Albert E. Bergen, CPA

What is a CP2000

What is a CP2000?

A CP2000, also known as a Notice of Under-reported / Over-reported Income or a matching notice,  is a letter that the IRS sends out when it has information on file that it can’t match up with the corresponding tax return.  The IRS typically sends CP2000s by regular mail, and they generally relate to the most recent tax year or one of the previous two years.  Just because you’ve received a CP2000 doesn’t necessarily mean that your tax return was wrong or that you owe additional money, but it does mean that you’ll need to respond promptly to resolve the notice.

Common Reasons for CP2000s

A CP2000 is an automated notice.  It’s generated by computer when the IRS matching software can’t reconcile the information in the tax return to what was reported to the IRS by third parties.  By far the largest source of information that the IRS works from to generate CP2000s is the 1099 reporting requirements.

Each time you receive a 1099 from a customer, a bank, or any other business, that business has also sent a 1099 to the IRS to tell them that you’ve gotten one.  Once your return has been filed, computers at the IRS try to match all of those 1099s up to information that’s been reported on your tax return.  If there are any left over after it’s matched what it can, you’re probably have a tax notice in your future.

In most cases, it will be easy for the IRS to match the return that you’ve filed to the information that it has.  Bank interest, dividends, and even most rental income and business payments don’t usually trigger a matching notice because taxpayers rarely forget about them and typically list them in exactly the place where the IRS expects them on the tax forms.

Here are a few common reasons why the 1099s or other pieces of information don’t match up.

  • Forgetting to include income on a return.
    • Contest winnings, early 401(k) or IRA withdrawals, and other one-time income are easy to forget.
    • People who file their returns as soon as they get their W-2s are often surprised when they get a 1099 a few days later.
    • If they fail to amend their returns before the IRS does its matching, they can expect a matching notice.
  • Netting income and deductions that needto be shown separately.
    • I see this most often with gamblers who don’t include their jackpot winnings because they have a net loss for the year.  Gambling winnings and gambling losses need to be reported separately in a return.
    • Likewise, some hobbies generate income and expenses, but don’t rise to the level of a trade or business.  The income and expenses still need to be shown separately, and netting them can trigger a CP2000.
  • Receiving income for someone else
    • I most often see this with partners in partnerships, when customers issue 1099s directly to the partner they work with.
    • If the partner just leaves this out of their return, it will trigger a CP2000, even if the partnership reports the income.
    • To avoid the CP2000, it’s possible to report the income on the return of whoever got the 1099 and then deduct it as a nominee payment to the proper recipient on a separate line, along with their social security or employer ID number.  Unless the other person is your spouse, you must also issue a 1099 to the person or entity that was supposed to receive the income.
    • When this happens, consider asking for a corrected 1099, or at least notifying the customer of the mix-up to keep it from repeating in future years.
  • Reporting information differently than the IRS expects
    • Sometimes the correct way to report information may not be what the IRS was expecting.
    • This can happen when a payment or deduction is properly spread across multiple forms.
    • Sometimes the only way to handle this is to respond to the CP2000 when it comes.

Is a CP2000 a tax bill?

A CP2000 is not a tax bill, but if the proposed change is an increase in tax and you don’t respond, it will result in the change being made and a bill being issued.  Even when a CP2000 results from an error in a return, it often over-estimates the increase in tax due.  If taxpayers don’t respond, or trust that the IRS figured the correct amount of tax, they often end-up overpaying.

For example, a gambler who forgot to report his or her winnings during the year may still have deductible losses.  The IRS will propose changes to the return which report the income, but do not deduct the losses.  It will be up to the taxpayer to figure out how much they lost during the year and deduct that amount, up to the amount of the winnings, as an itemized deduction.  A similar situation often happens with income-producing hobbies.

If capital gains information from stocks is left off of a return, the matching notice will typically re-figure the tax on the proceeds as though the taxpayer paid nothing for the securities when they bought them.  Once the correct tax is figured, sometimes the IRS even owes the taxpayer an additional refund!

How to Respond to a CP2000

Obviously, if you received a 1099 that you failed to include in your return, there’s not much to except complete the response form and send-in a check.  However, CP2000s have a very high error rate.  They’re generated by a computer without a lot of human interactions, and computers aren’t able to exercise any judgement or understanding.  When you receive a matching notice, you have 30 days to respond.  The IRS will generally give you an additional 30 days if you call them up to ask for it.

The exact nature of the response depends on what the CP2000 is about.  If you agree with all of the changes, you’ll simply complete the response form to that affect.  When the CP2000 is not 100% correct, you’ll complete the form to indicate that you do not agree to some or all of the changes.  Generally, you’ll want to include a letter that references the CP2000 and explains why you think the return is correct as-filed or the required changes are different from what the IRS is proposing.  You’ll also want to include copies (not originals!) of any information that supports your position.

 

 

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