A CP2000 Notice from the IRS highlights discrepancies between the income you reported on your tax return and information provided by third parties such as employers and financial institutions. The notice proposes additional tax based on the underreported income, along with potential penalties and interest, such as accuracy-related penalties. Taxpayers have two primary options for addressing the notice:
- Agree with the Proposed Changes: If you agree with the IRS’s proposed adjustments, respond to the notice by submitting an acceptance letter. You can either pay the additional tax immediately or set up a payment plan to settle the balance.
- Disagree with the Proposed Changes: If you disagree with the IRS’s findings, review the notice to identify the discrepancies, gather supporting documentation to validate the income reported on your original return, and submit this evidence to the IRS. If the IRS does not accept your explanation, you have the right to appeal the decision through the IRS Office of Appeals or, if necessary, take the case to U.S. Tax Court.
A typical penalty associated with the CP2000 notice is the accuracy related penalty, which is 20% of the unpaid tax liability from the proposed change. If the underreporting was unintentional, you may be able to request penalty abatement by showing that you acted in good faith and had reasonable cause for the mistake. Note that First-Time Penalty Abatement cannot be used to waive accuracy penalties.
Reasonable Cause Relief
To qualify for the relief of accuracy-related penalties, taxpayers may present their case for abatement due to reasonable cause during the CP2000 response period. If the IRS intends to assess an accuracy penalty, taxpayers can challenge it directly before it is imposed. Should the IRS disagree, taxpayers can appeal the decision through the IRS Independent Office of Appeals. If the penalty has already been assessed, taxpayers may request reconsideration via the CP2000 process or audit reconsideration.
To demonstrate reasonable cause, taxpayers must prove they acted in good faith and made a legitimate effort to report the correct tax liability. Criteria for reasonable cause could include:
- Circumstances Beyond Control: Events like natural disasters, serious illness, death, or other emergencies that made it impossible to meet tax obligations.
- Mistake or Oversight: A simple error or misunderstanding of tax law can sometimes qualify, particularly if the issue is complex.
- Inability to Obtain Records: If the taxpayer could not obtain necessary records despite reasonable efforts, this could qualify as reasonable cause.
- Efforts to Comply: The taxpayer must show they tried to meet their tax obligations even if circumstances made compliance difficult.
The IRS evaluates all actions taken by the taxpayer to accurately report their tax liability and comply with tax laws. To request relief, taxpayers should provide documentation that demonstrates a sincere effort to file correctly and calculate their taxes accurately.
To request abatement, submit a written explanation along with supporting documentation that proves reasonable cause. You can request penalty relief using IRS Form 843 or by writing directly to the IRS.
