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Getting a CP2000: Notice of Under Reporting of Income

Every year the Internal Revenue Service reviews every tax return filed to check it for accuracy errors.  This process ensures that taxpayers are paying the proper amount of tax and including all sources of income. If the IRS finds any discrepencies in their records, a CP2000 notice will be issued.

The IRS Analysis of Tax Return

The first step in the IRS’s analysis is to compare what a taxpayer reports on their tax return to what the IRS has on file under their Social Security Number or the Individual Taxpayer Identification Number (ITIN).  The IRS gets income information directly from the sources of income, either your employer, Social Security Administration, pension plan, or retirement.

If the IRS determines that the taxpayer did not report all reported income on the return, the IRS will issue a CP2000 notice.  This notice typically comes two years after a taxpayer files a return.  For example, in the fall of 2019, many taxpayers are receiving CP2000s for the tax year 2017.   In our office we see all sorts of situation arise with missing income; these issues range from forgetting about the second part-time job you had for four weeks in February to the 401(k) withdrawal you took before your 60th birthday to help cover a sudden surprise expense.

Notice of Under Reporting and Understanding the CP2000

Receiving a CP2000 may not mean you owe additional taxes.  It is simply giving you notice that there was a difference between what you reported and what the IRS received from your income sources.  The IRS gives you time to respond to the notice if you wish to challenge what the notice is reporting.  Typically, you have 30 days to respond either by agreeing to the notice or by not agreeing and providing some explanation as to why you think the IRS is in error.

If you agree that you made a mistake, you can agree to the changes suggested in the notice and send in a check for the amount proposed on the CP2000.  If you cannot afford to make just a one-time payment, the IRS does have other payment options at your disposal. 

Disputing the Changes

If you disagree with the proposed change to your tax return it is best to contact a professional to help you draft your response and gather what proof you may have so that you can put forth your best effort to get
things corrected to the proper amount.  Even if you are in the right with your dispute, failure to provide the proper documentation and/or give a complete and precise explanation can result the assessment of the proposed changes.

Often, the taxpayer had enough taxes withheld from the income to cover the additional income that was not reported, but since they didn’t report the full amount of actual income they had, it initially they got a sizeable refund when they first filed their return.  In situations like this, taxpayers may have to pay back that refund plus any additional taxes, penalties, and interest.  Interest and penalties are retroactive to when the original tax was due.

The most important thing when getting a CP2000 notice in the mail is to not panic, contact a tax professional and go over what your options are with that individual.

Arthur Rosatti, Esq. is a licensed attorney authorized to represent clients with the Internal Revenue Service and the U.S. Tax Court. He has experience negotiating with various taxing agencies on behalf of individuals and companies.  If you have concerns about your tax liabilities, making estimated tax payments, or correcting your withholding, schedule an appointment with our office.

Your 2018 1040 tax return will look very different than years past.  With the passing of the Jobs and Tax Act back in 2017, the Internal Revenue Service is experiencing the most substantial changes to the tax code in over 30 years.  These changes include edits to many of the forms you may be familiar with. 

The basic 1040 form will have a lot of changes on the first page.  The new 2018 tax form looks like a postcard.  It only has your filing information, such as name, address, filing status, dependents, etc.  What it will not have is any of your income information on the first page.  As you can see here it looks very different.   The second page of the basic 1040 has most of your income information as well your standard deduction and tax credits. 

The main difference on the second page of the 2018 tax form is that a lot of the “other” income and adjustments to income are not listed.  Those will now be on the Schedule 1.   Business income is reported on the Schedule 1, as well as certain adjustments to income like IRA Deduction, Student Loan Interest, Health Savings Account deduction, and many more. 

Online Filing Software

Many people use free online software to file taxes; the majority of those who use Turbotax will be in for a surprise if they need to include a Schedule 1.  Turbotax is charging individual taxpayers for this additional schedule.  H&R Block is not charging for Schedule 1.  So if you have been using tax software online to do your taxes, make sure to look into this so that you do not get surprised by additional fees from these online software companies. Comparing the various programs out there could save you some money.

Self Employed Individuals

Those with self-employment income, such as any 1099 income, will still have a Schedule C to fill out and report on your 1040.  Other additional attachments will also be included.  The real difference is the attempt by Congress to eliminate the Schedule A deduction for most people.  By raising the standard deduction and capping some itemized deductions (including eliminating some all together) they wanted to simplify the 1040 return.

Balance Owed

If you are seeing that you owe for the first time (or even for the 10th time), it is important to understand you have options. Regardless of when you file your return, any balance owed on your 2018 taxes must be paid by April 15, 2019 to avoid failure to pay penalties. This means, even if you file your return in March, you would have a little bit of time to get money together. If you think filing an extension will help, you are out of luck. An extension is only an extension to file, not an extension to pay. Regardless, the balance is still due April 15 and if you pay after that date, even with a valid extension, you will be subject to penalties and interest.

If you owe more than you can feasible pay over a couple months, then you likely need to set up a payment arrangement. The IRS has multiple options that vary depending on your situation. A tax resolution payment plans are agreements direct with the IRS, which allow you to structure payment over time. These plans vary depending on your income and financial situations. Some plans can be as low as $0 per month, if the IRS determines you fall into the category of currently non-collectible. This means that you do not have any disposable income under their standards. Other plans will structure the balance over six years to allow for more reasonable payments.

