What to Do When You Receive IRS Notice CP2000
IRS Notice CP2000 is sent when the IRS identifies income reported by third parties that does not match what you reported on your tax return. It proposes additional tax based on the income discrepancy.
What CP2000 notice means
CP2000 is an Underreporter Inquiry. It is not a bill or a final assessment—it is a proposal. The IRS is proposing changes to your tax return based on income records it received from third parties.
The notice shows:
- Income the IRS has on file that was not reported on your return
- The proposed additional tax you owe based on that unreported income
- Penalties and interest calculated on the proposed additional tax
- Your options for responding (agree, disagree, or partially agree)
CP2000 is not an audit. It is an automated matching process performed by the IRS Automated Underreporter (AUR) system. The IRS compares income reported on your return to income reported by employers, banks, investment firms, and other third parties. When there is a discrepancy, CP2000 is generated.
Why CP2000 is sent
The IRS receives copies of all income documents issued to you: W-2s, 1099s, K-1s, and other information returns. These documents are filed by:
- Employers (Form W-2 for wages)
- Banks and investment firms (Form 1099-INT for interest, 1099-DIV for dividends, 1099-B for stock sales)
- Clients and businesses (Form 1099-NEC or 1099-MISC for contract payments)
- Retirement accounts (Form 1099-R for distributions)
- Partnerships and S corporations (Schedule K-1 for income passed through)
The IRS's AUR system matches these third-party reports to the income you reported on your tax return. If the system detects a discrepancy—such as a W-2 or 1099 that you did not report—it generates a CP2000 notice.
Common reasons for CP2000:
- You did not receive a W-2 or 1099 and did not know to report the income
- You received the form but forgot to include it on your return
- You reported income on the wrong line of your tax return
- The third party reported incorrect amounts to the IRS
- You reported income but used a different description or category than the third party used
What the notice shows
CP2000 notices are detailed and include several sections:
Proposed changes to your return
The notice lists each income item the IRS believes was underreported. For each item, it shows:
- The type of income (wages, interest, dividends, self-employment income, etc.)
- The payer (employer, bank, or other entity that reported the income)
- The amount reported by the payer
- The amount you reported on your return (or zero if you did not report it)
- The difference between what was reported and what you reported
Proposed additional tax
The notice calculates how much additional tax you would owe if the IRS's proposed changes are correct. This amount is based on adding the unreported income to your return and recalculating your tax liability.
Penalties and interest
The notice includes:
- Accuracy-related penalty: Typically 20% of the additional tax if the underreporting is substantial
- Interest: Calculated from the original due date of the return to the date of the notice
Interest continues to accrue on unpaid amounts until the issue is resolved.
Response options
The notice provides a response form with three options:
- Agree: You agree with the proposed changes and will pay the amount or request a payment plan
- Disagree: You believe the IRS is incorrect and you provide documentation showing why
- Partially agree: You agree with some proposed changes but disagree with others
Understanding what the IRS is asking
IRS notices reference specific account issues. We analyze your IRS records to determine what triggered the notice and what response the IRS expects based on your account status and the income discrepancy identified.
How the IRS determines income discrepancies
The IRS uses an automated system called the Automated Underreporter (AUR) program. This system:
- Collects third-party income reports. All W-2s, 1099s, K-1s, and other information returns are submitted to the IRS electronically.
- Matches income reports to tax returns. The AUR system uses your Social Security number to match income documents to your filed return.
- Identifies discrepancies. The system compares the total income reported by third parties to the total income you reported on your return.
- Generates CP2000 notices. If the discrepancy exceeds IRS thresholds (typically small amounts are ignored), the system generates a CP2000 notice.
The process is fully automated until you respond. No human IRS employee reviews your return before CP2000 is sent. This means the notice may be based on incomplete information or may not account for valid reasons the income was not reported (such as it being non-taxable or already reported under a different category).
What response is required
You must respond to CP2000 within 30 days of the notice date. Your response depends on whether you agree with the IRS's proposed changes.
If you agree with the proposed changes
- Sign and return the response form included with the notice
- Pay the full amount shown (additional tax, penalties, and interest)
- Or request a payment plan by checking the appropriate box on the response form
If you agree and pay, the issue is resolved. The IRS will adjust your account and send a confirmation.
If you disagree with the proposed changes
- Complete the response form. Check the "Disagree" box and explain why you disagree.
- Provide documentation. Attach copies (not originals) of documents that support your position, such as:
- Corrected W-2s or 1099s from the payer
- Records showing the income was already reported on your return
- Documentation that the income is non-taxable
- Proof that the income belongs to someone else (incorrect Social Security number)
- Mail the response to the address shown on the notice. Use certified mail with return receipt to confirm the IRS received your response.
The IRS will review your response and documentation. If the IRS agrees with you, it will close the case. If the IRS still disagrees, it will send a Statutory Notice of Deficiency (90-day letter), which is your final opportunity to dispute the assessment before it becomes final.
If you partially agree
If you agree with some proposed changes but disagree with others, indicate this on the response form. Pay the portion you agree with and provide documentation for the portion you dispute.
If you do not respond
If you do not respond within 30 days, the IRS will send a second notice (CP2000 Reminder or Statutory Notice of Deficiency). If you still do not respond, the IRS will assess the proposed amount as tax owed. Once assessed, the amount becomes a legal tax liability, and the IRS can begin collection actions (liens, levies, garnishments).
Common CP2000 scenarios
Scenario 1: Unreported 1099 income
Situation:
Taxpayer worked as an independent contractor and received three 1099-NEC forms totaling $18,000. The taxpayer reported $12,000 on Schedule C but forgot to include the third 1099 for $6,000.
What CP2000 shows:
The notice proposes adding $6,000 of unreported income. Additional tax is calculated on that $6,000, plus self-employment tax. Penalties and interest are added.
Correct response:
If the taxpayer agrees the income was not reported, agree with the notice and pay or request a payment plan. If the taxpayer believes the income was reported but on a different line, provide documentation showing where it was included on the return.
Scenario 2: Incorrect W-2 from employer
Situation:
Taxpayer's employer issued a W-2 showing $50,000 in wages. The employer later issued a corrected W-2 (W-2c) showing $45,000 because of an error. The taxpayer filed using the corrected W-2 showing $45,000. The IRS sent CP2000 based on the original W-2 showing $50,000.
What CP2000 shows:
The notice shows $5,000 of unreported wages and proposes additional tax, penalties, and interest.
Correct response:
Disagree with the notice. Attach a copy of the corrected W-2c and explain that the employer issued a correction. The IRS will verify the correction with the employer and close the case.
Scenario 3: Non-taxable income reported on 1099
Situation:
Taxpayer received a 1099-MISC for $10,000 from an insurance company as reimbursement for medical expenses. The taxpayer did not report this on the tax return because it is non-taxable reimbursement, not income.
What CP2000 shows:
The notice shows $10,000 of unreported income and proposes additional tax, penalties, and interest.
Correct response:
Disagree with the notice. Explain that the amount shown on the 1099-MISC is non-taxable reimbursement for qualified medical expenses. Attach documentation showing the nature of the payment (insurance settlement letter, medical bills, etc.). The IRS will review and close the case if the documentation supports non-taxable treatment.
Key insight from these scenarios:
CP2000 notices are generated by automated matching. The IRS does not initially know whether the income was correctly omitted, already reported elsewhere, or non-taxable. Your response with documentation allows the IRS to review the specific facts of your situation. Do not ignore CP2000—respond with explanation and documentation to avoid incorrect assessment.
Frequently Asked Questions
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