You might receive an IRS Notice CP2000 (“CP2000”) in the mail. The IRS issues these particular notices to taxpayers based on discrepancies between tax return reporting and third-party reporting. Taxpayers must pay attention to these notices, as well as others, and understand their rights and responsibilities with respect to each. Our firm has previously described other notices: You Received an IRS CP518 Notice, Now What?; You Received an IRS CP504 Notice, Now What?; You Received an IRS CP15 Notice (re: Form 3520 Penalty), What Now?; and You Received an IRS LT11 Notice (or Letter 1058), Now What?. This article discusses the CP2000 and how a taxpayer should respond.
What is the CP2000?
Generally, a taxpayer receives the CP2000 from the IRS when his/her tax return does not match certain information reported by other third parties (e.g., employers, financial institutions, etc.). The IRS utilizes an automated system to compare the third-party information to a taxpayer’s tax return to identify potential discrepancies.[1] After a discrepancy is identified and reviewed, the IRS issues the CP2000, proposing certain adjustments to a taxpayer’s income, deductions, credits, and/or payments. The CP2000 prominently displays the following language at the top of page 1: We are proposing changes to your [year] Form 1040 tax return. This is not a bill.
The IRS describes (1) the purpose of these notices, (2) what a taxpayer needs to do, and (3) what kinds of property can be levied as follows:
What this notice is about
The income or payment information we have on file doesn’t match the information you reported on your tax return. This discrepancy may cause an increase or decrease in your tax or may not change it at all. The notice explains what information we used to determine the proposed changes to your tax return. . . .
What a taxpayer needs to do
Read your notice carefully. It explains the information we received and how it affects your tax return.
Complete the notice response form and state whether you agree or disagree with the notice. The response form explains what actions to take. (Your specific notice may not have a response form. In that case, the notice will have instructions on what to do). You can return your response by:
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- Mail using the return address on the enclosed envelope, or
- Fax your documents to the fax number in the notice using either a fax machine or an online fax service. Several online fax services use the internet to send files from your computer or smart device to a fax number.
What if the information reported to the IRS is incorrect or if the taxpayer disagrees?
If the information reported to us is not correct, contact the business or person who reported the information. Ask them for a corrected document or a statement to support why it is incorrect, then send us a copy with your response.
The notice response form has instructions on what to do if the information is incorrect. If you disagree, complete and return the response form. Provide a signed statement explaining why you disagree and supply any documentation or missing forms to support your statement.[2]
Next Steps for the Taxpayer
If a taxpayer agrees with the proposed changes, the taxpayer can complete the notice response, agree to the proposed changes, and then make arrangements to pay any additional taxes owed (to the extent applicable). However, for many taxpayers, they do not agree and/or the proposed changes are incorrect. In addition to completing the notice response and registering their disagreement with the proposed assessment, taxpayers should consider any additional actions that may be necessary. For example, to the extent the third-party information is incorrect, taxpayers may need to contact the applicable third party to obtain a revised information return (e.g., Form W-2, Form 1099, etc.). To the extent the third party does not comply, taxpayers may need to consider their legal remedies, such as litigation. Additionally, if taxpayers missed an information return and failed to report it on their income tax return, taxpayers should consider whether they should amend their tax return. For the Schedule C filer, additional income may mean deductions that can offset income. Taxpayers should assess their complete situations to understand how to respond to the IRS.
Collection Alternatives & Due Process Rights
Further, if changes to the tax return result in taxes, penalties, and interest owed to the IRS, taxpayers must also understand their rights and collection alternatives. A taxpayer can pursue certain collection alternatives, such as installment agreements and offers in compromise. While such installment agreements and offers are pending, no levy actions can occur.[3] However, taxpayers may also request (and are entitled to) a hearing. Collection Due Process (“CDP”) hearings are crucial to taxpayers. Taxpayers have a right to a CDP hearing with the IRS Independent Office of Appeals before levy action is taken. According to the IRS, a “CDP hearing is an opportunity to discuss alternatives to enforced collection and permits you to dispute the amount you owe if you have not had a prior opportunity to do so.”[4]
Conclusion
The CP2000 may arrive in a taxpayer’s mailbox if the IRS identifies certain tax return discrepancies. Taxpayers need to know that they have rights and options to address these notices. While this notice is not an audit, taxpayers may still be subject to an examination. Taxpayers who receive a CP2000 should consider contacting a tax advisor to determine the best course of action in responding to the IRS.
Expert Collections Defense Attorneys
Need assistance with how to respond to the CP2000? IRS collection efforts and your rights are time-sensitive, that’s why we use unique industry insights from day one and work to protect and defend taxpayers. We bring a range of experience, tools, and talent to address federal taxes, penalties, liens, levies, and other collection efforts. Schedule a consultation or call (214) 984-3000 to discuss your tax concerns or questions.
[1] Topic No. 652 Notice of Underreported Income – CP2000, IRS.
[2] Understanding Your CP2000 Notice, IRS.
[3] See I.R.C. § 6331(k).