If you owe, it is also important to determine how not to owe again in the future.For balances of only a couple hundred dollars, then adjusting your withholding to withhold $20.00 to $50.00 more a month, will likely solve the problem. If the balance is substantially more, you may need an analysis to figure out why there is a problem and what can be done to solve it.

Arthur Rosatti, Esq. is a licensed attorney authorized to represent clients with the Internal Revenue Service and the U.S. Tax Court. He has experience negotiating with various taxing agencies on behalf of individuals and companies.  If you have concerns about your tax liabilities, making estimated tax payments, or correcting your withholding, schedule an appointment with our office.

It is important at the end of the year to start thinking about next year’s tax situation.  While it is likely too late in the year to fix any issues you had in 2018 with your withholding or estimated tax payments; but it is never too early to get your situation fixed going into 2019. 

Analyze Your Situation 

If you are expecting similar income in 2019 compared to what you have earned in 2018 then you have a good starting point in determining what you need to do with your 2019 tax payments. Going online to a withholding calculator, like the one the Internal Revenue Service offers, right now can show you what type of refund or balance you can expect for your 2018 tax return. Usually, it is not as in depth as going to accountant to get your taxes prepared; but, it can give you a good estimate as to what you are looking for. 

Dealing With Refunds

If you are showing a major refund that is good news.  There are two ways to go with this information for 2019.  You can either keep things as they are and likely get another refund in 2020 for your 2019 tax year.  You could also change your withholding to lower what your refund would be; but, you would see the money in your paycheck every pay period. Just make sure to be careful you are not expecting a change to your 2019 taxes, such as no longer being able to claim a child or decrease in mortgage interest from selling a home (and not purchasing a new one).

A lot of people love getting all that money back in the spring time.  Some use it as a vacation fund that they cannot touch (because the money stays with the government until you file your return).  Others use their refund to pay off those holiday season credit card bills.  Still others use their refunds as a way to get that big-ticket purchase that they have been putting off. 

Others will look at getting a huge refund and think, why should the government get to hold my money during the year?  They can use a withholding calculator to determine the minimum that they would have to pay in during the year to maximize how much they take home every pay period.   Most calculators will advise you to withhold at a level that keeps your withholding at the point where you either get a $100.00 refund or will owe $100.00. 

People can use that extra money each pay period to catch upon bills throughout the year, start saving for a vacation, or starting a retirement account.  One reason why putting the money into a long term investment is a good idea is that it can help with lower your total taxable liability for that year.  It can also get rid of the temptation to dive into that fund for random things through the year.  This goes back to people who don’t mind having the government hold onto the over withholding, it serves has a no interest savings account that they cannot access.  In order to get that savings account back you must file your return.  You are only entitled to the three most recent years of refunds, if you do not file on time. 

Handling Tax Liabilities

On the other side, are those who have not been withholding enough taxes throughout the year.  Those individuals need to make the proper corrections so that they do not continue to owe taxes year after year.  The biggest issue most people have once they owe for one year is that they do not take the necessary steps to correct the underlining issue and the taxes owed for previous years can snowball on them to the point they do not know what to do. 

If you are expecting to owe for 2018, first thing to do is to figure out the issue that is causing you to owe. One common problem is under-withholding from your wages is causing the problem. If this is the issue, then provide an updated W4 form to your employer as soon as possible so that your withholding can be in the proper place at the start of the new year. Another one of the most common problems we see are self-employed individuals that did not make enough estimated tax payments for 2018. If this applies to you, then you need to start preparing for 2019 taxes now. 

Self-Employed Individuals or Business Owners

The first step would be to develop a business budget tracker.  Most self-employed individuals just do not keep good records of what is a business expense and what is a personal expense.  Keep these records can help determine what your actual net income is. Your net income is the key factor in determining what your tax liability is. If you keep a solid spreadsheet of your gross income minus business expenses you can then figure out how much of your net income should be set aside to make quarterly estimated tax payments. 

The IRS requires that if you owe more than $1,000.00 in self-employment tax for one year, the next year you are required to make estimated tax payments.  If you do not make those payments during the year, when you go file your return, and there is another balance, you may have additional penalties for not pre-paying your tax. 

We try to advise self-employed clients to look very closely at their business and personal budgets to figure out where they can make up the difference to pay their taxes going forward. For many, it’s a lot of tough decisions on their personal side. You often have to make the conscientious effort to set aside the potential tax payment every month or quarter.  For others, they realize that being self-employed is too much of a hassle and go find work as a wage earner.  It is possible to be self-employed, make good money, and be responsible with your tax obligation.  It isn’t the easiest thing, but it can be done.

Arthur Rosatti, Esq. is a licensed attorney authorized to represent clients with the Internal Revenue Service and the U.S. Tax Court. He has experience negotiating with various taxing agencies on behalf of individuals and companies.  If you have concerns about your tax liabilities, making estimated tax payments, or correcting your withholding, schedule an appointment with our office.