I want to go over some of the basics regarding the dreaded IRS Notice CP 2000 by providing a base description of what it is, the importance of timely response, an example of when this situation could occur, and finally, based on the example used, how to prepare for it.
Ordinarily, when an IRS Notice CP 2000 notice shows up in one's mailbox, one tends to fear the worst, even when one has made every effort to adhere to IRS taxpayer reporting requirements. The notice informs the taxpayer that their tax return information doesn't match data reported to the Internal Revenue Service by employers, banks, and third parties. The notice will list a proposed tax due. Receiving this notice can be quite bewildering, especially when the notice's proposed tax, penalty, and interest are overwhelming. Often the response to this shocking news is to want to ignore it.
Ignoring the IRS is not a good strategy! It's almost like ignoring a toothache; it only gets worse.
The IRS's process to enforce its policies becomes more progressive and could ultimately lead to securing liens and then facilitating levies on your personal property. Please realize that this letter isn't a formal audit notification but a letter to see if you agree or disagree with the proposed tax changes. You do have rights! Please respond within 30 days from the date printed on the letter to begin the corrective activities and avoid further escalation. The letter contains instructions on how to respond. You can also request additional time if needed to gather correcting information. The key is to answer the notice within the allowable time frame.
Suppose you could not respond to the initial CP2000 or your timely response contained information not accepted by the IRS. In that case, the IRS will issue the following Notice CP3219A Statutory Notice of Deficiency. This letter details why the IRS proposes a tax change and how the agency determines the difference. The notice tells you about your right to challenge the decision in Tax Court if you choose to do so. Even if you decide not to go to Tax Court, the IRS will continue to work with you during the statutory notice timeframe to help resolve the issue. This notice provides a 90-day response period. Otherwise, the IRS will assess the proposed changes and send you a bill. For more information about this letter, please click this link.
There are many potential causes for 3rd party information to differ from your tax return and what the IRS has. One circumstance that comes to mind results from inheritances, mainly when securities are involved. Many beneficiaries sell the inherited securities; however, sometimes, there is no listing at the financial institution of the stepped-up basis of the inherited security being reported to the IRS, resulting in a significant gain not reported by the taxpayer. The taxpayer does not owe tax on the stepped-up-basis portion of the gain but only would owe tax on gains occurring after death or after a selected alternative valuation date. It's essential to obtain information on the property's value inherited on the date of death. This verifiable information will ensure you properly reflect this on your tax return – Form 8949 Sales and Other Dispositions of Capital Assets. Having the records will also allow for optimal response to IRS CP2000 notice and put things back into a much better perspective!
I hope this helps alleviate some fears of receiving the dreaded IRS CP2000. For more information about IRS CP2000 Notice, please click this link: https://www.irs.gov/individuals/understanding-your-cp2000-notice
If you have observations or questions, please feel free to reach out to me.