Receiving a notice from the Internal Revenue Service (IRS) is rarely a pleasant experience, and a letter claiming (CP2000) you owe additional tax due to underreported income can be especially unsettling. This situation occurs when the income you reported on your tax return does not match the information reported to the IRS by third parties—such as employers (Form W-2), financial institutions (Form 1099), or other payers. The most common initial communication for this issue is the CP2000 notice, which is not an audit but a computer-generated proposal for changes to your tax liability.
📘 References: Understanding your IRS notice or letter
Understand the IRS Notice (CP2000)
The CP2000 Notice is the IRS’s way of informing you that the income reported on your tax return does not match the information they received from third parties, such as your employer (Form W-2), banks, or investment companies (Forms 1099, etc.). The notice will:
- Identify the tax year in question.
- Detail the income sources and amounts the IRS believes you failed to report.
- Present a proposed adjustment to your tax liability, including any potential penalties and interest.
- Provide a deadline (typically 30 days) to respond.
Review and Gather Your Records
The most critical step is to review your original tax return and compare it to the information the IRS is using.
- Gather All Income Documents: Collect all Forms W-2, 1099 (including 1099-INT, 1099-DIV, 1099-MISC, 1099-NEC, etc.), and any other statements of income for the specified tax year.
- Compare Against Your Return: Check if the income sources listed in the CP2000 notice were correctly included in your filed tax return.
Common reasons for discrepancy include, but are not limited to:
- Missing Offsetting Items: You reported the gross income, but failed to include related deductions or costs (e.g., basis on a stock sale reported on a 1099-B).
- Omitted Forms: You may have forgotten to include a 1099 form received after you filed.
- Incorrect Entries: A simple data entry or transposition error occurred when preparing your return.
- Mischaracterization: The IRS may be classifying a payment (like a loan repayment) as taxable income.
Determine Your Response Strategy
Based on your review, you may fall into one of three categories:
1️⃣ You Agree with the Proposed Changes
If you’ve looked over your records and realized that the income was indeed missed—and the IRS’s math is actually spot on—the best move is to be proactive. Start by completing and signing the response form that came with your notice, specifically checking the box that indicates you agree with their proposed changes.
If your budget allows, pay the balance in full by the deadline to put a hard stop on interest and penalties. However, if a lump-sum payment isn’t feasible right now, don’t panic. You can request a payment plan, such as an Installment Agreement, directly within your response to keep the situation manageable and move forward.
2️⃣ You Disagree with All or Part of the Notice
If you’ve reviewed the IRS notice and found that the math doesn’t add up—or that the agency is missing a crucial piece of the puzzle—you have every right to challenge their findings. To start the process, check the box on your response form indicating you disagree with the proposed changes. Rather than a simple “no,” you’ll need to provide a clear, point-by-point statement explaining exactly why the IRS calculation is off. Back this up with “bulletproof” evidence: attach supporting documents like corrected 1099s, bank statements, or proof of deductions that offset the income in question.
Send Your Response
When you’re ready to finalize your response, send clear photocopies only—never part with your original documents, as the IRS generally won’t return them. It is vital to keep a complete copy of the notice, your signed response, and every piece of supporting evidence for your personal records. When you’re ready to mail it, use the specific address provided on your CP2000 notice. To avoid any “he-said, she-said” situations regarding deadlines, use a certified mail with a return receipt.
What Happens After You Send Your Response?
After you send your response, the IRS will review your response.
- If the IRS partially or fully disagrees with your response: They will send you a revised notice or, if they believe your argument is without merit and the deadline has passed, a Statutory Notice of Deficiency (CP3219A/Letter 3219). This is a crucial document because it gives you 90 days to petition the U.S. Tax Court if you still wish to contest the determination
- If the IRS agrees with you: They will send you a letter confirming the issue is resolved and closing the inquiry.
Seeking Professional Assistance
While many discrepancies can be resolved on your own, it is wise to consult a qualified tax professional (tax attorney) if:
- The amount of proposed tax is significant.
- The issue is complex (e.g., related to business income, etc.).
- You receive a Statutory Notice of Deficiency and are considering filing a petition to the U.S. Tax Court.
A professional can help analyze your documentation, draft a compelling response, and communicate directly with the IRS on your behalf.
📘 References: Form 2848, Power of Attorney and Declaration of Representative
Need help with a similar issue? Contact our firm today for a consultation.
If the IRS says you underreported income, the risk is real and early legal protection is critical. Contact Pelham PLLC immediately for confidential audit-defense representation. The sooner we intervene, the better the chances of keeping the case civil — and avoiding criminal referral.
FAQs
1. What does “underreported income” mean?
It means income the IRS believes you earned but did not report.
2. Can Pelham PLLC take over my CP2000 case?
Yes — we handle all underreported income matters.
3. What should I do right now?
Contact a tax attorney immediately.
