Handling a Notice for Unreported Third-Party Payments

Why this matters

An IRS notice about unreported third‑party payments is usually the IRS saying: “We received information reports showing income you didn’t report.” If you ignore it, the IRS can assess additional tax, interest, and penalties. Acting promptly — verifying the figures, collecting proof, and responding correctly — is the fastest way to resolve the issue.

Step‑by‑step response checklist

1. Read the notice carefully and note the deadline

• Notices typically explain the type of information the IRS received (for example, a Form 1099‑NEC or 1099‑K) and list the amounts the IRS believes are unreported. Many notice types (for example CP2000) include a response period (commonly 30 days). See IRS guidance on responding to CP2000 notices for details (IRS: Responding to a CP2000 notice).

1. Verify the IRS numbers against your records

• Compare each income item on the notice with your bank records, client invoices, payroll, and any 1099/1098 forms you received. Small mismatches (rounding, duplicate reporting) are common.

1. Determine the correct tax treatment

• Identify whether the income is taxable, excluded, or already reported elsewhere (for example, included on a Schedule C or on Form W‑2). Remember: not receiving a 1099 does not exempt you from reporting the income.

1. Gather documentation

• Collect support: pay stubs, bank deposits, invoices, contracts, proof of corrected 1099s from payers, or evidence of refund/return of funds. If a payer issued an amended or corrected 1099, keep that document.

1. Decide whether to accept, amend, or dispute

• Accept and pay: If the IRS figures are correct, follow the notice instructions to pay or arrange a payment plan.
• Amend your return: If you omitted taxable income or need to correct filing positions, file Form 1040‑X. For guidance on when to file a 1040‑X after receiving corrected information, see our guide on handling amended 1099s and filing a 1040‑X (amending a return (Form 1040‑X)).
• Dispute: If the notice is wrong, respond in writing with copies (not originals) of supporting documents and a clear explanation. The notice will describe how to respond and where to send your reply.

1. Use proper forms and channels

• Follow the reply instructions on the notice. For amended returns, use Form 1040‑X (see the IRS Form 1040‑X page for official instructions). If the notice includes a proposed increase in tax, you can accept the change, pay, or file a formal disagreement which may lead to an appeal.

1. Consider professional representation

• If the amount is large, there are complicating factors, or you prefer not to handle IRS correspondence alone, hire a CPA, enrolled agent, or tax attorney to represent you. An authorized representative can communicate with the IRS on your behalf.

Common timelines and statute of limitations (short primer)

• Respond to the notice by the deadline shown — many notices allow about 30 days to reply or 60 days to request more time.
• The IRS generally has three years to assess additional tax after you file a return. That period extends to six years if you omit more than 25% of gross income. Fraud or a missing return can remove assessment limits.

Real‑world example

A freelance graphic designer received a notice showing $10,000 reported by a client on a 1099‑NEC. The client had mistakenly filed the 1099 under the freelancer’s prior tax ID. The freelancer gathered bank deposits, the contract, and a corrected 1099 from the client, then filed an amended return and a written response to the IRS. The notice was withdrawn and no penalties applied.

Options if you can’t pay the balance

• Pay in full by the due date to stop further interest and penalties.
• Request an installment agreement online or by phone if you qualify.
• Explore penalty relief — first‑time penalty abatement is available in some cases; reasonable cause may also be grounds to remove penalties. For large tax liabilities that cannot be paid, consider taxable resolution options with a tax professional.

Disputing incorrect information

• Send a written explanation with supporting documents per the notice instructions.
• If the payer reported the wrong Social Security number, business EIN, or amount, request a corrected 1099 from the payer and include it in your reply.
• If you don’t reach agreement, you can pursue IRS appeals; retain copies of all correspondence.

Frequently asked questions

Q — I didn’t receive a 1099. Do I still need to respond?
A — Yes. The IRS derives its figures from payers’ information returns. Not receiving a 1099 does not remove your obligation to report income or to respond to an IRS notice.

Q — Will I automatically be charged penalties?
A — Not automatically. Penalties and interest depend on the amount, whether the underreporting was negligent, and whether you correct the return promptly. Penalty relief is possible in qualifying situations.

Q — How long do I have to file an amended return?
A — To claim a refund, generally three years from the original filing date (or two years from the date tax was paid), whichever is later. If you are amending to report additional tax owed after a notice, act promptly; file Form 1040‑X and follow the notice response instructions. See IRS guidance on Form 1040‑X (https://www.irs.gov/forms-pubs/about-form-1040-x).

Related FinHelp resources

• Our guide to handling an amended 1099 and when to file a 1040‑X covers timing and documentation for corrections.
• If the notice concerns marketplace or payment‑processor reporting, see our article on dealing with a notice about unreported 1099‑K income for steps specific to 1099‑K mismatches.

Author’s practical tips (from 15+ years advising clients)

• Respond within the notice deadline even if you need more time — request an extension in writing.
• Keep copies of everything you send and note dates and names of any IRS contacts.
• If the payer agrees to correct a 1099, get that correction in writing and include it with your IRS response.

Authoritative sources

• IRS: Responding to a CP2000 notice and general notice procedures (see IRS website).
• IRS: About Form 1040‑X (Form 1040‑X instructions).

Professional disclaimer

This article is educational and does not substitute for personalized tax advice. For guidance specific to your situation — especially if your potential liability is large or complex — consult a qualified tax professional or authorized representative.