I Received an IRS CP 2000 Letter; What Do I Do?

A few days ago, I discovered a big fat envelope from the Internal Revenue Service in my mailbox.

“Well, this can’t be good,” I thought.

Inside was an IRS CP 2000 Letter. It had a friendly-enough-sounding title “We are proposing changes to your tax return.”

But I knew the truth. A CP 2000 notice is an audit (or “examination” as the IRS now calls them). No, it’s not the kind of audit in which you sit, sweating, next to a revenue agent while he slowly picks apart your finances in the hopes of finding prison-worthy fraud. (The chances of those audits are much lower). Rather, a CP 2000 is a correspondence audit. Typically, such CP 2000 letters can be resolved through the mail and/or over the phone.

That said, you shouldn’t sweat if you get one. Yes, you may owe additional taxes. On the flip side, some CP 2000’s actually result in a refund. Either way, as long as you respond by the deadline, you won’t get into any trouble, and the IRS may grant you a payment plan if you owe taxes and can’t pay in full.

Why Did I Get a CP 2000 Letter?

The CP 2000 letter I received was in regard to my 2008 tax return (yes, it’s been a while, but the IRS can take up to two years to send these out).

Honestly, I wasn’t surprised. My 2008 return was a mess. I moved several times that year and was missing documents. On top of that I was starting to earn money from my businesses and didn’t keep good records. I reported everything as carefully as possible, but I knew some figures were good faith estimates rather than dead-accurate.

(I’ve since wizened up, keep better records, and now get professional help with my taxes).

So according to this CP 2000, I forgot to report income from a 1099 which means I owe additional tax. Not good. On the flip side, however, I apparently missed reporting some taxes that were withheld, too. Finally, the IRS is claiming that some of the student loan interest I deducted is unsubstantiated. In other words, they didn’t receive a 1098-E from one of my lenders.

There are a lot of reasons you can receive a CP 2000, but the most common are:

• Missing Income. Your tax return didn’t income that was reported to the IRS on a 1099 or W-2 (remember, employers supply these forms to the IRS). Also, remember that you need to pay taxes on unemployment benefits…a common oversight.
• Unsubstantiated Deductions or Credits. Similarly, if you deducted student loan interest, IRA contributions, or anything else and the IRS didn’t receive proof.
• Other Errors. The IRS automatically corrects some common errors on your return when you file. But these errors may trigger a CP 2000 if they substantially affect how much tax you owe.

What to Do About a CP 2000

The most important thing to do when you receive a CP 2000 is to note the deadline and respond on time, either by mail or phone. You can even simply request more time, but failing to respond will trigger a bill and you may lose your right to dispute the information.

Next, do not assume the IRS is either correct or incorrect.

Carefully review the proposed changes on the CP 2000 with your tax records. Better yet, take the notice to tax professional. You can choose to agree with the changes and pay any tax deficiency, disagree with some of the changes, or disagree with all of the changes. If you disagree with any of the information, you’ll need to provide an explanation and documentation when you return the form.

In my case, the missed income and withholding is pretty clear. On the other hand, I know I didn’t deduct student loan interest I didn’t pay, so I can dig up the missing 1098-E and dispute that portion of the letter. At some point, however, I’ll have to ask myself whether it’s worth prolonging the correspondence with the IRS to save a small amount of just paying the bill and being done with it.

So if you get an IRS CP 2000, don’t panic. Step back, review the information, and respond on time. Good luck!

For more, read the IRS CP 2000 FAQ.