IRS Notice CP 2000 is one of the more common notices received by a taxpayer. And one that generally sends the average taxpayer into a state of panic. The CP 2000 is correspondence from the IRS showing proposed changes to their income tax return. Generally this proposal is based on the IRS Revenue Matching program – a comparison of the income, payments, credits and deductions reported on the tax return with information reported to the IRS by employers, banks, businesses and other payers. For example, employers must send the IRS copies of the Forms W-2 that they issue. The IRS then uses the social security number shown on the W-2 and the taxpayer’s tax return and looks for the amount shown on the W-2. If their automated systems do not find that amount they generate a notice.
Not to worry – just because the taxpayer received a CP 2000 does not mean that there is an error on their tax return or that they definitely owe the proposed amount. It does mean however, that a response is required. The IRS is not asking the taxpayer for money (yet). They are asking them to verify the amounts on their tax return because they’re different from the information the IRS received. The CP 2000 gives the opportunity to agree, partially agree or disagree with the proposed changes.
Page 1, IRS Notice CP 2000
Review the information shown on the notice. The first page of the CP-2000 is called the “Summary Page”. It provides a brief summary of the notice and instructions on what you should do to determine if you agree or disagree with the proposed changes. If you have any questions, the notice provides a phone number to call for assistance.
Item number one on the sample notice gives the number of the notice, the date of the notice and the taxpayer’s social security number. The taxpayer will generally have 30 days from the date of the notice to respond.
Check the Form and Tax Year to which the notice refers.
It is important that the taxpayer respond by the date on the notice or the proposed changes will become assessed taxes. The taxpayer (or representative) can call the number listed at the top of the notice to request additional time to respond. The IRS will allow a 30-day extension of time to research the proposed changes and may allow more time if circumstances warrant. It is important to remember that any applicable interest and penalties will continue to accrue during the period of the extension if the tax increase is correct.
This is a summary of the proposed changes. The notice goes into detail in the following pages as to how the changes were calculated. Again, remember that the proposed tax on the first page is not final nor has it been assessed against the taxpayer. At this time the IRS is giving the taxpayer time to provide information as to any discrepancies.
The Explanation Section
On the next couple of pages the IRS provides information to the taxpayer on what to do next. The next section of the notice is generally answers to frequently asked questions. After that is the Response Form. We will talk about this section a little later. Following the Response Form is the Explanation Section. This section provides more information about the information that the IRS has that they cannot find on the tax return.
Each item that the IRS cannot locate will be listed, along with the name of the issuer and the amount reported to the IRS. If the IRS has found an entry on the tax return for a partial amount from the same payer it will be indicated as well, and the difference reported in the far right column.
When reviewing the listed items, compare them to all the amounts listed on the tax return. The IRS will generally only look on the appropriate lines for each type of income listed (for example, line 8, Form 1040 for taxable interest). It may be that the amount is included on the tax return, just not in the expected place. If this is the case, it is a simple matter to clear up the discrepancy. While the IRS does provide a phone number to contact them in the letter, dealing with the IRS in writing is most often advisable. We will discuss responding to the IRS in more detail shortly.
The Reasons for the Changes Section
The other section in the CP 2000 that needs to be examined is the part that deals with the reasons for all the changes the IRS is proposing to the tax return. This section will include information about the proposed increase in income due to any previously unreported items that the IRS has discovered through their matching program, but also any other changes to the return. For example, the taxpayer may have been eligible for and claimed the Earned Income Credit on their tax return. Due to an increase in income, the amount of the EIC may change or the taxpayer may be ineligible for the credit altogether.
Other items that may be affected and listed in this area are the Child and Dependent Care Credit, one of the education credits claimed on the return, the amount of estimated taxes claimed on the return, etc. In addition, a change in Adjusted Gross Income may also impact the amount of itemized deductions as calculated on Schedule A if the taxpayer is taking a deduction for medical expenses or employee business expenses. Both of these are limited by the taxpayer’s Adjusted Gross Income and if their AGI increases, the amount of these deductible expenses may be reduced. It is important to address all of these changes when responding to the Internal Revenue Service.
Summary of the Changes
This section summarizes all of the information presented earlier in the letter. The first column contains the information as shown on the original return (or an amended return if it has already been received and processed by the IRS). The second column are the suggested amounts as calculated by the IRS. The right-hand column shows the difference between the amount originally reported and the amount proposed by the IRS (much like the columns on Form 1040X, just in a different order).
