Once you file your taxes, you can breathe a sigh of relief. The big task is done for the year. However, your taxes aren’t safe from further assessments until three years after you file them. You may receive a notice which requires you to dig back in. One such notice is for underreported income (CP-2000).
Here’s more on what the notice means and how to respond to it.
What is the IRS Notice of Underreported Income?
After you file your taxes, the IRS will compare the information it receives from banks, financial institutions, employers, etc. against the information you provided. If it finds discrepancies and suspects you have underreported your income, you will receive notice CP-2000.
The notice will include the following:
- Amounts you reported on your tax return.
- Amounts reported to the IRS.
- Information of the people or organizations that paid you.
- Proposed changes to your tax, payments, and credits.
The IRS may claim you did not report all of your income or that you overstated your credits, deductions, or payments.
How should you respond to a Notice of Underreported Income?
Don’t panic. Whether you agree with the notice or not, you are not in trouble. You just need to resolve the issue at hand. Here’s what to do.
- Read the entire notice so you understand the problem.
- Check the claim of the IRS against your records to figure out what caused the discrepancy.
- If you agree with the changes on the notice in full, fill out the form provided with the notice, sign it, and return it to the address provided. The notice will list payment options. If you can pay now, there is a payment voucher; if not, you can review the other payment options.
- Don’t sign the notice, if you do not agree with the changes in-full or in-part. Instead, write a statement explaining why you do not agree. Explain in full detail what you agree with and why, as well as what you disagree with and why. Include documents which support your case (bank statements, receipts, etc.). Once finished, sign your statement and return it with the supporting documents. Also, include your phone number and when the IRS can reach you.
- If you disagree because a third party reported incorrect information, contact the party and request that they update it and send you a new statement.
- If you need to report additional income, expenses, or credits, you may need to submit a 1040-X form which is for an Amended U.S. Individual Income Tax Return. If you do, send it in with your response form and write CP-2000 on the top of it.
You must submit your response within 30 days if you are in the country, or 60 days if you are outside the country. Responses can be sent via mail or fax to the address or fax number listed on your notice.
What happens if you don’t respond to the Notice of Underreported Income?
If you don’t respond to the notice within the given timeframe, the IRS will send you a statutory notice of deficiency. Afterward, you will owe the amount the IRS suspects plus interest and penalties.
Frequently asked questions about the CP-2000
Why did you receive this notice so long after you filed?
It takes several months for the IRS to receive all of the information and compare it against returns.
How can you prevent discrepancies in your tax returns?
To prevent discrepancies, it’s best to wait until you receive all of your income statements before filing your taxes. Additionally, keep detailed records and check the records you get from all parties (e.g., employers, banks, other sources of income, etc.) for accuracy.
If you owe more, will you have to pay interest on that amount?
You will have to pay interest on the unpaid balance until it is paid in full.
Where can I learn about other IRS notices and letters?
Find details about CP-2000 and many other IRS notices in this definitive guide.
What if you can’t pay the amount you owe?
If you realize you do, in fact, owe more than you originally thought but you can’t pay it, what should you do? The IRS has payment plan options in place. Or, if the IRS can’t reasonably expect you pay your balance, they may accept an offer for a portion of the amount.
If you can’t pay, consider hiring a professional tax relief firm to help you. They know all of the options and can guide you to the one that fits your situation best. Often, it ends up saving taxpayers time, money, and stress.
Compare industry-leading tax relief firms below.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.