Tax Audit CPA discusses IRS CP 2000 Notices | Amended Taxes

Gary Bode, CPA: if you’d like a free consult for an IRS CP 2000 Notice, please call us at 399-2705.

Tax Audit CPAs often see IRS Notice CP 2000. Ouch, an IRS envelope arrives in the mail. Notice CP 2000 starts an automated IRS Correspondence Audit. Notice CP 2000 “proposes” changes to a past tax return. Of course the proposed changes usually include an increase in the tax due, along with suggested interest and penalties. But some CP 2000 notices result in refunds. I’ll discuss possible responses to IRS Notice CP 2000 including when to amend the tax return in question.

Hi, I’m Gary Bode, CPA. You may not need a tax audit CPA to handle your Notice CP 2000. Here are some guidelines based on my experience. If you get uncomfortable handling it yourself consider giving us a call. We really try to help and don’t push our services.

Notice CP 2000: A Low Level IRS Audit is still an Audit

A Correspondence Audit is the lowest level of IRS audit. Their computers catch a discrepancy and automatically generate Notice CP 2000. Any IRS Audit deserves immediate attention. Usually a CP 2000 Notice just catches some income item you left off the tax return. For example, your employer must send both you and the IRS copies of your W-2s. The IRS then cross correlates your tax return against these records. If you neglected to include a W-2 on the tax return, their automated systems generate a CP 2000 Notice. They call it revenue matching. A very efficient IRS system, at least sometimes.

If IRS Notice CP 2000 is Correct

If the CP 2000 is correct, accepting their proposed changes satisfies the matter. Sign and return Notice CP 2000 with a check. You can usually setup an Installment Agreement, via Form 9465, to pay any money owed over time in monthly payments. Remember, the IRS will tell your State of these changes too. So be ready.

If IRS Notice CP 2000 is Incorrect

While the process for dealing with correct a Notice CP 2000 works well, resolution of an incorrect CP 2000 notice gets mired in red tape. You must build a bullet proof response for any disagreement.

“Remember, the IRS assumes they’re right and you must prove them wrong.”
- Gary Bode, tax audit CPA

Suggestions for a response to Notice CP 2000

• We suggest handling the response to Notice CP 2000 in writing. Their fax numbers don’t seem to work. The IRS has removed special call lines to dealing with Correspondence Audits.
• Understand your Notice CP 2000. What are the issues? What tax year is it for?
• Read your Notice CP 2000 twice. Even as a tax CPA I find the format odd, making it hard to read.
• Think of your response to Notice CP 2000 like a high school project to a grumpy teacher.
• Remember Notice CP 2000 is computer generated but real Agents will look at your CP 2000 response.
• Use a concise cover letter. Be polite. Be humble. Don’t poke the Bear.
• Keep the response limited to the issue in Notice CP 2000. Don’t open up other tax issues or other tax returns.
• Get your corroborating documents arranged in a logical way.
• Use certified post.
• Be ready for some annoyance. Delays in each step can lead to ever more threatening IRS notices. In my experience, most IRS Notice CP 2000s generate some other overlapping IRS correspondence.
• The IRS timeline is generous. But don’t waste valuable defense time.
• Don’t think the IRS will go away. Deal with Notice CP 2000 in some way.
• When necessary, request a real tax agent be assigned to the case. You have a right to a managerial conference.
• Look at it from the IRS perspective. Which is skeptical. Anticipate questions the IRS may ask and proactively address them.
• Always ask for penalty abatement if actually do owe additional tax.

“Sometimes the IRS is wrong. Sometimes they don’t have all the relevant information, like tax credits and deductions. Sometimes interest and/or penalties can be abated. Sometimes amending an earlier tax return helps.”
- Gary Bode, Notice CP 2000 CPA

Guidelines on when to seek help from a Tax Audit CPA

• There are other issues in the same tax return you don’t want the IRS to look at.
• There are issues in other tax returns you don’t want the IRS to look at.
• When the amount demanded by the IRS is large.
• You don’t understand the tax issues in your Notice CP 2000.
• Your case involves complex issues.
• You need help paying the amount due. After we check out the IRS demand, tax lien CPAs investigate whether the IRS will accept less money as payment in full.
• You have un-filed tax returns.
• Your spouse is actually responsible for the taxes. Read up on the Innocent Spouse defense.

Amending Past Returns for an Incorrect CP 2000 via Form 1040-X

Let’s say you neglected to report $1000 of Income from a home business. Maybe because it was your first year and you never received a Form 1099-MISC. IRS Notice CP 2000 proposes you pay tax, penalties and interest on the $1000. You had the obligation to report the $1000 as income, but didn’t. You had the right to deduct associated expenses from the $1000, but didn’t. But you still can. How? By amending the original return via Form 1040-X. Here you would claim the $1000 of Income on Schedule C, but deduct legitimate expenses. If it was your first year, there could even be a business loss, potentially turning the IRS demand for more taxes into a refund!

