Quick overview

A Notice of Unreported Income means the IRS has information — often a W-2, 1099, or broker statement — that differs from what you reported on your tax return. These notices are frequently delivered as a CP2000 (income mismatch) or other income-mismatch letters. They do not automatically mean you committed fraud; most are resolved by providing records, filing an amended return, or accepting a proposed change and paying any tax, interest, and possible penalty.

Sources to consult immediately: the IRS CP2000 guidance (official IRS page on income mismatch notices) and the Form 1040-X (amended return) instructions on IRS.gov (see Form 1040-X at https://www.irs.gov/forms-pubs/about-form-1040-x) for filing corrected returns.

Disclaimer: This article is educational. It summarizes common actions and professional experience, but it is not tax advice for your specific situation. Consult a qualified tax professional or attorney for personalized guidance.

Immediate steps to take (first 7–14 days)

  1. Read the notice carefully. Note the notice type, tax year, and response deadline. The IRS usually specifies a deadline (commonly 30 days) on the notice; missing it can increase interest and collection activity. (IRS notices list the response timeframe on the letter itself.)

  2. Confirm the tax year and income items the IRS lists. Compare each item to your copy of the filed return, W-2s, 1099s, brokerage statements (Form 1099-B, 1099-DIV, 1099-INT), and bank records for that year.

  3. Do not panic and do not ignore the notice. Ignoring it is the most common mistake; it typically leads to a proposed adjustment becoming final and additional penalties/interest accruing.

  4. Keep the original notice and make a dated copy. Create a file folder (paper or digital) labeled with the tax year and notice code.

How to determine whether you agree with the IRS

  • Agree if their records show correct, taxable income you inadvertently omitted. Accepting the notice is sometimes the simplest option when the amounts are small and you can pay or set up a payment plan.
  • Disagree if you can show the income was already reported, was incorrectly reported to the IRS by a payer, or is non-taxable (rare cases). For example, a payer may have issued a 1099 reporting a payment that was actually a loan repayment or previously taxed return of capital.

Evidence that supports disagreement includes:

  • Copies of W-2s, 1099s, corrected 1099s (1099-c), or corrected W-2s
  • Bank statements showing deposits were repayments or transfers rather than income
  • Contracts, invoices, or proof of business refunds
  • Broker statements that reconcile realized gain/loss numbers

If the payer made an error, ask them to correct the information return (file a corrected 1099 or W-2). A corrected information return plus a short explanation to the IRS often resolves the notice quickly.

When to file an amended return (Form 1040-X)

File an amended return when you determine you actually had taxable income that was omitted, or when correcting classification errors changes your tax. Use Form 1040-X and follow current IRS instructions. Filing an amended return can reduce penalties in some circumstances because it shows proactive compliance. See our guide to filing an amended return for missing income or credits for step-by-step help: Filing an Amended Return for Missing Income or Credits (Form 1040-X) (https://finhelp.io/glossary/filing-an-amended-return-for-missing-income-or-credits-form-1040-x/).

Timing notes:

  • File the amendment promptly after confirming the discrepancy. The IRS may still assess interest from the original due date.
  • An amended return can sometimes trigger a manual review; that is normal and preferable to leaving the discrepancy unaddressed.

How to prepare a written response

If you disagree with the IRS or you need to explain supporting documents, prepare a concise, factual response letter. Include:

  • Taxpayer name, SSN (or ITIN), and the notice number printed on the letter
  • Tax year in question
  • Short statement whether you agree or disagree with the proposed changes
  • Itemized list of documents you are enclosing and a clear explanation for each (e.g., “Form 1099-NEC from Acme Co. was incorrectly issued; attached corrected 1099 and email from payer.”)
  • A cover page listing attachments and contact information for the preparer
  • A signed declaration that the enclosed copies are true and complete to your knowledge

Mail the response to the address on the notice via a trackable method (certified mail, USPS tracking, or commercial carrier). Keep copies of everything you send.

If you need more time to gather documentation, call the number on the notice to request a reasonable extension; document the call (agent, date, call ID) and follow up in writing.

Working with payers and third parties

Often the fastest resolution is having the payer correct the information return. In my practice I’ve had contractors and small firms issue corrected 1099s that eliminated the mismatch within weeks. If the payer refuses or cannot produce a corrected form, provide the IRS with the payer’s communications (emails, invoices) showing your position.

If the notice concerns brokerage or mutual fund reporting, request an account-level statement from the institution showing transaction details; generic year-end summaries are often insufficient.

Penalties, interest, and relief options

If the IRS proposes additional tax, you will generally owe interest from the original due date until paid. Penalties may apply for underpayment or accuracy-related issues. Relief options include:

  • Reasonable cause: If you can demonstrate that an error was due to circumstances beyond your control (e.g., serious illness, natural disaster, inability to obtain correct documents), the IRS may abate penalties. Provide a written explanation and supporting evidence.
  • First-time penalty abatement and administrative waivers: In limited situations, the IRS offers administrative relief — check IRS guidance on penalty abatement (IRS, Penalty Relief) at https://www.irs.gov/payments/penalty-abatement.

Document all steps you take. A calm, timely, documented approach increases your chance of penalty relief.

If the IRS insists or the case escalates

  • Request a conference with the IRS examiner or appeals officer if you disagree after the initial reply.
  • If a notice becomes final and a bill is issued, consider a payment plan, Offer in Compromise (rare and fact-specific), or a collection appeals request.
  • If you believe the IRS made a procedural or factual error and internal appeals fail, consult a tax attorney for petitioning the U.S. Tax Court.

Practical checklist to include with your response

  • [ ] Copy of the IRS notice (front and back)
  • [ ] Copy of the original filed return
  • [ ] Copies of payor-issued forms (W-2, 1099 variants) and any corrected forms
  • [ ] Bank or broker statements that reconcile the disputed amount
  • [ ] Contract or invoice showing the nature of the payment
  • [ ] A concise cover letter explaining your position
  • [ ] Return receipt or tracking number for mailed package

Helpful internal resources

Final practical tips from experience

  • Act immediately — most fixes are time-sensitive.
  • Keep communications factual and document-oriented; emotion and assumptions do not help.
  • Use certified or trackable mail for responses; the IRS often logs receipt dates that affect timeliness.
  • When in doubt, hire a CPA or enrolled agent. In my practice, early professional involvement routinely reduces penalties and shortens resolution time.

Authoritative sources: IRS guidance on income mismatch notices (CP2000) and Form 1040-X instructions (IRS.gov), and Consumer Financial Protection Bureau resources on dealing with tax notices.

Professional disclaimer: This content is educational and based on professional experience and current public guidance; it does not replace individualized tax advice. For specific legal or tax advice, consult a licensed tax professional.