IRS CP2000 Letter Overview
What Is an IRS CP2000 Letter?
Employers, banks, businesses and others are required to provide the IRS forms each year that shows how much they paid a taxpayer. When the taxpayer files a tax return for the year, the IRS compares the 3rd party disclosure documents to the tax return. If the information on the return doesn't match the information reported, the IRS will typically send out a letter called a “CP2000 Letter” or CP2000 “under-reporter inquiry”.
The CP2000 letter isn't notice of an IRS Audit, but it will show a new, proposed debt amount based on the different income amounts reported. The CP2000 letter will also typically show penalties to the new debt amount, the largest of which is the 20% accuracy-related penalty.
These IRS CP2000 letters are issued quite often. The number issued is in the millions each year.
The receipt of the letter by the taxpayer doesn't mean the debt and penalty are in the IRS' system and that the IRS will begin to collect on the debt. The taxpayer is given time to respond to the CP2000 letter and provide explanation and proof if necessary to dispute the proposed number OR to simply agree to the proposed number if the taxpayer agrees with it.
How to Deal with An IRS CP2000 Letter?
Review the Letter Closely
The taxpayer should review the letter closely. A note should be made of the deadline to respond and also of the specific item(s) the IRS is claiming don't match between the reporting record and the return filed.
Gather and Compare Information
The taxpayer should gather the documents used to prepare the return, the tax return itself, and the wage and income transcript from the IRS for the year in question. These items should be used to compare with the CP2000 numbers and proposed changes.
This process of gathering and comparing should help the taxpayer determine whether the IRS proposed change(s) are correct or not.
Sometimes the changes are obviously correct and the change is correct as a result. For example, 3rd party banks will often report small interest income on savings accounts to the IRS that the taxpayer simply missed, or that was received by the taxpayer after the original return was filed.
Sometimes the changes are correct but the IRS is not privy to other information. A common example of this is when the IRS receives the 3rd party report related to the sale of a home. The IRS will propose that the income reported be taxed and the difference added to the 1040 in the CP2000 letter. However, the IRS isn't always privy to the basis amount of the home or to whether the home sale proceeds qualify to be excluded from income as a result of primary residence rules.
Create a Correct Return
It usually helps the taxpayer to understand the problem if an updated return is created with the new information and any additional income exclusions and deductions.
If the taxpayer disagrees with the IRS' calculation(s)once the updated return is created, the updated return can be added to the written response and help the IRS see the “big picture”.
Prepare a Response if Disagree with CP2000
If the cp2000 letter findings are incorrect, the taxpayer should check the box on the form indicating disagreement, prepare a response letter explaining the issues/disagreements, gather any proof documents to support the issues/disagreements, and send the form, letter, and support documents along with the original filed return copy (marked “for information purposes only) and the corrected return (unsigned and marked at the top “for information purposes only) to the address indicated by certified mail or by fax if the cp2000 provides that option.
The cover letter should include a request for penalties to be abated and for an appeal hearing to ensure “two bites at the apple” if the IRS disagrees with the taxpayer's response.
If the taxpayer agrees with the CP2000 letter, the letter can be marked in the “agreed” section and returned.
The taxpayer shouldn't create an amended return (1040X) and use that as the response. They may, as a result, treat this as a non-response.
Track the Response
The taxpayer should follow up with the CP2000 under-reporter unit to ensure the response is timely received. The IRS will typically issue a response of some kind within 30 days. Sometimes the notice will tell the taxpayer the IRS needs more time to review. Sometimes the IRS will send another CP2000 letter with adjustments and more requests for information/responses. If the IRS agrees it will issue a response as well.
File an Appeal
If the IRS disagrees with the taxpayer's explanations and proof documents, it will issue a letter indicating that and providing a final calculation. The taxpayer can respond with a appeal request.