When your tax return does not match data reported to the IRS from third parties, a letter called an IRS Notice CP2000 may be sent to you. It is not a formal audit notification, but it can quickly turn into a deficiency notice if not addressed. CP2000 Notices contain:
- The amounts you reported on your original or processed amended return;
- The amounts reported to the IRS by the payer or 3rd parties;
- The payer’s name, ID number, the type of document issued (W-2, 1098, 1099), and the tax identification number of the person to whom the document was issued;
- The proposed changes to your income, tax, credits, or payments; and
- A Response form, payment voucher, and an envelope.
An example is where the IRS shows you owe tax on a sale of stock securities because the cost basis of the stock was not included in the information reporting to the IRS. Other examples are where an incorrect Form 1099 was sent to you or where an exclusion to cancellation of debt income applies to you yet a Form 982 was never filed.
A prompt response is needed so that your tax account can be adjusted as appropriate. Your response can be that you agree or that you do not agree in whole or in part. You can avoid dealing with a Notice of Deficiency if you respond in a succinct, complete, and timely manner along with supporting documentation. You should not file an amended return as the IRS will make the corrections for you. Taxpayers should consider contesting the accuracy-related penalties as part of the response. If you do receive a statutory Notice of Deficiency, you must respond to it, typically through U.S. Tax Court. It is not enough to merely respond to the underreporting unit of the IRS or with the IRS Office of Appeals. Lastly, it is important to keep evidence of your delivered response to IRS, whether by fax or with mail tracking.