRS sends the CP2000 notice. Therefore, the taxpayer can avoid penalties and some interest. The accuracy-related penalty is generally 20% of the understatement of tax if the taxpayer has additional taxes owed of more than $5,000. Therefore, paying a licensed tax professional to monitor your account transcript for a small fee could save you thousands of dollars.
When to Call a Tax Professional
If you receive a CP2000 Notice with a small proposed amount due, contacting a tax professional may not be practical. But if the notice states you owe a substantial amount and you disagree or are not sure of that assessment, a tax professional may be able to help you to save your hard-earned money. Moreover, if a taxpayer has a change on a federal tax return then most likely they need to submit an amended state tax return (if applicable). Start your search below to find a tax professional to help with your tax problem.