How to handle tax notices from the IRS
You just got a letter from the IRS. Your first reaction may involve panic… and that can lead to not dealing with the letter at all.
Avoiding that IRS notice could end up costing you a lot of money. So take a breath, grab the letter, and read it. Chances are what you got was a CP-2000, a notice of underreported income.
The most important thing to do here is respond. And we’re going to talk about exactly how you can do that. But first, let’s figure out why the IRS is picking on you.
What’s a CP-2000?
The CP-2000 is the main audit tool of the IRS, because it’s all about computer mismatches. Maybe you typed a number in wrong on your tax return. Maybe you forgot to include one of the forms you got. Whatever happened, the information on your income tax return doesn’t match up with the information the IRS already has from your W-2s and 1099s.
A CP-2000 is NOT a tax bill. It’s more like a proposal to adjust the information on your tax return. Sometimes that results in more taxes owed… and sometimes it results in a refund for you.
The CP-2000 Contains Lots of Info
The IRS doesn’t just send you a notice that says: “You did your taxes wrong. We think you owe us $500 more.” The CP-2000 actually contains all the information you need to either agree with or dispute the IRS findings.
You’ll find a summary of their situation right there on the first page. This will spell out:
- The information you reported on your tax return
- The information the company that paid you reported to the IRS
- The type of form that provided the info, such as a 1099 or a W-2
- Who provided that info, such as an employer or a bank
- How the IRS thinks this changes your taxable income, tax payments, or taxes due
- The amount of tax the IRS thinks you should pay or they should pay you
Along with that, the CP-2000 includes a response form, a payment voucher, and a return envelope.
Your Next Steps
Once you’ve read the CP-2000, your next step will be to look at the related tax return. Find the document (1099, W-2, or whatever it was) and see whether the dollar amounts match what you put on your tax return.
Now that you have a clear picture, decide whether or not you agree with the IRS proposal. Either way, you’ll respond to the IRS using the response form they provided…ASAP.
Keep copies of everything you send to them for your records. And make sure to note the date that you sent your response.
If you agree with the IRS
If you realize that the IRS got it right – which they often do, since it’s just a matching program – fill out and sign the response form. If you’re married and filed a joint return, you both need to sign the form. Then mail it back in the envelope that came with the notice.
Be aware that agreeing with the IRS here means that you also agree with any interest or penalties they’ve decided to charge, which will be included on the CP-2000.
If the proposed change means you owe some money, you have 30 days to pay before interest and penalties start up on top of any interest listed on the CP-2000. You can submit your payment at the same time as the response, but you don’t have to. If you decide to wait, the IRS will make an official adjustment to your tax account and send you a bill. When you pay by check, make sure to use the payment voucher that came with the notice.
Don’t panic if you can’t pay the whole amount at once. The IRS offers payment plans and other options for people who can’t pay their tax bills in one big lump.
If you disagree with the IRS
If it turns out the IRS is wrong – and that 100% absolutely does happen – indicate that on the response form. Do this if you disagree with any portion of the notice – for example, if you agree that you made a mistake but disagree with the penalties they charged.
You’ll also explain why you disagree, and supply any documents that help prove your point. Include your best phone number along with the best days/times for the IRS to call you.
Send all of this to the address listed on the CP-2000 – and make sure to send it by the due date.
If you disagree because you reported the information in the wrong way or in the wrong spot on your tax return, call the IRS at the number listed on your notice. Those kinds of mistakes can usually be handled with one phone call.
What You Should NOT Do
There are two things you should not do if you receive a CP-2000:
1. Don’t ignore it. If you do not respond by the date on the notice, the IRS will send you another form, the Statutory Notice of Deficiency. This notice also explains a change in the amount of tax you owe, and how you can disagree by taking the case to Tax Court.
2. Don’t file an amended tax return. Normally, if you catch a mistake on your taxes, you can correct it by filing an amended tax return on Form 1040-X. But here, the IRS caught the mistake and sent you a CP-2000. They’re already amending your tax return for you.
However, if you realize that you’ve made the same mistake for other tax years, you can file amended returns for those years. Sort of like beating the IRS to the CP-2000 punch.
Don’t want to deal with this on your own?
You don’t have to.
If you used a paid tax preparer, contact them immediately. They can almost always handle this for you.
You can also set up an appointment with an IRS Taxpayer Assistance Center near you to get help.
If you did your own taxes, you can still hire a tax pro – like me – to help you respond to the notice.