Background and why it matters

The IRS began large‑scale electronic data matching in the 1980s and has expanded the practice as third‑party reporting and digital recordkeeping grew. Today the agency uses automated programs — notably its Automated Underreporter (AUR) and information‑returns processing systems — to compare what payers report to the IRS against what taxpayers report on Form 1040. When numbers don’t line up, the IRS often issues a notice proposing changes (for example, a CP2000). (See IRS guidance on information returns and notices: https://www.irs.gov)

How data matching works in practical terms

  • Third parties (employers, banks, brokers, state agencies) file information returns: W‑2, 1099‑NEC, 1099‑INT, 1099‑DIV, 1099‑B, etc. The IRS aggregates those filings and matches them to taxpayer returns. – The AUR system runs automated comparisons and flags mismatches in wages, nonemployee compensation, interest, dividends, and other reportable items. – If the IRS believes more income was reported to it than on your return, it may send a CP2000 (or similar) proposing additional tax; you then have the chance to agree, contest, or provide documentation. (IRS CP2000 basics: https://www.irs.gov/individuals/understanding-your-CP2000-notice)

Common triggers and examples

  • Missing or mismatched W‑2 or 1099 amounts (e.g., $60,000 reported by employer vs. $50,000 on your Form 1040). – Form 1099‑B transaction details that don’t match cost basis you reported. – Business 1099s or Schedule C income that conflicts with bank deposits (not a perfect match but a common signal).

In my practice, a common scenario is a taxpayer who received a corrected 1099 after filing. If the payer doesn’t reissue before the IRS processes returns, the taxpayer can get a notice months later — easily resolved by amending the return or submitting the payer’s corrected 1099.

What to do if you get a mismatch notice

  1. Read the notice carefully and note deadlines. 2. Compare the IRS’s figures with your records (W‑2s, 1099s, brokerage statements, bank records). 3. If the IRS is correct, pay or arrange payment, or amend your return (Form 1040‑X) if needed. 4. If you disagree, respond in writing with supporting documentation and use the contact instructions on the notice. 5. If you need extra help, consider the Taxpayer Advocate Service or professional representation. (Taxpayer Advocate: https://www.taxpayeradvocate.irs.gov)

Rights, appeals, and timelines

Taxpayers have rights to notice, a response period, and appeal. The IRS generally has three years to assess additional tax from a filed return and six years for substantial omissions (see IRS statute‑of‑limitations guidance). You may request an appeal if you disagree with the proposed adjustments. Keep in mind penalties (accuracy‑related, late payment) and interest can apply if an adjustment stands.

Recordkeeping and prevention strategies

  • Reconcile every W‑2/1099 with your tax return before filing. – Keep source documents (pay stubs, 1099s, brokerage statements) for at least seven years when you have substantial asset transactions or potential issues. – For businesses and payers, use the IRS TIN Matching program and issue corrected returns promptly when errors appear. – If you rely on software or a preparer, confirm all information returns were entered correctly.

For more on preventing notices and building an audit‑ready file, see our guides: Practical Steps to Prevent an IRS Notice From Becoming an Audit and Document Retention Best Practices to Survive an Audit. You can also use IRS transcripts to support a response — learn how in Using IRS Transcripts to Support an Audit Response.

Common misconceptions

  • “The IRS only matches a few forms.” In reality, the agency matches dozens of information‑return types across federal and state filings. – “A mismatch always means fraud or an audit.” Most mismatches stem from timing, corrected forms, or simple entry errors and can be cleared with documentation or an amended return.

Professional tips

  • Respond promptly to notices; early engagement often reduces penalties. – When possible, show payer statements or corrected 1099s rather than relying only on bank deposits. – If you face a proposed adjustment you can’t resolve, consider Limited Power of Attorney (Form 2848) and professional representation.

Authoritative sources and further reading

Disclaimer

This article is educational and does not replace personalized tax advice. For decisions about your specific tax situation, consult a qualified tax professional.