The CP2000 notice is a type of letter the IRS sends automatically when information is reported to them that doesn’t match your tax return, or when there is information on your return that they SHOULD have gotten information on but didn’t. You can tell it’s a CP2000 notice because it will say so in the upper right hand corner of the first page. A CP2000 looks like a bill, has a payment coupon like a bill, but it’s NOT a bill. It’s a “question” from the IRS about something that’s missing, and contains their suggestion as to what the answer to the question is (in the form of a bill). Don’t send money unless you are ABSOLUTELY certain that you owe it. You have 30 days to respond, and you should use this time to make sure you understand what you really owe. If you need more time, call the phone number from the upper right hand corner of the letter and ask for more time. DO NOT IGNORE THE IRS!
In this post I’m going to go through all the sections, and tell you what they mean, and what you should do in them. Most letters are very similar in structure, but some may not have all the sections. The sections are separated by a nice bold line across the whole page, so I’m going to make it easier to follow by putting a series of asterisks (*********) on my page where one of those lines would be.
First. Here are some things to do immediately:
1. Take a deep breath, even if the proposed payment amount is big. A lot of times the correct number is smaller, or zero, and even if it is the big number, there are ways to mitigate it or pay over time. Don’t Panic.
2. Make sure the letter is to YOU. Check the name in the top left and the Social Security Number in the top right. If it’s not you, I would suggest calling the number on the form immediately, or sending them a quick letter telling them so (I’ll go over exactly how to do this towards the end of this chapter when I get to the response section of the CP2000).
3. Make sure the letter is not a SCAM. There are some real a-holes out there who will stop at nothing to steal your money. If the letter was an email attachment, it’s a scam. I think the only sure ways to be certain it’s not a scam are to ask a professional or contact the IRS at 1-800-829-1040 (not the number on the letter). Also, if it differs significantly from my description of how the letter should flow, you should be suspicious as heck.
There are probably a few things in the envelope besides the CP2000 letter. When I refer to “the letter” I’m just talking about the pages that have page X of X in the upper right-hand corner information box. The letter may also include: an envelope to send a response in, a payment voucher that you include if you send them money (this may have page X of X on it like the letter, but should be easy to identify as a payment voucher), an installment request form for if you want to make payments, and a pamphlet on your rights as a taxpayer.
Now let’s go through the letter:
The first section has the IRS address, your name and address, the summary of proposed changes, a brief description of why they sent the letter, and, most importantly, the top right corner has vital details about the letter. These include the notice type (CP2000), the year in question (make sure you compare to the right tax return), the notice date, your SSN, the AUR control number (refer to this when communicating with the IRS), and the IRS contact information. It also tells you the date you need to respond by.
The What you need to do immediately section: This section is generally the same on every letter. We’ll be covering what to do as we go through the rest of the letter.
The If we don’t hear from you section: Tells you the date you need to respond by, and the fact that they will issue a Statutory Notice of Deficiency (basically a final notice) and a final bill once the date passes. Also states that they charge interest and penalties the whole time (if you pay by the due date in the letter the interest and penalty are already included). This is a good time for me to point out that ignoring the IRS is one of the two things the IRS hates the most (lying to them is the other.)
The Changes to your 20XX tax return section: This is usually a table with line items from your tax return that has columns with your numbers, the IRS numbers, and the difference. This can be confusing, and oftentimes not much use, but reviewing it will show you where they made the changes. The next section is often more useful. (The XX in the year obviously will be the year the letter applies to).
The Explanation of changes to your 20XX Form 1040 section: This is a big section, with a lot of information. If they got a form with information you didn’t include on your tax return, it will usually be listed here first. There’s a catch! If the form had tax withholding, they list that separately from any income it reported so it can look like there are a lot more forms missing than there should be. A W-2, for example, almost always has withholding, so there will be two separate lines with the same general information on the form, but one shows the withholding and one shows the income. If there are a lot of lines, it can be helpful to make a list of the forms missing (ignoring the duplicates for withholding) and comparing it with what you reported on your tax return. It’s not uncommon for you to have reported everything correctly, but somehow the IRS misses it (though sometimes this happens because your employer corrects a form, but does not indicate that correctly, so the IRS treats it as a totally separate form). If all the forms were reported on your tax return, try to figure out why the IRS doesn’t know that, and, even if you can’t figure out why, send them a letter explaining the situation ( I’ll go over exactly how to do this towards the end of this chapter when I get to the response section of the CP2000). If the forms aren’t included, but you are sure they shouldn’t apply to you (a W-2 for a company you never worked for) send a letter like we just discussed (be careful though, the name of the company on the W-2 may not be the name you know your employer by, and some jobs issue multiple W-2’s if they change corporate structure.) I’m going to cover some common missing forms and give some advice on each:
W-2, 1099INT, 1099DIV, SSA1099: If you missed one of these on your return, the amount owed calculated on the CP2000 is probably right, but you can redo the tax return to confirm.
W-2G: This is winnings from gambling at a casino or poker room, lotteries or horse races. If you did win the money, you can deduct your losses on Schedule A up to the amount of your winnings. This requires itemizing to make a difference. You might want to get some professional help if this is a big number.
