One of the best things you can do during tax season is to keep good records of all your sources of income. Why? You never know when the IRS might find an error.
The IRS sends out CP2000 Notices every year that identify discrepancies in reported income. Often this is because someone forgets to report a stream of income that the IRS wants to assess.
With more and more people earning income outside of a traditional W-2 job, there’s a chance you could forget to report income and get a CP2000 Notice as a result. This article will walk you through what a CP2000 Notice is, how to respond, and some best practices you can follow to avoid getting one in the first place.
The Short Version
- A CP2000 Notice is a computer-generated letter notifying you there is a discrepancy between the income you reported and the information the IRS has on file for you.
- Self-employed individuals -– including gig workers -– who accidentally forget to report income might receive a CP2000 Notice.
- Keeping detailed records of your income can make it easier to respond to a CP2000 Notice if you get one
What Is a CP2000 Notice From the IRS?
A CP2000 Notice is a letter indicating a discrepancy between the information in the tax return the IRS has on file for you and the information provided by an employer or other entity you might have earned income from.
You might receive a CP2000 Notice if you forget to report a source of income, an employer incorrectly reports your wages, or it could be a simple administrative error on the IRS’s end.
Sometimes individuals accidentally forget to report income. Gig workers, for example, aren’t classified as W-2 employees. As a result, taxes aren’t withheld from their gross pay. According to the IRS, gig workers, freelancers, and other self-employed individuals are responsible for paying these taxes.
Self-employed individuals must pay an additional 15.3% (this often called the self-employment tax) which goes to Social Security and Medicare. When you work a traditional W-2 job, your employer typically pays this tax on your behalf. However, when you work for yourself, you’re on the hook to cover this tax.
The notice doesn’t necessarily mean you or your employer did anything wrong; it just means the IRS is trying to figure out why the information it has doesn’t match the information you reported on your taxes.
How Many People Get a CP2000 Notice?
A CP2000 Notice is fairly common, according to Logan Allec, a CPA and owner of tax relief company Choice Tax Relief. Millions of individuals receive CP2000 Notices every year. While it's one of the most common notices sent out by the IRS, Allec notes that it's usually issued for minor issues like underreported income or a computer error.
Will a CP2000 Notice Stop My Refund?
It could, but it likely won’t. A CP2000 Notice flags discrepancies after your taxes have already been filed. It can take a while for the IRS’s systems to notice the mismatch and issue you a notice.
There’s a good chance that getting a CP2000 Notice won’t halt your refund. Instead, you might be asked to pay back the IRS whatever it decides you owe.
Will a CP2000 Notice Trigger an Audit?
A CP2000 could trigger an audit, but it probably won’t. Instead, once you receive your letter, you’ll be asked to agree or disagree with the IRS.
You might be slightly more likely of experiencing an audit though if the CP2000 Notice was generated due to underreported self-employment income. In Allec’s experience, the IRS more frequently audits Schedule C. This form reports your income from business-related activities.
A CP2000 Notice might make the IRS curious about how a tax filer prepared their overall tax return. If someone forgets to report their income, the IRS might examine whether they were also too aggressive in their deductions. This could prompt the IRS to dive deeper, resulting in an audit.
If you're self-employed or earn income from a small business, it's always a good idea to document your earnings and expenses. This way, if you receive a CP2000 Notice and the IRS initiates an audit, you have adequate documentation to support your reported income.
Read more >>> Tax Audit: What to Do If You've Been Audited By the IRS
How Do I Respond to a CP2000 Notice?
As shown in the steps below, responding to a CP2000 Notice is pretty straightforward. The one thing to keep in mind is that you should do so promptly. Not responding in the timeframe provided by the IRS could result in your being assessed a penalty or extra fees.
Step #1: Read the Notice and Review Your Data
Before you respond to the notice, read it in full and review your data. A CP2000 Notice is issued by a computer system that is far from perfect. While you might have accidentally underreported your income, there’s also a chance the IRS’s file on you is incorrect too.
Find the tax return in question and review your records. Compare it with the information provided in the CP2000 Notice. Look at any W-2s, 1098s, and 1099s that you might have reported for that year. Once you determine whether or not the CP2000 Notice is correct, you can submit your response to the IRS.
Step #2: Respond to the IRS
You have two options on how you can respond to a CP2000 Notice. If it is correct and you excluded a source of income, sign the response letter provided by the IRS and return it to them. Once the IRS receives your agreement, they will send you a tax bill.
If you find the CP2000 Notice is incorrect, you can disagree with it. To do so, you will need to provide a signed statement identifying why you disagree, and you will need to provide documentation backing up your claim. This notice can be mailed to the address printed on the original CP2000 Notice letter.
When you submit your statement, attach it to a copy of the CP2000 Notice response form with the corrected tax form, your original tax form, and any additional documents that might help your case. Make a note in your statement that you would like an appeal if the IRS still insists that you owe more than you reported.
The IRS can be slow and because there are penalties involved, ensure you keep copies of all documents for yourself. If you disagree, consider sending your response via certified mail. This will give you documentation that you sent your response promptly in case any of your materials get lost en route to the IRS.
Step #3: Follow-up
After you submit your response, be sure to follow up with the IRS. You'll either need a tax bill to pay what you owe or a resolution if you contest their findings. Even though the IRS initiated a review process by sending you a CP2000 Notice in the first place, it's still your responsibility to ensure everything is handled promptly to avoid penalties.
Can I Dispute a CP2000?
Yes, as previously mentioned, you can dispute a CP2000 Notice by asking the IRS for an appeal. If you do so promptly, the IRS can issue an appeal hearing to review your case. If disagreement persists, the case is moved to the IRS Office of Appeals for additional consideration.
If you don’t respond quickly, the IRS can proceed with issuing a Notice of Deficiency. This would kick your case up to the U.S. Tax Court and could become a bigger headache than you might want to deal with.
The Takeaway: Don't Fret if You Received a CP2000 Notice
While receiving any letter form the IRS can raise your blood pressure, is CP2000 Notice isn’t necessarily one that you should stress over.
Always keep good records of your income and business-related expenses and copies of all tax forms. This way, if you decide to contest a notice, you'll have documentation to back up your claims and to help you avoid penalties.
Tax time reading:
- What Happens if You Don’t File Taxes on Time?
- Tax Implications When Working Remotely
- Paying Taxes on Investments 2022 Guide