Now that we have examined most of the pieces and parts of the notice, it’s time to move on to determining if there is any validity to the information contained in the notice.
What Steps to Take Next
Look at the tax form and the tax year listed on the first page of the notice (never assume it is for the tax year that has just passed). Obtain a copy of the original return for that year and verify that the figures under the “Shown on Return” column match the figures on the copy of the return that you have. They should. If not, determine if an amended return was ever filed or if any correspondence from the IRS was received for this tax year.
Next, compare the “Information Reported to IRS that Differs from the Amounts Shown on Your Return” (under the Explanations page as described above) with the amounts shown on the original return. If the original tax documents (W2s, 1099s, etc.) are available, compare those forms with the amounts listed on the CP 2000. If the amounts differ, you may need to contact the employer, financial institution, or other issuer to determine if a corrected form was ever issued. Then you will need to find those entries on the tax return. Remember that the IRS looks only in the most logical places for the amounts in question – for example, wages shown on Form W-2 should be listed on Form 1040, line 7. If for some reason, the wages were listed in another place on the return, make a note. This will ultimately decrease the amount owed as shown on the CP 2000.
If the disputed amount shown in the CP 2000 does not show up on the tax return, determine if the amount in question had been received. If it was, was it reported on the previous or following year’s return for some reason? Make a note of your findings here as well. Do this for each amount that the IRS cannot find on the return. Do not worry at this time about other proposed changes, such as changes to any credit amounts, itemized deduction amounts, etc.
Once you have determined if any of the items that the IRS is proposing need to be included with the amount shown on the original return, the easiest way to proceed is to recalculate the return using the correct amounts. That way you can determine the accuracy of all of the other proposed calculations on the CP 2000. Be sure to save a copy of the original return for your records before making any changes.
Responding to the CP 2000
While the IRS does provide a phone number to contact them, we suggest handling any response to the CP 2000 in writing.
If the CP 2000 is Correct
If the changes proposed on the CP 2000 are accurate, the taxpayer just needs to sign and date the Response Form, selecting Option 1, I Agree with All Changes. They should make a copy of the notice for their records and return the signed CP 2000 to the IRS in the envelope provided. If they do not have the IRS envelope, be sure to use the correspondence address as shown on the notice. The taxpayer can enclose a payment for the amount shown on the notice (check Option 1 in Step B) and that will generally be the end of the matter.
If the taxpayer cannot pay the full amount, they should pay as much as possible with the notice (any interest and penalties will continue to accrue until the full balance is paid), check Option 2 in Step B and indicate the amount of the payment enclosed.
If the taxpayer would like to request an Installment Agreement, they should check Option 3 in Step B and complete Form 9465, Installment Agreement Request and enclose it with their response to the IRS.
If the Taxpayer Disagrees with Any Part of the CP 2000
If the taxpayer disagrees with any part of the notice, they should not sign the form. Instead, they should check either Option 2 (partially disagree with the notice) or Option 3 (do not agree with any of the changes). They should agree in a signed statement why they disagree and attach the statement plus any supporting documentation to the response page and submit the information to the IRS. They should include their phone number with area code and the best time of day to call as requested on the notice. The taxpayer can also designate another individual to talk to the individual to speak to the IRS on their behalf. This option gives only limited power to the individual listed. They cannot act or speak on the taxpayer’s behalf or enter into any agreements with the IRS for the taxpayer. They can simply help explain the items in question.
An amended return should not be prepared in response to the CP 2000 as they are only proposed adjustments and the tax liability has not yet been assessed. Form 1040X can be used as a worksheet to explain how the taxpayer calculated any partial agreement amounts, but be sure to write “CP2000” at the top of the Form 1040X.
Once the taxpayer has responded to the IRS notice, a couple of additional steps may be necessary depending on the taxpayer’s circumstances:
- An amended state and/or local return may need to be prepared to address any changes to the federal return that impact the state return. Even if there is ultimately no tax effect to the state, an amended return should perhaps be prepared if there is a change to income. The IRS information will ultimately be reported to the state and an amended return will pre-empt any questions from state or local taxing authorities.
- An amended federal return for a subsequent (or occasionally but rarely previous) tax year may need to be prepared if the items changed impact more than one tax year. Examples may include capital loss carryovers, NOLs, credit carryovers, etc.
We hope that you have found this information to be useful. If we can help you with any other tax education needs, please feel free to contact us at 888-342-1040. We would love to hear your feedback on this topic or suggested topics for the future. If you would like a .pdf copy of this article, you can download it here.
~ Megin Hughes, author
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