Receiving a notice that the IRS says you owe more tax than what you reported is unsettling. Whether it arrives as a CP2000, Letter 525, Form 4549, or a Notice of Deficiency, the IRS is telling you it intends to increase your tax liability — sometimes significantly. Taxpayers, however, successfully challenge and reduce IRS proposed assessments every day — if they understand their rights and follow the correct legal strategy.
📘 References:
- CP2000 — Underreporter Notice
- Publication 3498 — Examination Process
- Publication 556 — Examination of Returns
- IRS Independent Office of Appeals
The Legal Meaning Behind “You Owe More Tax”
When the IRS tells you that you owe more, it means the IRS has made a proposed assessment. This is NOT a bill — it is the start of a legal process in which you have the right to dispute the IRS’s conclusions. Under IRC §6212, the IRS is generally required to issue a formal Notice of Deficiency before assessing certain additional taxes. This notice is a crucial due process step that allows the taxpayer to challenge the proposed deficiency in U.S. Tax Court before the tax is formally assessed and collection begins.
Common IRS Notices That Claim You Owe More Tax
1️⃣ CP2000 — Underreporter Notice
This is the most common “you owe more tax” letter. A CP2000 Underreporter Notice is sent by the IRS when there is a mismatch between the income, credits, or deductions you reported on your tax return and the information submitted to the IRS by third parties, such as employers or financial institutions. It is not a formal audit but a proposal for adjusting your tax return, which could result in additional taxes or a refund.
2️⃣ Letter 525 — 30-Day Letter With Proposed Changes
Know as the “30-Day Letter,” this is a notice sent after an IRS audit (examination) is complete, informing the taxpayer of proposed changes to their tax return, typically resulting in additional taxes owed. It is not a final bill, but an opportunity to review the findings and respond before the changes become final.
3️⃣ Form 4549 — Report of Examination Changes
This is a document the IRS uses to officially communicate the findings of a tax audit (examination) to the taxpayer. It summarizes any proposed adjustments to a tax return, calculates the resulting tax liability or overpayment, and outlines the taxpayer’s options for agreement or appeal.
It may include:
- Disallowed deductions
- Increased income
- Reclassified expenses
- Accuracy penalties
- Negligence penalties
- Self-employment tax
- Interest assessments
A taxpayer should never sign Form 4549 without legal review.
4️⃣ Notice of Deficiency (90-Day Letter)
This is the most serious notice. A Notice of Deficiency (also known as a 90-Day Letter) is a formal legal notice from the IRS stating that it has determined you owe additional taxes, penalties, and interest. It is a critical document because it is the final notice the IRS must send before it can formally assess and begin collecting the tax, and it provides you with the legal right to challenge the proposed tax assessment in the U.S. Tax Court before paying the disputed amount.
📘 References: Understanding your IRS notice or letter
How the IRS Decides You “Owe More Tax”?
The IRS uses several tools to determine whether you underpaid taxes.
🔎 Information Matching (Automated Systems)
The IRS receives dozens of information returns from third parties about you. For example,
- W-2
- 1099-NEC
- 1099-MISC
- 1099-K
- 1099-INT
- 1099-B
- 1098 mortgage interest
- Crypto exchange reports
- FATCA/foreign account data
Based on information matching from third-party reports like W-2s and 1099s, the IRS will issue a CP2000 notice if it identifies a discrepancy between your tax return and the income reported to them. The notice is not an audit or a bill, but a proposal to adjust your tax return that requires a response.
🔎 IRS Examiner Review (Correspondence, Office & Field Audits)
IRS auditors decide if you owe more taxes by reviewing your tax return and supporting financial records to verify that your reported income, expenses, and credits are accurate. This process is part of an audit, or “examination,” which can be initiated by mail (correspondence audit) or conducted in-person (office or field audit). A decision that you owe more is made if the examiner finds discrepancies or issues with your return based on the review.
Deciding Whether to Accept or Dispute IRS Findings
When the IRS proposes changes to your tax liability (e.g., after an audit or automated review), you have to decide whether to agree and pay or disagree and fight the findings. This decision should be based on a careful assessment of the facts, the law, and the potential costs and risks involved.
✅ When to Accept the IRS’s Findings (Agree)
You may agree with the IRS’s findings and accept the proposed adjustment if the IRS is factually correct. In other words, you acknowledge the IRS’s finding is 100% accurate (e.g., you accidentally forgot to report a W-2 or 1099 form).
🛑 When to Dispute the IRS’s Findings (Fight)
You may consider disputing the findings and proceeding with an appeal or other challenge if:
- The IRS is Factually Wrong: The IRS made an error regarding the facts (e.g., basing their finding on an incorrect 1099-K issued by a third party).
- Disallowed Deductions Can Be Proven: You have sufficient documentation (receipts, logs, etc.) to substantiate deductions the IRS disallowed.
- The IRS Misapplied Tax Law: The examiner’s decision is based on an incorrect interpretation or application of the tax code.
