IRS notices – CP 2000

Recently I’ve been helping clients with CP 2000 notices. Many people get panicked when they get this notice. Many times the IRS assumes the worst when they send this notice.

What is a CP 2000 notice, basically the IRS received a 1099 indicating that the taxpayer is missing income.  For example , the IRS received a 1099 from Bank of America indicating you were paid $1,000 to your CD.  Most people I meet, never really know the interest they get from the bank.

Many times the CP 2000 notice is incomplete.  They may pick up some missing income from a 1099 or a partnership K-1 but they miss things like cost basis if you sold stock, Section 179 deduction on equipment purchases, and they don’t always compute the tax correctly especially with respect to qualified dividends (taxed at 15%) or long term capital gains (15%).  The key is to reduce penalties.  A key penalty is the 10% understatement, basically it translates to a 26% penalty and interest on the unpaid taxes.

Sometimes the CP 2000 allows for you to amend the tax return and review all issues to see if you had captured all your valid deductions.  If you can legitimately increase deductions that will reduce your unpaid taxes and penalties.  Keep in mind amended returns are reviewed by an IRS agent and sometimes you may be selected for an audit so keep the deductions pretty tight and if there was a large one that you didn’t capture, you may get selected.

The key with CP 2000 is 1) Communication with IRS / Tax Professional 2) Patience – IRS is a huge bureaucracy that does not render much personal interaction and takes a large response time 3) Strategy – review again your tax return to thoroughly document all deductions and analyze if the IRS is correctly computing the underpaid tax.

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