IRS Notice CP2566: Tax Due on Unfiled Returns

File a Return or Respond Immediately to Prevent Unwanted Tax and Penalties

IRS Notice CP2566 means the IRS has assessed tax against you for a year that you didn't file a tax return. 

In many cases, returns that the IRS files on your behalf show a larger balance due than if you file a correct return, and the IRS also adds penalties and interest to your account. This article explains why you got this notice, how to respond if you agree with the proposed assessment, and what to do if you don't agree with the tax due. 

You generally only have 30 days to respond to this notice, and if you don't do anything, the IRS will assess the tax against you. Then, the agency can start the collection process which may include wage garnishments, bank freezes, and other involuntary collection actions. To get help now, use TaxCure to search for a tax pro based in your area who has experience with unfiled tax returns and unwanted tax assessments. 

Key Takeaways

• IRS Notice CP2566 Overview: This notice is sent when you don't file a tax return with the IRS. The IRS is proposing an assessment based on income reported to them.
• Why Acting Within 30 Days Matters: The IRS gives you 30 days to respond. Failure to respond will lead to tax assessment and will start the IRS collection process.
• Inflated Tax Assessments: The IRS assessment of your tax balance will likely be overestimated because they don't account for deductions, dependents, or proper filing status.
• What To Do If You Disagree: File an accurate tax return to dispute the tax assessment. Provide the IRS with supporting documents to adjust the amount owed.
• Steps If You Agree: If the IRS's proposed amount is correct, you can pay the balance owed or setup a payment plan to avoid additional penalties.
• Consequences of Ignoring CP2566: Ignoring this notice will lead to taxes being assessed and starting the IRS collection process, which can result in wage garnishment, asset seizure, and tax refund offsets.

What Is Notice CP2566?

Notice CP2566 is a notice of proposed tax assessment for a year you have unfiled returns. If the IRS sends CP2566R, it also contains a warning that the IRS is going to seize your tax refund to cover your balance due. 

Before sending this notice, the IRS typically sends several notices telling you to file. The CP2566 goes to taxpayers who have ignored the IRS's previous notifications about their unfiled tax returns, and it includes a response form that you can use to let the IRS know how you want to proceed.

Why Did You Receive Notice CP566?

You received this notice because you didn't file a return, and the IRS has reason to believe that you were required to file and that you owed tax for the year in question. The IRS cannot collect taxes until they are assessed, and the agency uses notices like this along with substitutes for returns and 90-day letters to assess tax against non-filers. 

30-Day Deadline for Responding to CP2566

You have 30 days to respond to the CP2566 notice. Note the date carefully and make sure you're ready to file a correct tax return or agree with the assessment and set up payments. If you don't respond, the tax and penalties will be assessed against you, and the IRS may start the collection process.

How the IRS Calculates the Tax Due on a CP2566

The IRS uses income documents received from other parties to assess the tax you owe. For example, if you had an employer during the tax year, they would have sent the IRS a W2. If you had interest income or investment income, your bank or brokerage would have sent in a 1099. Similarly, if you were self-employed or received pension income, those payers may have also sent income documents to the IRS. 

When calculating your tax due, the IRS uses the filing status of married filing separately or single. They don't add any dependents to your return. They also don't consider any possible deductions or credits. As a result, the assessment is often higher than it should be. 

To give you a quick example, imagine that you received a W2 from your employer and a 1099-NEC for some freelance work you did. You're also unmarried with two dependents who rely on you for all of their support. If the IRS calculates your tax due and sends the proposed assessment on a CP2566, you will owe tax as if you are a single filer with no children. 

In contrast, if you file your own return, you will likely claim expenses against the self-employment income. That reduces your self-employment tax and income tax. You will also probably file as head of household instead of single, which shields several thousand more dollars from federal income tax. Finally, your return will accurately report your dependents and any credits you get related to them such as daycare credits or child tax credits. 

As you can see, there are often major differences in how the IRS assesses the tax and the liability you would owe if you filed a correct tax return.

How to Respond to Notice CP2566

There are a few different ways to respond to CP2566. If you've filed a return in the last eight weeks, you don't have to respond to this notice, but to be on the safe side, you should check you online account or call the IRS to make sure they received your tax return. Otherwise, here is what to do if you agree or disagree with the assessment. 

You don't agree with the tax assessment

If you disagree with the tax assessment, you should prepare an accurate return and send it back with the response form. Near the top of the response form is a box next to the following type of statement, "I am enclosing a signed and dated copy of my 20XX tax return." 

Tick the box, fill out your contact details, and attach your tax return. Make sure to sign the response form as well as your tax return.

You agree with the tax assessment 

Sometimes, the tax shown on a CP2566 is correct. For example, if you are a single filer and you don't have any dependents, deductions, business expenses, or other credits to claim, the tax may be correct. If so, tick the box next to the statement, "I agree with the proposed amount due." and then, go to the next section and note how you want to pay.

You believe you were not required to file a tax return.

The CP2566 response form does not have a section for people who were not required to file a tax return, but it is possible that this may be the case. If you don't think you were required to file, contact the IRS over the phone or in writing, and explain why you were not required to file. 

