Responding to an IRS CP2000 Letter

Responding to an IRS CP2000 Letter

If the IRS believes that there might be an error on your return or if they think that you did not report income that you should have, they will send you a CP2000 letter.  You can tell it is a CP2000 letter by looking in the upper right corner of the cover letter and there you should find the letter type.  If it is a CP2000 letter, that is both bad news and good news.  It is bad news because the IRS is of the opinion that there is an error somewhere on your tax return and it is good news because they give you the opportunity to prove them wrong. 

The CP2000 letter is the IRS telling you that they propose a tax liability for a prior year return.  The key here is that they propose the liability.  They are not sure and because they are not sure they want some clarification from you regarding their proposed tax increase.  Now you may not actually owe the IRS any money as a result of a CP2000 letter as they could be wrong.  It is up to you to investigate and respond to the letter.  Ignoring the letter is the worst thing you can do because you will lose very valuable rights in your interactions with the IRS.  Look at the date to respond and make sure you respond prior to that date and make sure you mail your response via certified mail so that you have proof of mailing.  Without that proof of mailing the IRS can deny they ever received it and you will lose those rights.   If you mail it certified mail you will eventually receive the green return receipt card.  Make sure you do not lose it – i.e. keep it in a safe place and remember where you put it.

There are many reasons why the IRS might think you owe money.    The letter will provide a detailed analysis of what errors or omissions the IRS thinks you made and the amount of each one.  Review the document carefully to evaluate whether the IRS’ position is valid or not.  If it is not valid, which is very possible, prepare a package of documents supporting your position and mail it back to them via certified mail.  People make mistakes and so does the IRS, so make sure you do not panic and that you analyze their position and understand what the IRS is saying in the letter.  Many times it can be resolved through correspondence with them. 

It may also turn out that you owe the proposed tax liability.  This is also not the time to panic.  The IRS has many ways for you to pay the money that you owe.  You can establish a payment plan that will take the money out of your account automatically every month.  Or if the amount is very high and you have no wherewithal to pay, you may be eligible for an offer in compromise.  The bottom line in all of this is to act right away to protect your rights.  Do not let the letter sit on your dresser at home unopened for several weeks as most people are prone to do.  If you just cannot bring yourself to open it (there are many who fall into that category) then bring it to an experienced tax attorney to open it and explain your rights and responsibilities.  I do this all the time for people. The key is to respond within the time allotted to you to insure that you get the best possible outcome.