We’re a CPA firm that handles back tax cases and IRS tax audits, including CP 2000 Notice resolution. We offer a virtual CPA office to serve national and international clients. Don’t let distance dissuade you from utilizing our free phone consult. Of course, we offer a full palette of CPA services too. Our posts should help you gauge our ability and proactive philosophy. If you need a free initial consult, please consider calling us at (910) 399-2705.

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Here’s a cut and paste blurb on CP 2000 from the IRS website.

CP 2000 Frequently Asked Questions (FAQs)

Why did I receive this notice?

Notice CP 2000 shows proposed changes to your income tax return. This proposal is based on a comparison of the income, payments, credits, and deductions reported on your tax return with information on these items reported to us by employers, banks, businesses, and other payers. The CP 2000 also reflects any corrections we made to your original return when we processed it.

Note: If we made any changes, we would have sent you a notice at that time.

Is this a bill?

No. We’re asking you to verify the income, credits, and deductions reported on your tax return because they’re different from the information we received from other sources. We may even be proposing a decrease to your tax. The CP 2000 is only a proposal that offers you an opportunity to disagree, partially agree, or agree with the proposed changes. We haven’t charged any additional tax at this time.

Why did it take you so long to contact me about this?

Tax years generally end on Dec. 31, but we don’t receive information from employers, banks, businesses, and other payers until much later. Once we receive all the tax returns and payer information, our computer system compares the information you reported with the information the payers provided. This process is very complicated and takes a long time to complete. We’re working hard to shorten the time it takes to contact taxpayers. You may be contacted as early as 12 months from the date you file your tax return.

What do I need to do?

Review the information in the column marked “Shown on Return” and compare it with the information shown in the column marked “Reported to IRS (or Proposed by IRS).” Did you receive the income? If you received the income, was it reported on your tax return? IRS employees search the tax return and try to locate all income. Sometimes, however, several income items are combined and the employees can’t determine the source. If it wasn’t reported on your tax return, was it an oversight? If so, don’t file an amended return to report the income. Just check box “A” on the CP 2000 response page and return it with your check or money order made payable to the United States Treasury. If you agree with the increase but you can’t pay the entire balance due, you may be able to request an installment agreement. If you didn’t report the income for another reason, please explain.

I need more time to find my records and go through them all. Will you allow me additional time to respond?

It’s important that you respond to the CP 2000 by the due date shown on the notice. If you don’t, we’ll assume the proposed changes are correct and continue processing the proposal ultimately to an assessment. If you find you can’t respond by the due date on the notice because you need more time to research your records, please call the toll free number at the top of your notice. We’ll update our records to show you’ve requested an extension. Generally, we’ll allow an extension 30 days beyond the response date shown on the notice. We may also provide additional time to respond if you have unusual circumstances. It’s important to remember that additional interest and any applicable penalties will accrue on the account during the period of the extension if the tax increase is correct.

Do I have to pay the interest? Can you remove it?

The law requires us to charge interest on any tax that isn’t paid by the return due date (Internal Revenue Code Section 6601). The IRS Restructuring and Reform Act of 1998, however, requires us to notify taxpayers of the proposed discrepancies within 18 months of the original filing date in order to charge normal interest. We may need to adjust the interest charge if we make initial contact after that time.

The law allows us to reduce or remove interest on tax increases attributable to errors or delays we made in the performance of ministerial acts (Tax Reform Act or 1986 - Ministerial Act provision). A ministerial act is a procedural, mechanical, or processing act that doesn’t involve the exercise of judgment and occurs even though you did everything we required you to do. If you believe you qualify for abatement of interest based on this provision, you should include your reasons in your response.

The law doesn’t permit us to reduce or remove interest for reasonable cause. Reasonable cause only applies to penalties and refers to an acceptable explanation of circumstances that prevented you from paying the tax when it was due.

What should I do to avoid problems like this in the future?

It’s always in your best interest to keep good records of the income you receive throughout the year. By keeping records, you’ll know if you’ve received all your payment information from employers, banks, and other payers. Note that some states pay taxable unemployment benefits and report them to you on Form 1099-G, Unemployment Benefits, so be sure to keep that information as well. It’s also important to keep accurate information on any mortgage interest you’ve paid. This information is reported on Form 1098, Mortgage Interest Statement.

When you receive these documents, review them and make sure the payers have your most current address.

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