IRS Letter 566(CG) and IRS Notice CP2000 arrive by non-certified US mail. Both mark the start of an IRS correspondence audit. Correspondence audits are low-key and about two-thirds of them ask for additional tax. The average demand is about $1300. Sometimes they arrive a few years after the tax year they’re issued for. Don’t panic, most correspondence audits are straight forward. But conversely, an IRS tax audit is an IRS tax audit. The IRS automates correspondence audits, and both Letter 566(CG) and Notice CP2000 are computer generated. It may list an IRS Agent but that’s a ruse; generally no IRS Agent with that name works at listed IRS Center. I’ll try to provide tips I’ve learned as an IRS Letter 566(CG) CPA over the years.
Cut to the Chase for Letter 566(CG) and Notice CP2000
- Don’t ignore them. The IRS seems slow and ponderous but they won’t forget about you. Don’t waste valuable defense time. Some new Clients call me a few days before a final deadline.
- Don’t expand the scope of the IRS audit. Every CPA sees Clients who shot themselves in the foot.
- Leave emotion out of it. You’re essentially dealing with an IRS computer.
- If it’s a few dollars, maybe it’s easier to just pay the IRS. I’ve seen Clients who stand on principle for $60 or so. As a CPA, I like to be cost effective.
- The IRS will contact your State. If you have a State income tax requirement remember to deal with them proactively.
- Understand your Letter 566(CG) or IRS Notice CP2000.
- Do you have same issues in another tax year? Maybe you’ve consistently made errors on your returns. Sometimes it’s easier to address multiple years simultaneously.
- Ask for penalty abatement.
“Here are some tips on IRS Letter 566(CG) and Notice CP2000. Many correspondence audits resolve without CPA help.”
– Gary Bode, IRS Letter 566(CG) CPA
The IRS assumes Letter 566(CG) and Notice CP2000 are correct
You or your CPA must to prove them wrong. Sometimes that’s easy.
The IRS isn’t always right; refunds are possible
The IRS bases its demand, on Letter 566(CG) and Notice CP2000, from data they have on file. If you think about it, the IRS mostly receives information on income like W2s, Form 1099-MISC, Form 1099-C etc., all of which incur income tax. Generally deductions and tax credits aren’t in their calculation. Often just supplying them with a complete picture of the tax year clears up the issue. So often the amount you’ll have to pay is usually less than the first demand. Refunds are even possible.
Understand the year in question
Both Letter 566(CG) and Notice CP2000 often arrive late. Clients report wasting time researching a different tax return! Find the tax year on both documents.
Understand the tax issue involved
Many clients don’t understand IRS Letter 566(CG) or Notice CP2000. Call the IRS and ask for help. Many issues are simple and easy to deal with.
They’re trying to politely get your attention – accurate information can lower the initial IRS demand
CPAs that deal with correspondence audits think the IRS doesn’t expect to get the amount demanded on IRS Letter 566(CG) and Notice CP2000. I think, based on years of experience, that they just want an accurate tax return for that year.
You must reply – the worst tactic is to ignore IRS Letter 566(CG) and Notice CP2000
Some cases present to CPAs because the client procrastinated in dealing with the correspondence audit. No reply initiates a string of escalating IRS letters and notices. Some appropriate responses include:
- Just paying the IRS what they want. Sometimes they’re right. Sometimes it’s easier to pay them than mount an offense over a few dollars despite the principle involved.
- Providing the IRS additional requested information.
- Amending a prior return.
The IRS is generous with time frames. But they eventually lose patience. Don’t squander response time without a good reason.
If you send information, arrange it logically
We always send a cover letter that explains the situation clearly and succinctly. Don’t get emotionally involved. We always figure the IRS employee has to deal with 80 or so cases a day and we have 20 seconds to make our case.
Don’t expand the audit
This is the biggest pitfall of the entire process, at least in my opinion. Client often open up another can of worms.
Know when to punt
Consider calling us or another IRS tax audit CPA when:
- The amount is large. No sense spending money to fight $120 tax bill.
- If you feel there might be bigger issues that might come up later. See below.
- When the tax issues aren’t cut and dry.
- If the IRS isn’t something you can deal with.
- If you feel that your case might require a professional, even if it is just to get that CPA signature on your case.
IRS Letter 566(CG) example
Our client received the above letter which noted she sold a piece of real estate a few years earlier. They assessed income tax on the entire sale amount, about $100,000. That’s scary. Ordinarily we’d resolve that just from ascertaining her basis in the property (what she bought it for). In this case, because of the recession, she sold it at a loss. So, no taxes were due. But Gary noted she sold it at a loss (short sale) and the bank forgave the outstanding balance. So he suspected the bank might have issued a 1099-C. Cancelled debt (Form 1099-C) becomes taxable unless you can exclude it. So we pulled her IRS files and sure enough there were two Form 1099-Cs listed. So we amended the return to include the basis of the sale and Form 982 to show she was insolvent when the building sold. No additional taxes (!) and no other issues to come forward later. And yes, in this case, Letter 566(CG) didn’t tell the whole story. Without question the Form 1099-Cs would eventually come up.
Notice CP 2000
Our client had a car repo and the bank forgave the loan. He didn’t report the Form 1099-C (cancelled debt), probably because he never received it. But the IRS did and wanted to tax him on that amount. Gary spoke with the client for a while and noted he switched jobs and moved in the tax year under audit. He started receiving rent on his house the following year. But, he didn’t report rental expenses in the tax year under audit. Yes, there can be expenses before you receive income. So we amended that return. The rental expenses were a passive loss under $25,000 which easily wiped out the legitimate Form 1099-C issue and generated a refund.
We’re an IRS Letter 566(CG) and Form CP2000 CPA firm with a virtual office to serve you and/or your company regardless of where you live. Yes, we have international and long distance clients. Sometimes just our free phone consult clears up the matter. (910) 399-2705.