What is a CP 2000?
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IRS sends audit letters to taxpayers when tax returns and reported data from employers or banks do not match. This specific letter is IRS letter CP 2000. It is not a formal audit letter notice. However, it does notify the taxpayer that the agency found a discrepancy, and asks if the taxpayer agrees or disagrees with the tax changes.
These letters are different and more complex because they’re correspondence audits. You are not meeting with an auditor face to face. Instead, you’re dealing with the audit through letters. Mail correspondence can be more challenging than explaining audit technicalities face to face.
Explaining audits on paper takes more effort than audits performed in person because the taxpayer receiving the letter needs to know the correct documents to provide, and what issue IRS is looking at. Advocacy plays a large role in these audits.
What Triggers IRS to Send a CP 2000 Letter?
These letters originate because of a mismatch of information. At times, the mismatch is due to a simple but valid error or omission. For example, a taxpayer might have received $200,000 from a distribution from an IRA account, but forgot to report that on a tax return.
This causes IRS to look into the tax return because the distribution was reported by the organization and the investment company to IRS. This triggers IRS to view that the same Social Security Number reported income from a third party, which is valid, and a tax return that doesn’t reflect the income from the third party IRA. This in turn, triggers IRS to send the CP 2000 letter to ask why there was a discrepancy.
Other scenarios, such as reporting different numbers on W-2 income, can trigger an IRS CP 2000 letter. A sole proprietor with a merchant account who fails to report the correct amount of gross receipts can also receive the letter.
A proprietor can collect $1,000,000 in credit card payments, but only report $800,000 for a variety of reasons. Sometimes proprietors are not always collecting income. A merchant collecting credit card sales might run into chargebacks or refunds.
These chargebacks and refunds are not included in the total number that the bank reports to IRS. Banks only report gross proceeds, not net. They’re not offsetting total income with returns- which can trigger the discrepancy.
What Do I Do if I Receive a CP 2000?
CP 2000 letters are sent in the mail by IRS. The agency gives 30 days to respond to the letter. If they do not receive a response, they will send a second letter called an IRS Notice CP3219A. IRS provides a phone number on the letter to assist taxpayers with any questions and explain further action required to settle discrepancies.
You may receive a CP 2000 letter late because IRS is currently backlogged. If this occurs, look at the date at the top of the letter and calculate 30 days out to find when your response is due.
If you need more time, it’s possible to respond to the agency asking for a two or three-week extension. Remember to provide a specific date as to when you can provide requested records. Best practice when mailing correspondence with IRS is to send letters through certified mail.
Requesting an extension doesn’t guarantee the agency will grant the additional time. However, if IRS closes your case, you will be able to argue that you requested a time extension, and it was unreasonable for the IRS to close it.
What Happens if I Don’t Respond to a CP 2000?
Failure to respond to a second letter, or failure to provide correct information triggers an assessment by IRS. If this occurs, the taxpayer will need to petition the tax court. However, if you file a timely request, you can go to appeals.
Should I Hire an Attorney?
Depending on the case, your CPA can support you during the audit process. However, if the proposed taxes owed are high enough, consider hiring a tax attorney with experience dealing with IRS letter CP 2000.
An experienced attorney has the resources to understand how to navigate discrepancies while helping you explain the reasoning behind the differences in reported income.
Curious about what else can trigger an IRS audit of your business? Read our article here.