An estimated 3 million Americans under report their income.
- Known as the IRS Automated Underreporter Program (CP2000 notice)
- Out of 150 million individual filers, 27 million taxpayers do not report all W-2s/1099s
- Average amount owed : $3,336
If they find that you underreported your income, the IRS begins the collections process. First, they send you a letter to inform you they found a discrepancy and that you may have unpaid taxes. At this point, you can either dispute the discrepancy or make arrangements to pay the amount due.
“I did not report all of my W-2s/1099s”
As a business owner, one is always trying to walk the thin line between financial success and paying less in taxes. The only way to pay less in taxes is to show that the business doesn’t make a significant profit. Underreported income may not be a surprise to many in this scenario.
However, a surprising number of individual return filers inaccurately list income on their return, too. In fact, 27 million filers underreported their income in 2021.
“Remember,” points out Taxpayer Advocate Service (TAS), “income isn’t necessarily just the money you make from your job – it’s also things like freelance income, interest, dividends, settlements, sale of property, and many other sources.”
“According to random audit data,” says Washington Center for Equitable Growth (WCEG), “all groups of the population underreport about 4 percent to 5 percent of their income on average.”
If there’s a possibility that you underreported your income on your tax return, you’ve come to the right place. Here’s an overview of what to expect if you file a tax return with your income underreported.
Underreported Income: Notice CP2000
The Internal Revenue Service (IRS) cross-checks the information from one filed return to another. If one taxpaying party claims that they paid you money that you didn’t claim on your return, the system notices.
“When a potential discrepancy is identified,” says the IRS, “a tax examiner further reviews the return, comparing the information reported to the IRS by employers, banks, businesses, and other payers on information returns to the income, credits, and deductions you report on your income tax return.”
If the IRS suspects that you have underreported income, they generate a Notice CP2000. Notice CP2000 suggests some changes to your return. That’s not to say you should file an amended return.
In fact, you do not need to file an amended return if you receive Notice CP2000. However, it’s imperative that you carefully review the information on it for accuracy. This process will make the necessary changes to your filing.
Whether or not you agree with the changes in the notice, you must respond to the IRS. The IRS includes a response form, a payment slip, and a return envelope with the Notice CP2000.
If You Agree That You Underreported Income on Your Tax Return
Firstly, sign the response form. Both spouses must respond to the IRS on the response form if they filed married filing jointly. In other words, both must sign the form.
Secondly, determine your plan to pay the new amount due. You can include it with your response, or you can pay it later.
Include it with your response:
The payment proposed on Notice CP2000 probably won’t include the penalties due (See below for more information). However, it will likely include interest due from the deadline to 30 days after the date on the notice. No additional interest will accrue if you pay the amount due on the notice by the deadline.
Pay it later:
If you make the payment later than 30 days after the date on the notice, you may not be paying in full. That’s because additional interest accrues past that date. The notice shows the amount due if you pay within 30 days of the date on it. Interest continues to accrue until you pay the balance in full.
If You Disagree with the IRS’s Claim and Proposed Changes
Firstly, sign the form. Both spouses must sign if you filed married filing jointly. Also, be sure to mark the appropriate box indicating that you do not agree with their suggested changes.
Gather supporting documentation. Make copies to send to the IRS. Include your contact information and mail it all before the deadline on the notice. The IRS will review your response and contact you with any questions that arise.
If you disagree with the IRS and its assessment of underreported income, contact a qualified tax professional immediately. It’s important to allow yourself enough time to craft a response that sends an accurate message to the IRS.
If you don’t report all your income, the IRS assesses an Accuracy-Related Penalty on your case. They also assess one of these penalties on taxpayers who claim credits or deductions that don’t apply to them.
The IRS points out the following two as the most common:
- Negligence or Disregard of the Rules or Regulations
The IRS applies the textbook definition of “negligence” to this penalty. It ultimately means that the taxpayer didn’t even try to include the correct information on their return.
Its examples include:
- Documentation evidence of your claims is missing.
- Omitting income information shown on return forms (e.g., Form 1099)
- Not being mindful of obvious errors (e.g., not checking the accuracy of a deduction or credit that seems too good to be true)
- Substantial Understatement of Income Tax
The IRS explains that “for individuals, a substantial understatement of tax applies if you understate your tax liability by 10% of the tax required to be shown on your tax return or $5,000, whichever is greater.
What to Do First
The first thing to do when you receive Notice CP2000 is take a deep breath. There may be a simple error in the reporting. If the information is correct, then you may need to consider multiple options.
We recommend contacting Advanced Tax Team for a free consultation. Whether you decide to hire us as your representative in this matter is a later decision. For now, we’re happy to help you sort out your options until you have some clarity.
There’s no obligation to hire our firm after your consultation. Our tax team members can help you sort out your options. Then you can walk away to make your decision with no strings attached. If you choose to hire us or take care of the matter on your own, we’ll have no hard feelings. We promise.
Our team members have decades of experience negotiating with the IRS. We’ll get straight to the point. No sales pitches. No pressure.
We’re an accredited business with an A rating at the Better Business Bureau. We’ve helped many clients with underreported income. We’ll help you, too. Contact us today at 877.959.0975 today. You’ll sleep better tonight.
- 8, Author on December, and Professionally reviewed by David J. Allen. “Underreported Income.” Tax Relief Professional, 8 Dec. 2022, https://taxreliefprofessional.com/underreport-income.
- “Accuracy-Related Penalty.” Internal Revenue Service, https://www.irs.gov/payments/accuracy-related-penalty#negligence-of-rules.
- “Tax Evasion at the Top of the U.S. Income Distribution and How to Fight It.” Equitable Growth, 22 Mar. 2021, https://equitablegrowth.org/tax-evasion-at-the-top-of-the-u-s-income-distribution-and-how-to-fight-it/.
- “Topic No. 652 Notice of Underreported Income – CP2000.” Internal Revenue Service, https://www.irs.gov/taxtopics/tc652.
- “Underreported Income.” Taxpayer Advocate Service, 1 Dec. 2022, https://www.taxpayeradvocate.irs.gov/get-help/issues-errors/underreported-income/.
- “Understanding Your CP2000 Notice.” Internal Revenue Service, https://www.irs.gov/individuals/understanding-your-cp2000-notice.