Understanding CP2000 Notices
There is nothing worse than the feeling you get when a notice from the IRS arrives in your mailbox. You shouldn't panic. You are not the only person that this happens to. The IRS sends out over one million notices and letters to people every year. The majority of these notifications are computer generated and are called Automated Under Reporter (“AUR”) notices, also known as CP 2000 notices.
The CP2000 series of tax notices are sent to mailboxes via the United States Postal Service. The IRS will never make contact via telephone, text message, email or social media in order to learn more about your personal and financial information. Learn more about popular IRS phone scams and how to avoid them here (IRS Phone Scams). The IRS contacting you via any other method than a letter that is sent via the United States Postal Service could be a ploy to steal personal information about you or to gain access to your financial records. Identity theft and tax refund fraud are growing problems that have affected hundred of thousands of taxpayers. Don’t be a victim.
Audit Notices Increase as the Number of IRS Agents Decreases
The IRS has been placed under a reduced budget in recent years. With fewer bodies, the IRS has started using more computer automated forms of communication.
What should you do when you receive a CP 2000 notice?
Make sure that you review the notice carefully. It will tell you all of the information that the IRS received and how this information will affect your tax return.
You should follow the procedure to respond to the notice by using the notice response form, regardless of whether you disagree or agree with the notice. Your notice may not come with a response form. In this case, the notice will inform you of the next steps to take.
Get in contact with the person or business that is responsible for reporting this information, if there is something that is incorrect. You should ask this person or entity to revise the information and then send the corrected information.
The IRS will send out a letter or notice to you if:
- You have a balance due;
- You are due to receive a larger or smaller refund;
- IRS has a concern about your tax return;
- IRS needs verification of your identity;
- IRS needs more information;
- IRS made a change to your return;
- IRS wants to notify you about a delay in the processing of your return.
One of the most commonly issued IRS notices is CP2000, which is a notice of proposed adjustment for underpayment or overpayment. A CP2000 notice does not always mean that there is a problem. In some cases, this notice can indicate that a refund is on the way.
The IRS uses computers to compare the information that has been reported by your employer(s), banks and other businesses using Forms W-2, 1098 and 1099 with the personal information, deductions and income that you have reported via your income tax return. If you fail to report any payments, income or credits (or if you have overstated deductions in some categories) on an income tax return, you may receive a CP2000 notice.
This notice is not a bill. What it does is inform you about any potential adjustments to payments, income, credits or deductions. This can result in a refund on taxes paid or additional tax owed.
The IRS also looks at personal information from you, your dependents, your spouse and their names, addresses and Social Security numbers. Any inconsistencies that appear on the personal information on Forms W-2, 1098, and 1099 and your personal tax return could trigger an IRS notice.
A CP2000 notice will indicate the amounts that you submitted via an original or amended tax return, the amounts that the payer reported to the IRS and any additional adjustments that were made by the IRS. The notice will also provide the following information: name of the payer, the payer's ID number, the type of document that was issued, and the tax ID number for the person that the document was issued to.
The notice will then suggest a decrease or increase in your tax liability as a result of the payer documentation. You should look over this information very carefully to ensure that all of the details provided are indeed accurate. These notices are often generated by a computer and have been erroneous in some instances. Perhaps your name is not formatted correctly or you have a typo on a form. This could flag your return.
Responding to Your IRS CP Notice
Make sure that you follow the directions. Every notice will be about a specific issue and will tell you what you need to do. If the notice demands a response, you should only deal specifically with the question that has been asked by the letter. If there are other concerns that you would like to mention, you should make sure that you send in another letter separately.
If you agree to the findings of the notice, normally no response is required unless the notice provides instructions or you are required to make a payment. You should make sure that you send your response to the proper mailing address. You should always maintain copies regarding any correspondence that you have with the IRS. You may need to review these items at a later date.
Ignoring the IRS does not make the problem go away. Typically, if a notice has been issued that says that you have to pay additional taxes, the IRS looks at your lack of response as an admission of underpayment, which will initiate a collections process.
You should stand firm. You may receive a notice that states that the IRS changed or corrected your tax return. You should review this information and determine if it matches with your original return.
If you don't agree with the findings stated on the notice, you need to make sure that you respond within 30 days (or 60 days if you are living outside of the United States). Don't sign the notice and fail to make payment thinking that you can just ignore the payments just to get the IRS to stop contacting you.
