Shortly after tax returns are processed by the IRS, many taxpayers unfortunately receive an IRS CP2000 Notice from the IRS. These are computer-generated notices that are sent automatically when an item or items reported on a tax return either does not match or does not include items received from third parties by the IRS or if an item is not reported on a return in a prescribed manner. This type of notice will include information on what type of income (or other item) the IRS believes is incorrectly reported, the amount of the related income (or other adjustments), and a calculation of the tax, interest, and penalties that the IRS believes should result from this item. The notice also includes important information regarding providing a response, if you believe the Service’s assessment of the situation is incorrect or incomplete. These notices can be generated by a slew of reporting discrepancies, but most commonly include the following situations:
- Failure to report (or erroneous input of) information from Forms W-2, Forms 1099, or other payee statements
- Not including information regarding gambling winnings (Form W-2G) and corresponding, offsetting losses
- Incorrectly reporting exemptions, deductions, or credits
- Omitting cost basis information on Schedule D for investment activity, which shows that investments or assets were sold at a loss (or less of a gain)
- Subsequent changes to payee statements (e.g., Forms W-2, Forms 1099, etc.) cause a mismatch between the income reported to the IRS and what was reported on the return
Assuming that a taxpayer has retained relevant information, these issues can generally be resolved through correspondence; however, it is very important that a timely response be provided. If no response is provided, the IRS will finalize the assessment (based on their records and no input that would correct the issue) and assume that additional taxes are owed. Fighting the issue later can become a much more arduous, expensive, and time-intensive process. Moreover, even if the IRS is correct, the manner of a response can dictate the extent of any interest and penalties that apply.
Many taxpayers may be able to respond to these issues on their own; however, many will not be able to do so either because of lack of supporting information, lack of understanding of the basis for the position taken on their return, or because there may have been an error on the tax return. For the latter categories of taxpayers, it is imperative that competent counsel be sought in order to understand available rights, alternatives, and to develop a strategy in responding to such notices. Simple reporting mistakes can, and likely will, carry tremendous financial consequences if appropriate action is not taken in response to an IRS CP2000 Notice.
Brandon N. Mourges is an attorney in Rosenberg Martin Greenberg’s tax controversy practice group. For a free consultation, he can be contacted at firstname.lastname@example.org or 410.951.1149.