A notice of underreported income doesn’t have to trigger a tax audit if you deal with it quickly and correctly
The IRS often sends out notices if there’s an issue with your tax return. These notices can be confusing and hard to understand. No matter what the letter says, seeing that envelope marked with the IRS logo might make your pulse race and your stomach feel queasy. Unless you are expecting a tax refund check, no news indicates good news when you’re dealing with the Internal Revenue Service.
You don’t want to receive a tax notice that you’ll need to deal with – especially if you are like many Americans and work a full-time job, have side gigs or other self-employment endeavors, and are raising kids while keeping a house together. It’s a lot just to get by without adding more to your plate.
That’s why tax professionals are so valuable in helping you navigate tax preparation, IRS notices, and even an audit. If you receive an IRS Notice, it’s important to relax, take a step back, and consider what it says before you start to panic.
If you’ve checked your tax transcripts or used the Where’s My Refund Tool to find that your tax refund was held up, you might receive IRS Notice CP2000 in the mail. Keep in mind, IRS Code 570 or Code 151 may not lead to form CP2000. In fact, there are at least five reasons you might see IRS Code 570 on your tax transcript. CP2000, notice of underreported income, is just one possibility for a delay in processing your return. But if you receive CP2000, you don’t want to wait before taking action.
Why Am I Receiving Form CP2000?
You might receive form CP2000 if the wages reflected on your W-2 statement from your employer do not match the wages reported on your 1040 tax form. Likewise, if your wages from 1099 income don’t match the forms received by the IRS, it will trigger CP2000. You may also receive Notice CP2000 if income from interest or dividends reported by a financial institution to the IRS is not reflected on your tax returns.
Let’s explore these scenarios and consider the action you should take in each circumstance.
Underreported W-2 Income
The IRS may send a notice CP2000, Notice of Underreported Income if your wages earned and reported in Box 1 of your W-2 forms do not match the income reported on line 1 of your 1040 form. If the IRS flags a problem with your reported W-2 income, make sure you:
- Reported all income from every W-2 form received, including spouse’s
- Included wages from tips, prizes or other compensation reflected on your W-2 form
- Added the W-2 wages properly
What To Do
If you find an error, you can respond to the IRS notice with the correct information. If the updated information results in tax debt owed, you can make a payment in the enclosed envelope or online at the IRS website. Be sure to include the payment voucher if you’re paying by mail.
You can also send the Response form stating that you agree with the changes and wait for the IRS to mail you a bill. If you wait, interest and penalties will continue to accrue until you pay the tax debt in full. In either case, do not send an amended tax return, as the IRS will take care of the corrections for you.
If you don’t agree with the IRS’ proposed change, return the Response form along with a signed statement explaining why the IRS data is incorrect. Include supporting documentation.
Incorrect 1099 Info
Similarly, 1099 contractors may have a discrepancy between the income reported and the amounts shown on 1099 forms. Mistakes can happen. Independent contractors may not receive a copy of a 1099 form from a client, even though the client submitted the form to the IRS. 1099 forms showing income or interest earned can be lost in the mail or delivered to your junk inbox accidentally. If you are a sole proprietor who works with a lot of clients, it’s easy to misplace or forget about a single 1099 form when you’re preparing your tax returns.
What To Do
As with a discrepancy in your W-2 income, wait to receive Notice CP2000. Then, try to find the error. Make sure you have a 1099 form from every client that paid you $600 or more during that tax year. This might involve reviewing your bookkeeping records, emails, or bank statements.
You may reach out to clients you worked with in the past year to make sure the income you reported matches the information they shared on the 1099 form. If you find that a client did not submit a 1099 form, you should still report that income to the IRS. If a client submitted a form to the IRS and you didn’t declare that income, you’ll want to reply to CP2000 on the response form and admit to the error. The IRS will probably re-calculate your tax return showing your additional tax liability, which you’ll need to pay.
If you can’t find any discrepancies in your reported income and 1099 forms received, fill out the Response form accompanying CP2000 with supporting evidence and a signed statement explaining why you disagree.
NOTE: If your client issued a 1099 form after the January 31 deadline and you did not receive it until after you filed your taxes, that client will be subject to penalties as high as $60 to $310. Regardless, if you receive a 1099 form after you’ve filed your taxes, you should submit an amended tax return reflecting the income, as well as any deductions and expenses related to that income. Otherwise, you risk triggering a CP2000 form. It’s typically best to be proactive in matters related to the IRS.
If the IRS estimates a higher tax bill on CP2000 due to a missing 1099 form, you might want to file an amended return. If you neglected to include specific income from a client on your tax return, you may have also forgotten to report expenses related to that client. An experienced tax professional can help you file an amended return that more accurately reflects your income and expenses for the year.
Underreported 1099-DIV or 1099-INT Income
If you receive dividends, capital gains distributions, or interest from investments or savings accounts, you should receive 1099 forms from the financial institutions that issued the funds. If you received interest, report it in Box 1 on the “taxable interest” line of your return. Dividends and distributions should be reported on line 3b of your 1040 form, according to IRS.gov.
What To Do
As with earned income, failure to report interest, dividends, or distributions could trigger Notice CP2000. You’ll want to cross-reference your 1099 forms, along with bank and investment records, to determine if the IRS calculations are correct. Send back your reply on the Response form, with supporting evidence if you disagree with the IRS figures and your new tax assessment.
What To Do When You Receive IRS Notice CP2000
Don’t worry. IRS Notice CP2000 is not an audit and it won’t necessarily trigger an audit. It’s merely a request from the IRS for more information to ensure you’re paying all the taxes you owe. Read the notice carefully. Determine if the information the IRS shared is correct or not. If you need help making a case that you didn’t under-report your income or you want to file an amended return to reflect additional credits and deductions, reach out to tax experts like the professionals at Alleviate Tax.
Keep in mind that agreeing to the IRS assessment of underreported income could result in penalties as high as 20% of the additional taxes owed. Alleviate Tax can help you get penalties and interest waived on past-due taxes and negotiate an installment agreement for the balance due.
FAQs
Should I worry about a CP2000?
IRS Notice CP2000 indicates that the IRS found a discrepancy between the amount of income you declared and the amount of income earned based on 1099 and W-2 forms. It could be due to a simple math error, a misplaced 1099 form, or an error made by the IRS. Respond to the form within 30 days but, remember, you have a right to an appeal if you don’t agree with the IRS’ tax assessment.
Do I need a lawyer for CP2000?
A CP2000 form does not indicate an audit and does not automatically mean you need a tax lawyer. A qualified tax preparer may be able to help you file an amended return that will reflect a more accurate assessment of your income and expenses. If you decide to file an appeal after receiving a CP2000 notice, a tax lawyer can represent you in the court of appeals.
