If a taxpayer does not report all of their income or has a discrepancy associated with an information statement (Form W-2, 1099, 1098, K-1, etc.) that is filed with the IRS, the taxpayer may receive an underreporter notice – called a CP2000 notice. CP2000s are not audits because the IRS does not request supporting evidence for an item reported on a tax return. CP2000s are like audits in that the taxpayer is offered an appeal to contest the findings before the tax is assessed.
CP2000 facts:
- CP2000s are more common than audits: there are three times more CP2000s than there are audits. Why? The IRS can use information statements to find obvious questionable returns that do not match the information statements on file. The average CP2000 balance owed is about $1,600.
- CP2000s arrive three times a year: The IRS starts its CP2000 program each November when it sends out discrepancy notices to 4/15 filers. The IRS also has two other additional cycles – the following March and one last cycle in the following summer after you file. In 2017, the IRS sent over 3.5 million to the 150 million tax filers.
- CP2000 notice process is very confusing: The CP2000 notice is usually the first notice in the underreporter program. However, taxpayer can receive a preliminary notice before the CP2000 (a CP2501 notice). After a CP2000 response, taxpayers can receive another CP2000 that makes adjustments to the proposed taxes and penalties based on the initial response. If the time period to respond to a CP2000 (30 days from the date of the letter but the IRS gives you an additional 30 days to allow for mail in process) expires, the IRS will send a CP3219A (Statutory Notice of Deficiency) that proposes to assess the tax and penalties unless you petition the US Tax Court. Once assessed, the IRS sends a CP22 – which announces you now owe the IRS based on the CP2000 notice.
- CP2000 propose tax, and penalties: the CP2000 is a proposal for additional taxes, penalties, and interest. If you do not respond, the IRS will proceed to assess these amounts proposed.
- You need to respond timely and completely: You have 30 days to respond to the IRS before it proceeds to the next notice (note: the IRS allows 60 days to allow for mail processing time).
- Argue penalties: it is not uncommon for a 20% accuracy penalty (negligence or substantial understatement) to accompany a CP2000 adjustment. The tax code allows the IRS to attach the accuracy penalty. However, taxpayers can argue this penalty if they believe that they made an honest attempt to file an accurate return. Some arguments used to request relief from the accuracy penalty include reliance on a tax professional or non-receipt of the Form W-2 or 1099. There are several other possibilities (called reasonable cause) that would warrant penalty relief. It is very important that you argue the accuracy penalty before the penalty is assessed. Arguing after the penalty has been assessed requires CP2000 reconsideration.
- Appeal is available, if you know to ask: All responses to CP2000 need to ask for an IRS appeals hearing if the IRS disagrees with your response. Why? CP2000 work like audits- the IRS has to offer you an appeal before they assess any additional taxes or penalties. However, you need to ask timely – and that means you need to ask with your response to the CP2000 because the next letter will be a Statutory Notice of Deficiency- and once the SNOD is issued, you do not have a clear path to argue with the IRS Office of Appeals.
- You can avoid a CP2000: it is easy to avoid a CP2000. First, file an extension allowing you time to file before the 10/15 deadline. In July, the IRS has accumulated most of your information statements to compare against the return you have filed. After early July, you can order the IRS transcript of your information statements on file with the IRS- it is called a Wage and Income Transcript. When you prepare your return, make sure all of the gross amounts on the W-2s, 1099s, etc. on the Wage and Income Transcript are reported on the return on the correct line items on the return. If you report all of the items correctly, you will avoid a CP2000.
Solutions:
CP2000 response:
The best and most common solution to a CP2000 is a timely, complete response to the unreported W-2s, 1099s, etc. The response should also address any proposed penalties and request an appeal if the IRS disagrees with your response. After the response, the IRS can send another CP2000 with adjustments to their first CP2000, a CP2005 that states that no additional taxes are proposed, or a proposed SNOD.
CP2000 reconsideration:
If you miss the deadline to respond, you can request CP2000 reconsideration. In this process, you respond to the appropriate IRS compliance unit with a complete response that addresses all items on the original CP2000. CP2000 reconsideration is a common solution because many taxpayers’ responses miss the deadline, or their responses are not fully addressed by the IRS.
Appealing a CP2000 discrepancy:
You can appeal CP2000 proposed adjustments. However, most taxpayers fail to do so because they do not timely request the appeal. It is very important that all CP2000 responses request an appeal if the IRS disagrees. Appeals cases are often left to experienced tax professionals who can petition appropriately and timely and represent you before the Appeals Officer.
Offer in compromise- Doubt as to Liability:
OIC-STAL is a very little used solution for CP2000 assessments. Basically, this solution also works like audit or CP2000 reconsideration. The taxpayer files a Form 656-L with all of the supporting information that addresses the original CP2000 unreported items and penalties.
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