You have a right to dispute the findings of the notice. Get in contact with your tax adviser about drafting a letter that explains why you are not in agreement, making sure that you include any documents or information that you would like the IRS to review.
Mail in your reply with the bottom tear-off portion of the notice. Make sure to send it in to the address indicated on the upper left-hand corner of the notice. You should expect to wait at minimum 30 days, often 60 days or longer, in order to get a reply back from the IRS.
You should make sure that you make payments on time so that you can minimize interest charges and penalties. A bill will arrive separately from the IRS, if there are additional taxes owed. Make sure that you pay the balance to the IRS that is due immediately, because interest and penalties quickly increase.
Interest will be issued on any unpaid tax starting from the return’s due date until the date that the payment is made. This interest rate is determined on a quarterly basis and is the equivalent of the federal short-term rate plus 3 percent. The interest is compounded daily.
If you file a return but you fail to pay the amounts that are due on time, you will typically have to pay a late payment penalty that is equal to roughly 0.5 percent for each month (or a portion of the month) with a maximum total of 25 percent, on the amount of tax that remains unpaid starting with the return due date until the tax has been paid in its entirety. The 0.5 percent rate grows to 1 percent if the tax remains unpaid 10 days after the IRS has issued a notice of intent to levy.
For individuals that have filed a return by the due date, the 0.5 percent rate is decreased to 0.25 percent for any month in which an installment agreement has been put into effect.
If you owe taxes and also did not file on time, the total failure to file penalty is typically up to 5 percent of the tax owed for every month (or a part of a month) that your return is past due, up to a maximum of 5 months. If your return is over 60 days late, the minimum penalty for filing late is 100 percent of the tax owed or $135, whichever amount is lower.
The penalties for submitting your return late and making late payments could be abated if you have a reasonable cause for failing to pay on time and this failure was not due to willful neglect. In addition, a late payment that is made as soon as you have the opportunity to help could establish that your initial failure to pay was not the result of willful neglect but due to reasonable cause.
Typically, the interest charges are not abated; they continue to be added on until all of the assessed tax, interest, and penalties have all been paid in full. Taxpayers can fix minor IRS issues, such as incorrect addresses, account numbers and Social Security Number. However, other notices should be dealt with by a tax professional. The response forms typically permit you to authorize some other than you personally to contact the IRS on your behalf about the notices.
Never hesitate to get in contact with a tax professional that has experience with working with the IRS if you are uncertain how you should handle a letter from the IRS.
Most Frequently Sent IRS Notices
Here is a list of the most frequently sent IRS notices and the reasons why such a notice is issued.
CP 12 - The IRS made changes to correct a miscalculation on a return.
CP 14 - First notice that a balance is due.
CP 31 - A refund check was returned to the IRS. Need to update address.
CP 42 - The amount of a refund has changed because the IRS used it to pay a spouse's past due tax debt.
CP 49 - All or part of a refund was used to pay a tax debt.
CP 90 - Final notice -- notice of intent to levy and notice of the taxpayer's right to a hearing.
CP 91 - Final notice before levy on Social Security benefits.
CP 161 - Request for payment or notice of unpaid balance.
CP 214 - You received this notice because you filed Form 5500-EZ for a retirement plan last year (or you filed Form 5500-SF in place of a Form 5500-EZ for a one-participant plan).
CP 403 and CP 406 - delinquency notices for Form 5500-series returns.
CP 501 - First reminder notice that there is a balance due.
CP 503 - Second reminder notice that there is a balance due.
CP 504 - Final balance due notice. If amount is not paid immediately, the IRS will seize (levy) a state tax refund and search for other assets to levy.
CP 523 - Notice of default on installment agreement and imminent seizure (levy) of assets.
CP 668 Y(c) Notice of Federal Tax Lien - The lien gives the IRS an interest in a taxpayer’s property.
CP 668 A(c) — Notice of Federal Bank levy - The bank will hold your money in escrow for 21 days before they give it to the IRS.
CP 668 W(c) — Notice of Federal Wage Garnishment – The government will take part of your wages.
CP 2000 - Notice of proposed adjustment for underpayment or overpayment.
With any IRS action, you may feel overwhelmed or intimated by the audit process. It may be a smart decision to consult with a licensed tax professional that can represent you in front of the IRS. The more organized you are, the better. Whatever you do, don’t lose your cool with an IRS agent. The more you cooperate the smoother the process.
If you have received a notice and want additional information on how you should respond to the IRS, you should call us at (855) 829-4475 and let us handle your tax problems.