By Evan Pillsbury on Jun 30, 2020 7:00:00 AM
Though it typically isn't intentional, there are times when a taxpayer does not include income information on a tax return. This can happen due to the taxpayer having not received the tax information at the end of the year, records of income sources being improperly kept, or the taxpayer simply forgot about the income they received. When this occurs the IRS will most likely issue a CP2000 notice stating there was income information left off of a tax return that was filed. Should you find yourself in this situation, here are a few things you should know.
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The IRS Has Some But Not All Income Information
When a taxpayer earns income during the year, that income is reported to the IRS on an "informational return." So, if the taxpayer is a W-2 employee or works as an independent contractor receiving 1099 income, who ever is paying the taxpayer is also sending that information to the IRS. However, income sources are not limited to an employer. A taxpayer can also receive interest income, dividend income, income from the sale of a home or property, income from a settlement, etc. All of these income sources are also reported to the IRS.
Should one of these pieces of income information not make it onto the taxpayer's tax return, the return may be flagged. The IRS will match up the information they have reported to them and the information reported on the tax return. This is done using a document matching software, so it is fairly efficient and accurate. If there are any discrepancies, the IRS will issue a CP2000 notice, notifying you of the missing information and their proposed changes to the tax return.
Now, there are sources of income, usually cash based, that don't get reported to the IRS. Nevertheless, taxpayer's are required to report this income on their tax return. If the IRS were to later find out income was received and intentionally not reported, the taxpayer could face serious penalties.
Below is a common list of tax forms taxpayers receive to complete their tax return:
- Form W-2, used to report employee wages paid and taxes withheld
- Form 1099-Misc, used to report income paid to independent contractors, rental income, royalties, etc.
- Form 1099-INT, used to report interest income
- Form 1099-DIV, used to report dividend income
- Form 1099-R, used to report retirement account distributions
- Form 1099-K, used to report payment card transactions and third party network transactions (PayPal for example).
- Form 1099-S, used to report the sale or exchange of real estate
- Form 1099-B, used to report proceeds from the sale of securities
- Form 1099-C, used to report income from debt forgiveness
What To Do If You Receive A CP2000 Notice
The biggest piece of advice is to not ignore the notice. There will be a section on the notice that indicates what information the IRS has reported to them that was not on the tax return. After reviewing this information, the taxpayer can determine whether the information is correct or not.
In certain situations an employer may have double reported to the IRS income paid to an employee. If this is the case, the taxpayer will need to contact the employer and have them correct the information with the IRS. In other situations there may be income information reported to the IRS from an employer the taxpayer never worked for. This may be a case of identity theft and the taxpayer should notify the IRS right away.
If the information on the CP2000 notice is correct and the taxpayer realizes information was in fact left off of the return, the taxpayer does not need to amend the return. They willy simply need to notify the IRS that the information is correct and the IRS will adjust the return and send a bill should any tax be due.
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When To Hire A Tax Attorney
More often than not, the CP2000 notice is for an item that would end up causing a minimal amount in tax owed. In these types of cases it is best to accept the proposed changes to the tax return and pay any tax that is due. If you are unable to pay the amount in full you can also enter into a payment agreement. For more information on IRS payment agreements see our blog, IRS Payment Plan Calculator: Finding Your Minimum IRS Payment.
There are times when the CP2000 notice indicates some significant items were left off the tax return. These items include things like stock transactions, the sale of a property, or a taxable business transaction. For these situations consulting with a tax attorney is advisable. With these types of items the IRS only receives the information regarding the income that was received but it is up to the taxpayer to report the basis in the stocks or property or to show whether or not the transaction was taxable. By consulting with a tax attorney the taxpayer can make sure their issue is being handled properly.
Keeping accurate records of all your income sources is always recommended. This will help ensure that the tax return is completed accurately. Remember, the IRS has most but not necessarily all of the income information for you. Sometimes it is up to you to provide certain information to show that income you received was not actually a gain or was not actually taxable. If you do receive a CP2000 notice, make sure to respond rather than ignoring it. Most of the time the proposed changes to the tax return are minimal and won't require a tax attorney. However, should the changes be significant, consulting with a tax attorney is advisable to make sure a proper plan is in place.
If you have a tax issue with the IRS, FTB, EDD, or CDTFA, give us a call at 760-932-0042 for a free phone consultation with a tax professional.