Key Steps to Maintaining Your Sanity with the IRS
Picture a scenario where April 15th is a date in your personal rearview mirror! You’re relaxing on the front porch with a sweet tea and one less stressful tax-related task to consume your mind. The mailman meanders up your front walkway with a smile on his face…life is good. Then you see it, a thick envelope in his hand. After a quick glance, you notice it is from the IRS. Your mind starts to race — it’s too big to be a check! After ripping the envelope open, you notice at the top of the page (in big bold intimidating letters) it says “PROPOSED AMOUNT DUE”!!!!
Step 1: Try to Calm Down
Take a deep breath…it’s a common occurrence to get a CP2000 letter. The first thing to understand about the CP2000 is that it is NOT a bill, but rather a notice from the IRS. A CP2000 letter usually relates to the tax return filed two years ago. The notice explains that the IRS believes you did not include some income on that year’s tax return which was shared with them on a W-2 or 1099 form. The letter then goes on to
- list the sources of missing income
- explain the IRS calculations to determine the “correct” tax liability
- outline the proposed amount due
Step 2: Better Understand the CP2000 Letter
A CP2000 letter contains the “proposed amount due” as calculated by the IRS. Unfortunately for you and your blood pressure, the amount is almost always incorrect. Let’s break this down further to better understand what the inflated proposed number means.
The reason the proposed amount is usually wrong on a CP2000 letter is that when the IRS receives their copy of the W-2 or 1099 form (you inadvertently left off the tax return), they are often only getting part of the story. Things the IRS doesn’t usually factor into the equation are items such as
- The cost basis of stock sales
- Exemption of capital gains for home sales or allowable tax-free distributions from HSA accounts may not be accounted for.
- Sometimes, you did actually report the income on your tax return, but on a line the IRS didn’t expect.
Step 3: DO NOT WRITE A CHECK
The worst thing you can do is simply write the IRS a check. There are a multitude of reasons why, but the most common reason is that the amount is more than likely incorrect! So, what can you do? This is going to take some serious dedication on your part to remedy the situation.
Step 4: Understand the Process
Let’s be honest, trying to remedy a CP2000 takes time and some sleuthing on your part. If you don’t want to go down that road, give Tax Advisors of Cary a call. We are professional tax accountants who know our way around the tax planning and preparation process and have handled our fair share of CP2000 forms. However, if you want to try to fight the IRS alone, these are the steps to take.
- Gather the forms for all of your income.
- Confirm that the missing income is actually missing from the tax return and not hidden or misidentified.
- Prepare an amended tax return for both the IRS and your home state to include the missing income along with any of the details the IRS is not in possession of.
- The CP2000 states that it is not necessary to prepare a 1040X but, trust us, it is.
- The IRS communicates with your home state and will let them know if there have been any changes made to your tax return. When that happens, you will get your state’s version of the CP2000. Filing an amended return for the state at the same time you respond to the IRS will save you grief and effort later.
- If the amended return shows the same amount due as the IRS notice, you CAN simply sign the section of the letter agreeing to the assessment and return it with a check. However, you will still need to send the amended return to the state.
- Note: The CP2000 includes proposed penalties and interest as well as adjusted tax liability. So, make sure you’re comparing the amended return balance due to just the IRS tax adjustment.
- If the amended return shows a different balance, or even a refund (very possible for unreported stock sales), check the “disagree” box on the response portion of the letter and write “see attached 1040X near the signature sections. Write “CP2000” on page #1 of the signed Amended return and send it along with the response letter to the address shown on the letter. Send the state amended return separately to your state tax agency.
- Be prepared to wait and then wait some more for a response. In the best of times, the IRS will take 2-4 months to process. During Covid, we’ve seen response times balloon to more than a year. During that time the IRS will often send repeat requests or even versions of the CP letter that seem to impose the tax bill. That’s usually because the IRS hasn’t even opened your mail while their computers churn out letters on a schedule that will eventually end with a default assessment and collection activity.
- To avoid this, you’ll need to call the IRS at the phone number shown on the original letter each time you get another letter which obviously indicates they’ve never processed your first response, and ask them to put a hold on collections. This will usually buy you 60 days of peace but will likely have to be repeated a few times before you get a final resolution.
- At some point, the IRS will acknowledge they’ve processed your changes and offer you a new proposed balance (or refund). If it agrees with your amended return, sign off on the letter and mail them a check or wait for your refund (another 2-3 month wait). Unfortunately, because these amended returns are manually processed, the IRS often messes up the calculations. If they come back with a number higher than you expected, you’ll have to figure out where they made their error and write or call to explain the mistake.
Step 5: Get Help
If all this seems daunting, hire a professional who handles these issues every day and has priority access to the IRS. At Tax Advisors of Cary, we handle CP2000 letters year-round for our clients and help to alleviate the headache that comes with the process.