What Is A CP2000 Notice From The IRS?
A CP2000 notice is an Underreporter Inquiry that gets issued when the filed tax return does not resemble income information reported to the IRS by third parties. Most often a CP2000 is triggered by a 1099 or W2 that was reported to the IRS, but which you did not include in your tax return. A CP2000 notice can be likened to a “mini audit” by the IRS.
See our video below for a short version of understanding your CP2000 letter.
CP2000 notices are computer-generated
CP2000 notices are output by a computer system that detects something is off with your filed tax return. Most of the time there’s a 1099 or W2 you or your tax preparer forgot to include in your tax return.
This is good to know because if there is an error in the pipeline somewhere, you know that the notice is automatically triggered, but you’ll still be able to clear things up when you talk to a human.
Most common events that frequently result in a CP2000 notice
Self-Employed Example: Eric has a self-employed business that receives 1099s from multiple companies. He forgot to include 1099 of $50,000 from Company A. Later on, the IRS sends out a CP2000 notice that recalculates his income with that $50,000 added on top. The IRS sends the CP2000 with a proposed balance, penalties, and interest.
Wage Earner Example: Rick works one full-time job and had two different part-time jobs in 2019. He filed his 2019 tax return, not including his W2 from the first part-time job. The IRS then sends out a CP2000 notice adding the additional W2 as income, but also crediting taxes paid.
Stock Sale Example: Laura had 50,000 shares of Company B that she sold for $2 per share, totaling $100,000. She actually bought the shares for $1 each, so her profit is $50,000. Laura did not include any of the stock sale information on her tax return, so she received a CP2000 notice adding the income of $100,000 to her tax return.
NOTE: This same rule might also apply to the sale of cryptocurrency, which the IRS treats as the sale of property and not like a stock or bond. As with stock, it is up to you to report your costs when purchasing cryptocurrency, since the IRS only taxes profit. However, for cryptocurrencies wash sale rules do not apply.
1099 or W2 Issuer was Wrong: Billy has been working at the same job for years. His payroll department sent a W2 to the IRS stating he made $100,000 more than he actually did. The IRS then sends Billy a CP2000 notice adding the additional income to his total.
Self-Employed and Stock Sale CP2000 letters are more likely to result in a larger balance than those for wage earners. Most wage earners have some taxes taken out. There’s also the rare chance the IRS’ software has made an error.
What you should do with your CP2000 notice
Submitting an appropriate response to a CP2000 notice depends on what you received, but there are some basic rules to follow:
- Read your CP2000 notice and its proposed amount due. See if you agree or disagree with the findings. Sometimes they are right and there is nothing to do but agree, but often the IRS has come up with a balance that does not include related expenses or a cost-basis, making the amount due larger than it should be.
- If you agree, sign and date the form and send it back. If you disagree, it’s time to get a response going. The IRS may include a response form, but they do not you will need to send a response letter (see example below) or get an expert to respond for you.
- If the IRS has information that is incorrectly reported by a third party (ie: employer or 1099 issuer), you should contact that company or individual to issue a correction. If you can get proof of correction fast enough, include it in your CP2000 response.
- Get your response in within 30 days from the date of the letter. Ideally, it should be received within 30 days, but if it is properly postmarked it should be fine. Send your response by USPS certified mail with a return receipt.
- If you did the same mistake listed on the CP2000 for other tax years, you probably want to file an amended return.
You can also get a tax attorney to handle it for you. Just make sure you get an attorney familiar with tax relief and not just general tax items.
CP2000 response letter examples
Below we have sample CP2000 response letters that you can use to edit and send out for your response.
Some cases might not be so simple and you may want professional help in getting out a CP2000 response. Some are so easy, you can use our examples and get it out yourself.
CP2000 Frequently Asked Questions and Answers
Can I call the IRS to correct the information that I reported incorrectly?
If it does not change the tax balance higher or lower, you can often call in and get the adjustment. Getting through to the IRS can be difficult sometimes and it may be easier to just mail a response. If the tax balance changes based on the information you are going to provide, you or your representative need to mail in response.
Someone else appears to be using my information and I may be a victim of identity theft, what should I do?
Call the IRS and let them know. They will start an investigation and may be able to resolve it that way. Still submit a response to the CP2000 within the deadline stating that you believe you are a victim of identity theft. Do not just rely on the IRS phone call, even though it should start the investigation into identity theft. Identity theft cases can get overwhelming quickly, and maybe a real mess to sort out.
Should I submit an amended tax return?
If there are additional expenses, credits, and/or income you may want to file an amended return. Sometimes you can just provide the information required and the IRS will accept it.
Will the increased balance from the CP2000 notice result in additional penalties and interest?
Yes, but if some of the penalty is failure to pay, there’s a good chance you can get it off with a first-time penalty abatement.
Do I need to pay the entire balance in full?
If the IRS is correct and you owe them money, you do not need to pay in full. You can request a payment plan, file an Offer In Compromise, request Currently Not Collectible status, and if it’s from your spouse, you may be eligible for injured spouse relief.
Can I file an Offer In Compromise for my CP2000 debt?
Yes, but it’s a good idea to make sure you qualify before wasting time on it. Not everyone does, but if you do qualify this often is the best option to resolve your tax debt.
Be warned of fake CP2000 notices
Although not frequent, there are fake CP2000 notices that are sent out by scammers to gather information. See this IRS article about fake CP2000 notices.
Avoiding CP2000 problems in the future
Here are some things you can do to avoid CP2000 problems in the future:
- Keep records of your income and expenses that are accurate
- File your tax return after all income statements are received. Be proactive and request them from a company or individual that did not send them to you.
- Check all records you get from payment sources and make sure they are correct. W2’s, 1098s, 1099s and related forms should be reviewed for accuracy.
- Make sure to add up all income and put it on your tax return.
- Properly report income, expenses, and deductions.
- File an amended tax return before a CP2000 notice is issued if you are made aware of additional income you did not report on your original tax return.
- Having a qualified tax preparer do your returns can reduce the chances of receiving a CP2000 notice.
Get help with your CP2000 notice
IF a CP2000 notice letter was sent to you and it’s something you either can’t handle or do not want to deal with, let our expert tax attorneys help. You can schedule a consultation by clicking here or calling us at (888) 515-4829. If you need just a question answered, you can post it in our comments section or on the TRP YouTube channel.