Under Reporter Notices

Jim Buttonow, CPA CITP

Updated on: November 4, 2024

Underreporter Notices Facts

Issuing a CP2000 notice

Three times a year the IRS matches up income, expenses, and credits on filed tax returns with information returns filed (i.e. Forms W-2, 1099, 1098, 5498, etc.). If there is a discrepancy, the IRS can issue a CP2000 notice proposing additional taxes, penalties, and interest.

CP2000 notices are NOT audits.

However, just like audits, they propose additional tax, penalties, and interest based on taxpayer’s filed information statements (W-2s, 1099s, etc.) with the IRS.

CP2000 notices MAY include penalties.

The most common penalty is a 20% accuracy penalty. Taxpayers can contest this penalty if they have cause- even if they agree to the added tax.

You can ask for a “do-over.”

If the taxpayer misses the deadline and the additional tax is assessed, they can ask for “CP2000 reconsideration” to undo the assessment.

How long does it take to resolve?

1- 6 months. One complete and timely response in the right format will facilitate quick resolution. The IRS can ask for additional time if they are backlogged with many CP2000 responses.

Appealing CP2000s.

CP2000 proposed assessments can be appealed if the taxpayer timely requests an appeal. However, most taxpayers and tax professionals fail to request an appeal with their response if the IRS disagrees. Once the IRS issues Letter CP3219A (statutory notice of deficiency), the taxpayer must appeal to the Tax Court or request reconsideration from the IRS. If the tax is assessed (90 days after IRS Letter CP3219A), then the taxpayer must file claim for refund procedures or ask for CP2000 reconsideration or request an offer in compromise- doubt as to liability.

The CP2000 response format is important.

CP2000 response are worked in a first in-first out basis by IRS tax examiners. The response should include a cover letter explain your agreement and disagreement. Attached to the cover letter should be the CP2000 response form, the corrected return (marked “for info only), the original return (marked “for info only”), and any supporting documents and schedules needed. If penalties are proposed, the taxpayer should also provide their disagreement in the cover letter and a statement of why the penalties should not apply (i.e. their reasonable cause arguments). Finally, the cover letter should also request an appeal if the IRS disagrees with the response.

The IRS prefers you DO NOT send a Form 1040X.

A 1040X as a CP2000 response is confusing to the IRS. The IRS may not process the 1040X as a CP2000 response and this can delay the resolution of the CP2000 inquiry. Instead provide a copy of the original return and a “corrected return” with the response. The corrected return should show the corrected tax computation and report correctly the items noted on the CP2000.

When in doubt, send support documents.

Supporting documents are not required as CP2000s are not audits. However, providing the documents may provide convincing evidence should the IRS not want to believe you. For example, if the CP2000 relates to unreported stock sales, send a corrected Schedule D with the broker statements that show the taxpayer’s basis in the stocks sold.

Request an appeal if the IRS disagrees.

It is rare, but if the IRS disagrees and you do not request an appeal, the IRS may automatically proceed to assessing the tax. If you timely request an appeal, the IRS must send your case to the IRS Office of Appeals for reconsideration. Failure to request means that the taxpayer’s only recourse is to dispute the tax owed in Tax Court or to request reconsideration.

CP2501 notices

The CP2501 is a notice that the IRS sends to request that the taxpayer explain a discrepancy on the return. If the taxpayer does not respond, the IRS will issue a CP2000 response. The IRS uses the CP2501 to notify taxpayers of larger discrepancies ($100,000 or more), missing K-1 reporting of $50,000 or more, and cases that may result in a possible refund. The CP2501 also provides additional time to resolve the issue before the issuance of the CP2000 notice.

Underreporter Notice Solutions

Response to disagree, in whole or in part, with the notice

A timely filed, complete CP2000 response to the IRS. This response should include the taxpayer’s corrected tax return if the taxpayer is computing a new tax due. This response should also dispute any penalties and request an IRS appeal should the IRS tax examiner disagree with the response.

Response to agree with the notice

Response and payment to the IRS for the balance owed.

CP2000 Reconsideration

If a taxpayer missed the CP2000 deadline, they could request reconsideration by following CP2000 reconsideration procedures.

Appeals

If the IRS disagrees with the CP2000 response and the taxpayer timely requested an appeal, the taxpayer can request an IRS appeals officer to review the disagreement.

Offer in Compromise: Doubt as to Liability

Taxpayers can request that the IRS formally reconsider the CP2000 through an Offer in compromise- doubt as to liability (Form 656-L). This request is very similar to a CP2000 reconsideration request.

Resolving a CP2000 requires completing these steps:

1. 1. Review the CP2000 letter: Analyze the year and items that the IRS says were omitted. Many times, taxpayers find that information statements were filed incorrectly or that someone was using their SSN for employment.
  2. Gather your original tax return documents for the year in question: Gather the tax file for the CP2000 year in question.
  3. Compare the missing information statements on the CP2000 to your version: Review the accuracy of IRS information returns reported on the CP2000.
  4. Do your own matching: Taxpayers may want to get their IRS wage and income transcript for the year and match the information statements to the return. This reconciliation will identify any discrepancies. Now you can gather other information to prepare a corrected return if needed.
  5. If you disagree with the tax, prepare a corrected return and supporting schedules/documents: The corrected return can be used with your response. The corrected return will compute the correct tax and allow for deductions.
  6. If you disagree with the penalty, prepare your position on why you disagree: Protest the penalties by providing the IRS reasons why you made a reasonable attempt to report all items correctly on the return. Reliance on a tax pro and tax software, lack of information returns needed to file, and ignorance of the tax law are common arguments against the accuracy penalty.
  7. If you agree with the adjustment, respond to the IRS with your agreement and payment method: Use the response form and, if a payment plan is needed, a Form 9465 to request an installment agreement. Also, the taxpayer can make full payment with the response form agreeing to the assessment.
  8. If you disagree in whole or in part, prepare your complete response and send to the IRS: Respond using a cover letter explaining the disagreement(s), the CP2000 response form, documents that support your disagreement, and a copy of the original and corrected returns. In this response, the taxpayer should always request an appeal if the IRS disagrees with the response.
  9. Monitor notices for status, agreement, and assessment (if applicable): The IRS is likely to request more time if they cannot reply to your response within 30 days. IF there are more questions, the IRS can issue another CP2000. If the IRS agrees, they will send an adjustment notice or a CP2005 no-change notice (whichever is applicable). Taxpayers can also call the IRS to get a status update (be prepared for long wait times) if they do not hear from the IRS within 30 days.
  10. Appeal any disagreement: If the IRS disagrees with the response and the taxpayer timely appeals, the taxpayer can receive an appeal hearing to review their case.

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