Underreported income, part 1: Responding to robo-notices

Every year, millions of taxpayers receive a computer-generated notice from the IRS about (supposedly) underreported income.

These notices are called CP2000 or automated underreporting (AUR) notices. They are generated (shall we say "spit out"?) by IRS computers based on a mismatch between the income reported on a taxpayer's return and information available to the IRS from third parties such as employers and banks.

If you get one, it doesn't mean you did anything wrong. But you do need to respond.

Look in the right-hand corner

As a first step, take a close look at the upper-right-hand corner of the notice. If it says Notice: CP2000, and has an AUR control number, that means the document was generated by an IRS computer without any human signing off on it.

Having verified this, you can breathe a little sigh of relief because a CP2000 notice is not an audit. To be sure, the IRS does initiate correspondence audits by letter, asking for more information about your tax return. But a CP-2000 notice isn't that. Instead, it's informing you that the IRS is proposing changes to your tax return.

Do you agree with the proposed changes?

If you agree with the changes, you can sign the response form and mail it back in. But if you don't agree, you have 30 days to tell the IRS that (or 60 days if you live outside the U.S.).

If you don't respond within the requisite time, and the IRS has determined you owe more tax, you will be facing a notice of deficiency. And in addition there would be interest and applicable penalties.

In other words, a CP2000 notice isn't a tax bill, but you could end up with a bill by default if you don't respond.

More difficult issues

If you did underreport your income by a substantial amount, the issues of course become more difficult. Was the underreporting the result of a good faith mistake, for which the IRS can waive any tax penalties? Or was the underreporting the result of willful tax evasion?

We will take up these questions in part two of this two-part post.

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