Is a CP2000 Notice an Audit? What You Need to Know

A CP2000 notice is a communication from the Internal Revenue Service (IRS) indicating a potential discrepancy between income and payment information reported to the IRS by third parties and the information on a taxpayer’s federal income tax return. These notices are generated when the IRS’s automated systems identify a data mismatch, informing taxpayers of proposed changes to their tax liability.

Understanding the CP2000 Notice

Formally known as an Underreporter Inquiry, a CP2000 notice is a computer-generated notification from the IRS. It arises when third-party reporting (e.g., W-2s, Form 1099-INT, Form 1099-B) does not align with income or payments declared on a taxpayer’s federal income tax return. The goal is to propose adjustments to a taxpayer’s tax account, which may include additional tax, penalties, and interest, based on identified discrepancies in income, credits, or deductions.

A CP2000 notice is not a traditional IRS audit. Unlike a comprehensive audit involving an in-depth review of a taxpayer’s entire financial records, a CP2000 is an automated data-matching process. It operates under IRS Code Section 6020, allowing the IRS to assess tax based on available information. The notice focuses narrowly on specific, identified mismatches rather than a broad examination of all aspects of a tax return.

Common Reasons for Receiving a CP2000

CP2000 notices often result from various forms of unreported income. A frequent cause is missing wage income, such as when an individual receives a Form W-2 from an employer but fails to include it on their tax return. Unreported self-employment income, typically reported on Form 1099-NEC, also commonly triggers these notices if not properly accounted for on Schedule C. Interest income reported on Form 1099-INT from bank accounts or dividend income from Form 1099-DIV from investments are other common sources of discrepancies that can lead to a CP2000.

Failure to report capital gains or losses from stock sales, documented on Form 1099-B, can also lead to a CP2000 if the amounts reported to the IRS do not match the taxpayer’s return. Income from partnerships or S corporations, detailed on Schedule K-1, if omitted, will likely generate a notice. Beyond income, incorrect or unsupported deductions and credits can also cause a CP2000. For example, claiming a deduction that the IRS’s records do not support, or a credit for which the taxpayer does not meet eligibility based on reported data, could trigger the notice.

How to Respond to a CP2000 Notice

Upon receiving a CP2000 notice, thoroughly review its contents. Examine the proposed changes, the specific income or payment items in question, and the stated due date for your response, typically within 30 days. Gather all relevant documentation for the tax year, including your original tax return, all Forms W-2, 1099s (INT, DIV, NEC, B), K-1s, and any bank or brokerage statements. You should also collect receipts or other records supporting any deductions or credits you claimed.

If you agree with the proposed changes, sign and date the response form provided with the notice. Return the signed form to the IRS and arrange to pay the additional tax and interest by the specified due date, or establish an installment agreement if immediate payment is not feasible. If you disagree with the proposed changes, provide a clear and detailed written explanation of your reasons. Attach copies, not originals, of all supporting documentation that substantiates your original tax return figures, such as corrected 1099s, proof of basis for stock sales, or evidence of expenses.

In cases of partial agreement, indicate which proposed changes you agree with and provide explanations and documentation for the ones you dispute. If you require more time to gather information, you can request an extension; instructions are usually included in the notice itself. Always send your response by certified mail with a return receipt requested. This provides verifiable proof of mailing and delivery to the IRS.

What Happens After Your Response

After the IRS receives your response, they will review the submitted information and documentation. The timeline for this review can vary, generally taking several weeks to a few months, depending on the complexity of the case and IRS workload. If the IRS accepts your agreement with their proposed changes, they will send a notice of adjustment confirming the revised tax liability. If you disagreed and the IRS accepts your explanation, they will send a closure letter or a revised notice reflecting the accepted adjustments.

In some instances, the IRS might partially accept your explanation or require further clarification, resulting in a revised CP2000 notice or a request for additional information. If the IRS reviews your disagreement and does not accept your explanation, they may issue a Notice of Deficiency. This formal notice, often called a “90-day letter,” gives you 90 days to petition the U.S. Tax Court if you wish to dispute the proposed tax changes further. Receiving a Notice of Deficiency is a serious procedural step, but it is distinct from a full-scope audit, providing a legal pathway to challenge the IRS’s determination in court without first paying the disputed tax.