IRS CP2000 Notice CPA tax accountant discusses aprropriate CP2000 responses and amended tax returns | Form 1040X CPA | IRS audits

IRS CP2000 Notice CPA tax accountants don’t always amend tax returns as a CP2000 response. As I’ll discuss below, an amended tax return Form 1040-X generally isn’t warranted. The CP2000 Notice, Notice of Proposed Adjustment for Underpayment/Overpayment, is a computer generated IRS letter “proposing” changes to your tax return. Sometimes that’s a refund. But generally they “propose” additional tax. CP2000 is non-threatening. But it’s actually the start of an IRS audit, albeit the lowest level of IRS audit. I’ll offer some tips I’ve learned from years of dealing with IRS CP2000 Notices. Here’s a disclaimer. My experience with IRS CP2000 is skewed. Why? Many Folks deal with CP2000 themselves and any CP2000 CPA only sees the more complex cases. I’ll present a case where filing 1040-X as a CP2000 Notice response saved the day.

What’s the number cause for an IRS CP2000?

The IRS received some income related statement, like a Form 1099-C, Cancellation of Debt, that you didn’t present on your tax return. That generates additional tax due.

Read your IRS CP2000 Notice carefully

Because the CP2000 Notice doesn’t seem threatening some Folks don’t take it seriously. Remember it’s the start of a low level IRS audit. A proper CP2000 response should shut down the audit.

Don’t procrastinate with your IRS CP2000 Notice response, if a response is required

Most CP2000 CPAs have seen cases where months go by without consequences before responding to an IRS CP2000 Notice. While the IRS timeline is generous, eventually the CP2000 changes into a more formal IRS demand. I’ve seen Clients stall long enough that an IRS Lien and then an IRS Levy goes into affect. That generates credit problems, penalties, interest CP2000 CPA fees, stress, wage garnishment, etc. So many problems that could have been avoided.

“The IRS assumes their CP2000 Notice is correct. But that’s not always the case. But you or your CPA must prove they’re wrong.”
- Gary Bode, IRS CP2000 CPA

Understand your IRS CP2000 Notice For IRS correspondence, CP2000 is an easy read. If you’re due a refund, understand why. If you incorrectly filed something on your Form 1040, don’t so it again next year. If the IRS “proposes” more tax, understand the underlying tax issues.

Don’t allow a low level IRS audit to expand

Every CP2000 CPA sees cases where the Client opened up other issues on the tax return in question and/or expanded the IRS audit to other tax years. Limit any CP2000 response to the issues on your CP2000.

Should you report other tax issues you found once you received IRS CP2000?

You might think the IRS would cover all their issues with a single CP2000 Notice. That’s not always the case. You can correctly respond to the CP2000 only to have another CP2000 arrive for a different issue in the current tax year. Consider using the IRS Get Transcript online tool to see what they have on file on you for the given tax year. If you’re married, both spouses should use the Get Transcript Tool. If the website doesn’t work for you, and it’s quirky, you can mail in a request for a Wage and Income and/or Record of Account transcript.

Is your IRS CP2000 Notice correct?

Say you left off a Form 1099-INT (bank interest income) on your return. The additional tax proposed is $50. Just pay it.

Is your IRS Notice CP2000 incorrect?

Well CP2000 tells you how to respond if your don’t agree. Let’s say they want $50 of tax. It would take you three hours to rustle the documentation and generate a response. Then you’d wait to hear back from them. I’ve had one lady fire me over this next comment. Sometimes it’s just easier to pay them than to fight them. I know that seems un-American. While time and stress don’t cost you money, they may cause loss of sleep. Sometimes information the IRS has is incorrect. Let’s say your bank reported $5000 of taxable interest to the IRS when it should have been $50. The IRS says that’s your problem. Try to get the bank to correct it. Document your attempts. If the bank won’t correct, present your case to the IRS.

What’s the worst way to deal with an IRS CP2000 Notice when it proposes additional tax? Ignore it.

“Sometimes your CP2000 requires documentation. Try to think of the IRS Agent who’s reading your response as a grumpy school teacher grading a term paper. Figure out what they’d need to see to put your response in the “good” pile.”
- Gary Bode, IRS CP2000 CPA

Don’t forget the State The IRS notifies your State of any changes on your Form 1040. Sometimes it’s better to be proactive with the State before the IRS reports on you.

When do you need an IRS CP2000 CPA?

There’s no single factor. But here are some considerations:

• The proposed additional tax is substantial.
• There are other errors on your tax return.
• Other tax returns have similar errors.
• The tax due is your estranged or divorced spouse’s issue.
• You’ve had bad experiences with the IRS before.
• You don’t understand the underlying tax issues.
• You can’t correct bad information the IRS has on file.
• You’re too emotional about CP2000 to handle it objectively.

A CP2000 Notice case study; filing an amended tax return using Form 1040-X

I got a call form a new Client who presented with a CP2000 proposing $3,000 +/- of additional tax. The issue was a Form 1099-C, Cancellation of Debt, the Client hadn’t put on the tax return. The Form 1099-C was for a car repo; the Client bought a car for his girlfriend and ran into a cash flow problem while changing jobs. Cancelled debt (Form 1099-C) becomes taxable income unless you can exclude it using Form 982. While reviewing his original tax returns, including the ones before and after the year in question, I noticed he moved. There wasn’t moving expenses reported on the original return. I noticed unemployment payments. I notices a small amount of rent income on the original Form 1040. S0 I filed an amended tax return using Form 1040-X. This turned an IRS demand into a refund. Here’s why.

• I excluded the cancelled debt from 1099-C from taxable income using the insolvency exclusion of Form 982, Reduction of Tax Attributes. This solved the IRS CP2000 issue.
• I included legitimate moving expenses.
• His rental home had a slew of accrued maintenance and repair he paid once the tenant moved into his old house.

“Sometimes an amended tax return as a response to IRS CP2000 turns an IRS demand into a refund.”
- - Gary Bode, IRS CP2000 CPA

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