I do tax preparation and tax representation before the IRS and State for individuals and businesses, primarily in Western PA and the tri-state area.
April 18th marks the end of the non-extended tax filing season. There is a short break until May and then begins the CP-2000 Season.
For those unfamiliar with the IRS Form CP-2000, it is the IRS letter that magically begins appearing in mailboxes, beginning sometime in May for those that filed their tax return in late March and early April. The reason why it was sent is quite simple. You see the IRS uses a system called the "Discriminant Function System" or "DiF System" for short. Whenever you receive taxable income from any company or individual, tax forms commonly known as "information returns" are generated. Information returns come in many forms, a lot of them beyond the scope of this article, but the most common ones are
Form W-2 (From your employer)
1099-MISC (From an individual or company where you received various forms of income that is taxable but is not considered self-employment income)
1099-NEC (Non-Employee Compensation. Given for work done as a non-employee. Much of NEC income is subject to both self-employment tax AND income tax)
1099-DIV (issued for dividends on stock holdings),
1099-INT (isssued for interest income, usually from a bank or brokerage),
1099-B (issued by brokerage firm where you or your financial advisor engaged in stock, bond, or mutual fund selling activity during the year)
K-1 (issued to those who received income from a partnership, LLC, S-Corporation, estate, or trust during the year)
Now, when one of these forms is issued one goes to you, and the other one goes to the IRS. They enter it into the DiF System (mentioned above), and when your tax return is filed, the DiF System is checking off the information they received from a third party versus what is listed on your tax return. If a form is received from a third party but DOES NOT show up on your tax return, it triggers a Form CP-2000 to be generated and sent to you via US Mail.
What should you do if you receive such a letter in the mail? Well, first off, open the darn thing up and review it (you'll be surprised the number of people absolutely petrified to the point of inaction when they see a piece of correspondence from the IRS) Is it a CP-2000? The Form or letter number is written in the upper right corner of the page, and is usually at the very bottom, or near the bottom of that group of information in that upper right section of the page. If it isn't a CP-2000, you can see what it is, and what it means by going to www.irs.gov and enter your letter number in the "search box" in the upper right corner of the webpage. That will take you to a page of options that will explain the letter.
If IT IS a CP-2000, then look to see what information the IRS received from a third party that didn't show up on your return. Do you recognize it? If you do recognize it, agree with it and the figure is relatively small (possibly under $1000, and definitely under $500), send in a check with the voucher at the bottom of one of the pages, consider it a lesson learned and be done with it if you prepared your own tax return. If you paid a preparer to do your return, it begins to get a bit more involved. You still owe the tax and would have owed it if it had been properly included on the tax return. If it was something that was overlooked by your paid preparer, then he or she SHOULD cover any of the inevitable penalties and interest that is included with the CP-2000. However, if you did not supply your tax preparer with the documents missing, it is hardly their fault. Some preparers (like me) scan all preparation the documents that we are provided with into our computer, so we know exactly what we were given to work with.
If you do not recognize the missing information and/or the figure owed is quite large, it is probably best to hire a professional knowledgeable in IRS Representation, such as a CPA, Enrolled Agent (EA), or attorney (that is knowledgeable in taxes) to deal with the IRS on your behalf, just like you would hire a criminal or civil lawyer to represent you if you were sued.
Halas Consulting
Christian E Halas
Ph: 412-685-4285
email: chalas@vennwealth.com
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