- The IRS Used Indirect Methods Incorrectly: The methods the IRS used to reconstruct your income, such as bank deposit analyses, are flawed or error-prone.
- Penalties are Inappropriate: You believe the penalties are unjustified and have grounds to request their removal, such as:
- Reasonable Cause: You acted in good faith despite an oversight.
- First-Time Abatement: You have a clean compliance history.
- A Notice of Deficiency was Issued: A Notice of Deficiency (statutory notice of deficiency) is a critical legal document. If you want to challenge the findings in Tax Court, you must file a petition within 90 days of this notice. You should almost always fight if you receive this and disagree with the result.
When an IRS Proposed Assessment Becomes Dangerous?
When an IRS proposed assessment presents certain risk factors, it can become particularly dangerous due to the potential for severe penalties and criminal investigation.
| Potential High-Risk Situations | Description |
| Large Unreported Income | Significant amounts of unreported income, especially from sources like cash transactions, cryptocurrency, or foreign accounts, are major red flags that can suggest intent to evade taxes. |
| Missing Records | The inability to substantiate income or deductions forces the IRS to use indirect methods to reconstruct income, which often results in unfavorable outcomes for the taxpayer. |
| High-Risk Deductions | Aggressive or large business expenses claimed without proper substantiation are likely to be scrutinized and potentially disallowed, increasing the overall assessment. |
| Foreign Income Issues | Errors with Report of Foreign Bank and Financial Accounts (FBAR) or Foreign Account Tax Compliance Act (FATCA) compliance can lead to escalating civil penalties, which can be severe. |
| Repeated Issues Across Multiple Years | A pattern of non-compliance suggests intentional behavior rather than a one-off mistake, prompting the IRS to view the conduct as potentially willful. |
| IRS Asking Intent-Based Questions | When an IRS agent begins asking questions designed to determine the taxpayer’s intent (e.g., “Did you know you were required to report this income?”), it signals a potential pivot from a civil audit to a criminal investigation for tax fraud or evasion. |
In these situations, it is crucial to seek professional help immediately.
How a Tax Attorney Fights IRS Proposed Assessments?
A tax attorney fights an IRS proposed assessment by taking over all communication with the IRS, conducting a legal analysis of the case, and pursuing a resolution through negotiation, appeal, or litigation. By filing a Power of Attorney (Form 2848), the attorney is legally authorized to act on the taxpayer’s behalf, protecting them from direct and intimidating IRS contact.
A skilled tax attorney combats IRS proposed assessments through a multi-faceted approach, which includes:
- Forensic analysis: They conduct a forensic review of income and deductions, meticulously examining the IRS’s calculations and the taxpayer’s financial records to challenge errors or inconsistencies.
- Legal arguments: They craft legal arguments based on tax statutes and relevant court cases to support the taxpayer’s position and identify potential procedural flaws by the IRS.
- Penalty abatement: They negotiate for the reduction or removal of penalties, which can be granted for “reasonable cause,” first-time abatement, or other circumstances.
- Appeals-level strategy: If initial negotiations are unsuccessful, they prepare for and represent the taxpayer at the IRS Office of Appeals.
- Tax Court preparation: If a settlement cannot be reached, they prepare for litigation and can file a petition in U.S. Tax Court to dispute the assessment.
Throughout the process, a skilled tax attorney uses their judgment to:
- Push hard to defend the taxpayer’s rights and position.
- Negotiate with the IRS to reach an equitable resolution, such as an Offer in Compromise or installment agreement.
- Settle cases strategically to minimize time, cost, and stress.
- Escalate to administrative appeals or litigation when necessary.
- Sue in Tax Court to contest a notice of deficiency.
- Keep quiet to protect the client and prevent self-incriminating statements, especially when potential criminal issues arise.
📘 References: Form 2848 – Power of Attorney
Before You Respond to the IRS, Protect Yourself. Contact our firm today for a consultation.
If you receive any communication from the IRS indicating additional tax owed, such as a CP2000, Form 4549, Letter 525, or Notice of Deficiency, it is critical to consult a tax attorney before responding. Your initial communication with the IRS is crucial and can significantly impact the outcome.
A tax law firm like Pelham PLLC can provide comprehensive representation, including:
- Challenging incorrect findings and reversing disallowed deductions.
- Fighting penalties and negotiating with the IRS to reduce liabilities.
- Handling audits and appeals at all stages.
- Filing petitions in Tax Court to dispute the IRS’s claims.
- Protecting taxpayers from fraud allegations.
You should never face the IRS alone. Seeking legal counsel ensures your rights are protected and that you have an expert advocating on your behalf. Contacting a tax attorney for a confidential case review is the best first step.
FAQs
Does a CP2000 mean I’m being audited?
No.
How long do I have to respond to a CP2000?
Usually 30 days.
What if the IRS is wrong?
You can dispute it in writing, provide documentation, or appeal.
What if I miss the 90-day deadline on a Notice of Deficiency?
You lose your right to Tax Court — you can only pay first and sue for refund later.
Can penalties be removed?
Yes. Through reasonable cause, first-time abatement, or procedural challenges.
