Quick overview

If you receive an underreported income notice (usually a CP2000), the IRS believes income reported to them by a third party differs from what you reported on your tax return. Acting promptly, documenting your position, and using the IRS response options will often resolve the issue without an attorney.

Read the notice first — what to check

  1. Confirm the tax year and notice date.
  2. Compare the IRS’s reported amounts to your filed return and to your third‑party forms (1099‑MISC/NEC, 1099‑K, W‑2, K‑1).
  3. Note the IRS proposed changes, the additional tax, interest, and any penalties, and the deadline to respond (CP2000 notices normally set a response period; see the IRS CP2000 Q&A linked below).

Step-by-step actions you can take (no attorney required)

  1. Gather documentation. Collect the specific records that support your position: 1099s, W‑2s, bank deposits, invoices, contracts, payment ledgers, and date‑stamped delivery or completion records.
  2. Decide whether you agree or disagree with the notice:
  • If you agree: sign the response or pay the proposed amount, or request a payment plan via the IRS Online Payment Agreement. Paying promptly limits interest and penalties.
  • If you disagree: prepare a clear, itemized rebuttal and attach supporting documents. Explain why the IRS amounts are incorrect (e.g., income belongs to a different year, duplicate 1099, or payer error).
  1. Correct the return if needed. If you omitted income or need to correct basis or deductions, file Form 1040‑X for the affected year and include documentation. Don’t assume the CP2000 automatically changes your return.
  2. Mail the response as instructed. Follow the exact mailing or electronic instructions in the notice. Include a copy of the CP2000, your return, and supporting documents. Keep certified‑mail receipts and copies.
  3. Track follow‑up and keep records. Note when the IRS received your response and save all correspondence.

When to ask for penalty relief or an installment plan

  • If the tax owed is correct but you can’t pay in full, request an installment agreement or short‑term extension (see IRS payment options).
  • If penalties were assessed because of circumstances beyond your control, request penalty relief on reasonable‑cause grounds or first‑time penalty abatement. Provide documentation supporting your claim.

Common scenarios and brief examples

  • Missed 1099 freelance income: Compare bank deposits, invoices, and calendar entries to show when the work was performed. If the income belongs to a different year, document that timeline.
  • Duplicate reporting: Provide proof of which payer issued payment and whether two forms report the same payment.
    (In my practice helping clients with CP2000s, careful documentation and a concise cover letter resolved many notices without escalation.)

Practical tips to improve your response and reduce risk

  • Respond within the notice deadline (usually 30 days on CP2000 notices). (IRS: CP2000 Q&A)
  • Provide a one‑page cover letter summarizing your position, then attach supporting documents in a logical order.
  • Number exhibits and reference them in your letter.
  • If you file Form 1040‑X, allow the IRS time to process it — include a copy of the CP2000 with your amended return if instructed.
  • Keep a simple folder for each tax year with 1099s, bank records, and invoice logs to speed responses.

When you should consider professional help

Consider hiring a CPA, EA, or tax attorney when:

  • The amounts are large, the notice suggests fraud, or identity theft is involved.
  • Multiple years are affected or complex items (partnership K‑1s, S‑Corp allocations, large capital gains) are disputed.
  • You prefer representation in appeals or Collection Due Process hearings.

Errors to avoid

  • Ignoring the notice. Silence usually increases interest and penalties and can trigger further collection.
  • Sending incomplete documentation or vague explanations.
  • Assuming the IRS is always correct — but also don’t reflexively refuse to pay legitimate tax owed.

Short FAQ

  • What should I include in my response? A clear cover letter, copies of relevant third‑party forms, ledger entries/bank records/invoices, and any correspondence with the payer.
  • How long does the IRS take to respond? Processing times vary; amended returns and disputes can take weeks to months. Keep copies and follow up if you don’t hear back.
  • Can I appeal? Yes—if you disagree with an IRS determination after their review, you can pursue administrative appeal rights or Tax Court in some cases.

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Professional disclaimer

This article is educational and does not constitute legal or tax advice. For personalized guidance, contact a qualified tax professional or attorney.

Authoritative sources