The IRS selects returns for examination for a variety of reasons including Information Matching: Some returns are examined because payer reports, such as Form W-2 from employers. Form 1099 interest statements from banks, or Schedule K-1 issued by partnerships or S-Corporations, do not match the income reported on the tax return (an example of this type of examination is the CP2000).
Under-reporter program notices
The IRS initiates an under-reporter case when its computer finds a discrepancy between two data sources. Usually the two sources are your tax return and information reported to the IRS on a 1099 or W-2 form. You will get either a CP2501 notice – a letter asking you to explain (CP means computer paragraph) – or a CP2000 notice proposing additional tax, penalties and interest. In either case, you will be given 30 days to respond.
CP2000 notice process is very confusing
The CP2000 notice is usually the first notice in the under-reporter program. However, taxpayer can receive a preliminary notice before the CP2000 (a CP2501 notice). After a CP2000 response, taxpayers can receive another CP2000 that makes adjustments to the proposed taxes and penalties based on the initial response. If the time period to respond to a CP2000 (30 days from the date of the letter but the IRS gives you an additional 30 days to allow for mail in process) expires, the IRS will send a CP3219A (Statutory Notice of Deficiency) that proposes to assess the tax and penalties unless you petition the US Tax Court. Once assessed, the IRS sends a CP22 – which announces you now owe the IRS based on the CP2000 notice.
It is not uncommon for a 20% accuracy penalty (negligence or substantial understatement) to accompany a CP2000 adjustment. The tax code allows the IRS to attach the accuracy penalty. However, taxpayers can argue this penalty if they believe that they made an honest attempt to file an accurate return. Some arguments used to request relief from the accuracy penalty include reliance on a tax professional or non-receipt of the Form W-2 or 1099. There are several other possibilities (called reasonable cause) that would warrant penalty relief. It is very important that you argue the accuracy penalty before the penalty is assessed. Arguing after the penalty has been assessed requires CP2000 reconsideration.
Appeal is available, if you know to ask
All responses to CP2000 need to ask for an IRS appeals hearing if the IRS disagrees with your response. Why? CP2000 work like audits- the IRS has to offer you an appeal before they assess any additional taxes or penalties. However, you need to ask timely – and that means you need to ask with your response to the CP2000 because the next letter will be a Statutory Notice of Deficiency- and once the SNOD is issued, you do not have a clear path to argue with the IRS Office of Appeals.
The best and most common solution to a CP2000 is a timely, complete response to the unreported W-2s, 1099s, etc. The response should also address any proposed penalties and request an appeal if the IRS disagrees with your response. After the response, the IRS can send another CP2000 with adjustments to their first CP2000, a CP2005 that states that no additional taxes are proposed, or a proposed SNOD.
If you miss the deadline to respond, you can request CP2000 reconsideration. In this process, you respond to the appropriate IRS compliance unit with a complete response that addresses all items on the original CP2000. CP2000 reconsideration is a common solution because many taxpayers’ responses miss the deadline, or their responses are not fully addressed by the IRS.
Appealing a CP2000 discrepancy
You can appeal CP2000 proposed adjustments. However, most taxpayers fail to do so because they do not timely request the appeal. It is very important that all CP2000 responses request an appeal if the IRS disagrees. Appeals cases are often left to experienced tax professionals who can petition appropriately and timely and represent you before the Appeals Officer.
Offer in compromise - Doubt as to Liability
OIC-STAL is a very little used solution for CP2000 assessments. Basically, this solution also works like audit or CP2000 reconsideration. The taxpayer files a Form 656-L with all of the supporting information that addresses the original CP2000 unreported items and penalties.
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