For example, perhaps the IRS thinks that you needed to file based on receiving a 1099-NEC with your Social Security Number, but when you take into account all of your business expenses, you had less than $400 in net self-employment income and were not required to file. Or perhaps, you had income documents that put you over the filing threshold for a single filer, but you are married and your spouse didn't have any income (thus, puting you below the threshold). Those are the types of issues you should explain to the IRS if you were not required to file.

How to Pay the Tax Due on a CP2566

The CP2566 response form has a few different payment options that you can select if you agree with the tax assessment. 

You can include full payment, partial payment, and/or no payment. You can also attach a request for a monthly payment plan to your response. If you include full or partial payment,write your Social Security Number, the tax year, and the tax return number (1040 for individual income tax filers) on your check. Be aware that if you don't pay the balance in full or set up a payment plan, the IRS will try to collect the remaining balance. 

To request a payment plan, attach Form 9465 (Installment Agreement Request). This form helps you calculate your minimum monthly payment if you stretched out the payments over six years, but if desired, you can set up your payment arrangement with larger monthly payments. If you cannot afford the required minimum payment, you may be able to get a reduced monthly payment and/or a longer payment term, but you will have to send the IRS additional financial documents. 

What If You Ignore CP2566 or Don't Pay Anything

Let's say you just throw CP2566 away, and you don't evne look at it. If you do, you're not alone - a lot of people cannot bear the estress of IRS notices so they just ignore them. Or let's say that you respond that you agree but don't include a payment. 

In both cases, the proposed assessment will become final, and when that happens, the IRS has the right to collect the tax due. After sending the CP2566, the IRS may issue a substitute for return - this is a return filed by the IRS on your behalf that reflects the info on your CP2566 notice. The agency may also send you a Notice of Deficiency such as the CP3219 which gives you 90 days to file a correct return or appeal the assessment in Tax Court.

The IRS will add interest and penalties to the balance until it is paid. The agency will also send several demands for payment, and if you continue to ignore the bill, the IRS can take involuntary collection actions, including wage garnishments or asset seizures.

The IRS will also seize your state and federal tax refunds. Say you file your 2024 tax return and it shows a refund. However, you haven't filed your 2023 tax return yet. The IRS may calculate the amount it believes you owe for 2023, and it will apply your 2024 refund to the previous year's tax bill. 

Interest and Penalties on Notice CP2566

By the time you get Notice CP2566, it will usually show a lot of penalties and interest, and your bill will be higher than the assessed tax. The IRS backdates interest to the filing deadline. For example, if the IRS sends you a notice because you didn't file your 2023 tax return, the interest will be backdated to April 15, 2024 which was the due date for that return. 

Additionally, the IRS will also add a non-filing penalty backdated to the due date of the return. This penalty is 5% of your assessed balance, up to 25% of your total balance. A failure to pay penalty of 0.5% to 1% will also accrue on your account monthly, up to 25%. 

Because the penalties are based on the amount of tax you owe, you may be able to reduce them by filing a correct tax return. If your final tax assessment is lower than the amount proposed on CP2566, the IRS will adjust the penalties accordingly. If this is the first time you have incurred penalties for a few years, you may be able to get them waived through first-time penalty abatement.

By law, the IRS cannot abate interest. However, if you file a correct return that shows a different amount of tax due, the IRS will reduce the interest accordingly. Also, if you get penalties removed from your account, the IRS will remove any interest that was assessed on the penalties.

FAQs

What is CP2566R?

This version of the CP2566 notice lets you know that the IRS will apply your tax refund to this tax assessment if you don't take action. Usually, you receive CP2566R if the IRS has already sent you Notice CP63 letting you know that your refund is being held, and you didn't respond.

What if you cannot afford to pay the taxes due on CP2566?

If you cannot afford to pay in full or make monthly payments, you may want to look into an offer in compromise where you pay a lump sum reduced settlement or a partial payment installment agreement where you essentially make monthly payments on a settlement. Both options require extensive paperwork. You must prove to the IRS that you cannot afford a traditional payment plan and that a settlement is in the best interest of everyone involved.

Does the CP2566 include all of my income?

The CP2566 includes all of the income sources that the IRS knows about. If you operated a business where you accepted cash or check payments that were not reported on a 1099-NEC, 1099-K, or a similar form, the IRS may not know about all of your income, and thus, it will not be accurately reflected on the CP2566. You are required to report all income.

Why am I receiving Notice CP2566 now?

The IRS started sending out Notice CP2566 in 2024, along with several other notices from its automated collection system including LT-38, CP59, and others. The IRS paused many of these notices during the COVID pandemic, and the agency resumed sending out many of these notices in early 2024.

What if I don't have the right documents to file a tax return?

Filing back taxes can be tricky because you may have lost your income documents or other paperwork. To get help, reach out to a tax pro who has experience filing back taxes without records. They will be able to obtain wage and income documents from the IRS, reconstruct business financial statements, and help with other aspects of the process.

Get Help With Notice CP2566

If you have received Notice CP2566 or any other IRS notices, use TaxCure to find a local tax pro today. A local pro can help you get back on track with the IRS and/or your state if applicable. They can help you understand the consequences of unfiled tax returns and what to do if you owe taxes due to the unfiled returns. 

Do not ignore Notice CP2566. Ignoring the IRS will only lead to more penalties, interest, and unwanted collection actions. Instead, reach out for help from a knowledgeable trustworthy tax pro today, and put this stress behind you.