You Received An IRS CP2000 Notice

I read a considerable amount on a routine basis. It might be fairer to say that I skim, changing it to a read if I think that something might apply here at Galactic Command.

I came across something recently that made me scoff out loud.

Somebody somewhere was talking about never receiving an IRS CP2000 notice again.

Yeah, right.

What is a CP2000?

You know it as the computer match. The IRS cross-checks your numbers against their numbers. If there is a difference – and the difference is more than the cost of a stamp – their computers will generate a CP2000 notice.

How does the IRS get its numbers?

Easy. Think of all the tax reporting forms that you have received over the years, such as:

W-2 (your job)   

1099-INT (interest from a bank)

1099-DIV (dividends from a mutual fund)

1099-SA (distribution from an HSA)

1099-B (proceeds from selling stock)

It is near endless, and every year or so Congress and/or the IRS requires additional reporting on something. There is already a new one for 2022: the minimum threshold for payment card reporting has been reduced from $20,000 to $600. Think Venmo or Pay Pal and you are there.

If the IRS has information you didn’t report: bam! Receive a CP2000.

It happens all the time. You closed a bank account but forgot about the part of the year that it did exist.  You traded on Robinhood for a couple of weeks, lost money and tried to forget about it. You reimbursed yourself medical expenses from your HSA.   

The common denominator: you forgot to tell your tax preparer.

We get a ton of these.

Then your tax preparer might have caused it.

Maybe you did a 60-day roll on an IRA. Your preparer needs to code the distribution a certain way. Flub it and get a CP2000.

These you try to never repeat, as you are just making work for yourself.

Is this thing an audit?

Technically no, but you might still wind-up owing money.

The notice is proposing to make changes to your return. It is giving you a chance to respond. It is not a bill, at least not yet, but ignore the notice and it will become a bill.

The thing about these notices is that no one at the IRS reviews them before they go out. Yours are the first set of eyes to look upon them, and your preparer the second when you send the notice to him or her. You there have one of the biggest frustrations many practitioners have: the IRS sends these things out like candy; many are wrong and would be detected if the IRS even bothered. Attach an explanation to your return in the hope of cutting-off a notice? Puhleeze.

You really need to respond to a CP2000. I have lost track of how many clients over the years have blown these notices off, coming to see me years later because some mysterious tax debt has been siphoning their tax refunds. Combine this with the statute of limitations – remember, three years to file or amend – and you can be digging a hole for yourself.

If you agree with the notice, then responding is easy: check the box that says you agree. The IRS will happily send you a bill. Heck, don’t even bother to reply. They will send you the same bill.

If you disagree, then it can be more complicated.

If the matter is relatively easy – say an HSA distribution – I might attach the required tax form to my written response, explaining that the form was overlooked when filing.

If the matter is more complicated – say different types of mismatches – then I might change my answer. My experience – especially in recent years – is that the IRS is doing a substandard job with correspondence requiring one to think. They have repetitively forced me into Appeals and unnecessary procedural work.  My response to more complicated CP2000 notices? I am increasingly filing amended returns. Mind you, the IRS DOES NOT want me to do this. Neither do I, truthfully, but the IRS must first give me reason to trust its work. I am not there right now.

You can fax your response, fortunately.

You might try to call the IRS, but I suspect that will turn out poorly. Shame, as that would be the easiest way to request additional time to reply to the CP2000.

Whatever you do, you have 30 days. The days start counting beginning with the date of the letter, so mail delays can cost you.

Is the IRS gunning for you?

Remember: no one at the IRS has even looked at the notice you received.

 

The CP2000: Underreported Income IRS Notice

I am somewhat impressed with the amount of information the IRS processes in order to generate CP2000 notices. The CP2000 is the “Underreported Income” notice. I have seen the IRS flag bank and broker accounts, independent contractor payments and even W-2s that clients failed to clue us on.

The IRS receives almost 2 billion information statements (think W-2s and 1099s) annually.

NOTE: Do you wonder what the cost to employers and financial institutions is to generate these documents? The government doesn’t care, but it is a societal cost. Ignoring it doesn’t make it free.

It matches these against approximately 140 million individual tax filers.

The IRS generates notices to almost 5 million taxpayers.

The IRS unit responsible, the Automated UnderReporter Unit, has approximately 2,500 employees.

You have to admit, there is lot going on for only 2,500 employees.

CP2000 notices come out twice a year. The IRS begins matching information during the summer with the goal of a December mailing. The second wave comes right after tax season – in the second half of April.

The IRS is notorious for skipping line with these ACS notices. You might find yourself with a deficiency notice while you still have time remaining on the ACS notice. Been there. Often you can get the IRS to walk-back the deficiency notice.

By the way, do not send an amended return in response to an ACS notice. These go to different units and will likely cause unnecessary correspondence and telephone time with the IRS. Been there too.