1099B: This is one of the most common missing items. Usually, this represents you selling some investment. A lot of people don’t report these because they lost money, or didn’t make much and they thought it wouldn’t make a difference. BIG MISTAKE! The IRS doesn’t take what you paid for the investment (your basis) into account, so this letter is charging you taxes on the amount you sold it for, ignoring what you paid for it. Find the 1099B, use it to fill out a Schedule D, Form 4797 and/or Form 8949 and then run those numbers onto your tax return to get the RIGHT amount of tax you owe (or you might get a refund!) Make sure this number is the DIFFERENCE between your original result and the new result. Make sure to include the revised schedules when responding, and there is also a worksheet for calculating the tax on capital gains that you should include.
1099MISC: This could be for work as a contractor, rental income, or even royalties from writing a book or owning an oil well. These can get very complex and you should seek professional help unless you are absolutely sure how to handle these.
1099C: This is for having debt canceled by someone you owed money to. Don’t be surprised if the event happened years ago, and/or the creditor bears no resemblance to the people you originally owed. Don’t assume that just because you don’t recognize the debt means it isn’t yours (unless you are absolutely sure you never owed money that you didn’t pay back). This is also very complex, and there are some ways to avoid paying the tax on it.
There are a few other forms, but they don’t come up much.
Below the list of missing items will be a list of reasons why your tax results might have changed. Some of these are explanations about the affect of the missing forms above, and others are about changes unrelated to missing forms. One very common example would be if you claimed an education credit, but the IRS did not receive a 1098T showing the expenses you paid. They also have been tending to ask for additional proof of education expenses even when they got the 1098T, especially if they are sending you a CP2000 for an unrelated missing form. Read this section carefully and it will usually tell you what they are looking for in order to prove the specific item missing. Don’t worry if not every listed change asks for documents, most will simply be explaining how the missing forms affected various items on your return. Again, read this section carefully. It helps to make notes for each item of information that you need to find or verify, leaving out the things that don’t require action.
The Next steps section: This section just tells you not to file a 1040X for the tax return the letter refers to, but to check state returns for the year in question and all returns for other years in which you might have made the same mistake. Most states will chase you down if the CP2000 effects the state return, so be aware of this possibility.
The Interest charges section: This section explains how the interest amount was calculated.
The Additional information section: This section has information on obtaining forms and assistance. It should be the last section before a new page, which will be the start of the Response form.
The top of the first page of the Response form has the IRS address, the response due date, a place for you to update your contact information and the identifying information in the upper right-hand corner (SSN, AUR #, notice type, tax year, and notice date). You’ll use this form to respond to the letter, whether you agree or not. You can usually fold the response form in a way that the address at the top of this form will appear in the window of the envelope the IRS provided for responding. If you don’t use that envelope, the address at the top of the form (the one that starts with INTERNAL REVENUE SERVICE) is where you send it.
1. Indicate your agreement or disagreement:
Two choices, you either agree with the amount they want you to send, or you don’t. If you agree, you check the box and sign that you acknowledge that you owe the money. You are also acknowledging a few other things, but you basically had better be sending in the money with the response, or arranging to make payments. If you disagree, check that box, and move on, though there is often a fax number here that you can use to send the response form with supporting documents back to them.
2. Indicate your payment option:
Four options: Full payment, Partial payment (write in the amount you are sending), No payment, or installment request form. You can check more than one, but that would generally be partial or no payment with an installment request. If you’re sending a check, make sure you follow the instructions in this section and include the voucher page from the letter. If you don’t write the requested information, when the guy at the IRS messes up and separates the check from the voucher, the payment might not get credited to you. This is a good time to mention that when sending money to the IRS, it’s a good idea to track when the check gets paid and print out proof that it was. Anyway, check the box or boxes that apply. If you want to do an installment request, there is usually one included with your letter, if not, go to irs.gov and search for Form 9465 (or apply online).
3. Authorization (optional): You use this section if you want someone to talk to the IRS on your behalf.
******* (there’s not actually a line here, it’s just the end of the letter.)
That’s just about everything in the letter. So…
If you agree with the letter, send the response form, the payment voucher, a check and/or an installment agreement request.
If you disagree with the letter, but still calculate that you owe them money, send the response form, the voucher, a check and/or an installment agreement request. Include a letter explaining why you disagree with their conclusion and how you came up with your amount. Include all forms and worksheets from your tax return that have changed with the correct amounts on them. Include any proof to substantiate your claim.
If you disagree with the letter and don’t think you owe them any money, send the response form indicating that you disagree with the changes and are sending no payment. Include a letter explaining why you disagree with their conclusion. Include all forms and worksheets from your tax return that substantiate your conclusion (for example, you may have failed to include a 1099C for canceled debt, but you use Form 982 to exclude it from taxation). Include any proof to substantiate your claim.
On occasion, they may owe you money! This can happen if you didn’t include the information from a 1099B (investment sale) and the sale was actually at a loss. Respond the same way discussed above for not owing any money, and simply indicate in the letter the amount you think they owe you. With luck, you’ll get a check…with interest!
Send all of the above to the address at the top of the response form (you can also fax them to the number provided). Make sure to include enough postage! The IRS will send you a response indicating whether they agree, and may request more information. Make sure to keep your address updated with them!
Some notes on writing them a letter. Be polite. Be factual and to the point. The letter does not have to be complicated. I like to use a memo format: To, From, Subject (the letter and it’s AUR number), and then numbered, bulleted points for each fact. The second to last bullet should be the final amount you owe, they owe you, or “I don’t believe I owe any taxes”. The last bullet should be a thank you/sorry for messing up and a “Feel free to contact me at: phone number”. Sign it with your favorite professional salutation (I use Very respectfully).