Why it matters
The IRS relies heavily on third‑party reporting to verify income. Because employers, banks, brokerages and many payers must file information returns with the IRS, those independent records let the agency check whether taxpayers reported all taxable income. Data matching helps the IRS find underreported or unreported income without examining every return manually — and it’s one of the most common ways taxpayers first learn of a possible discrepancy.
Core programs and tools
- Automated Underreporter (AUR): The AUR program is the long‑standing system the IRS uses to compare amounts on information returns (like 1099s and W‑2s) with amounts on filed individual returns. When the system finds a mismatch, it generates a report that can lead to a CP2000 notice proposing changes to your tax liability.
- Information returns processing: Payers file information returns (W‑2, 1099 series, 1042‑S, 1098, 1095, etc.) with the IRS. The IRS links these records to your Social Security number or Taxpayer Identification Number (TIN) and the amounts reported.
- Data analytics and compliance tools: Besides AUR, the IRS uses data analytics to prioritize cases, identify patterns (for example, mismatches that indicate identity theft or systemic payer errors), and route issues for correspondence or audit.
What information the IRS matches
Common information returns matched to individual returns include:
- Form W‑2 (wages and withholding)
- 1099‑NEC and 1099‑MISC (independent contractor and miscellaneous payments)
- 1099‑INT (interest) and 1099‑DIV (dividends)
- 1099‑B (brokerage proceeds and capital gains)
- 1099‑R (retirement distributions)
- 1099‑G (unemployment compensation, some state tax refunds)
- Form 1042‑S (payments to foreign persons)
The match looks at TIN/name combination and dollar amounts. Small rounding differences or duplicate forms can produce a mismatch, so not every flag means intentional underreporting.
Typical outcomes after a mismatch
- CP2000 notice (proposed changes): This is the most common result. CP2000 is not a bill; it’s a proposed adjustment showing additional income the IRS believes you should have reported and the tax, penalties and interest that would result. The notice includes instructions for agreeing, disputing, or providing documentation.
- Correspondence audit or information request: If documentation is needed, the IRS may ask you to mail substantiating records. Many issues are resolved by sending pay stubs, broker statements, or corrected forms from payers.
- Full audit or criminal referral (less common): Repeated mismatches, very large unreported income, or evidence of deliberate fraud can escalate to an audit or criminal investigation. For most taxpayers, mismatches lead to correspondence and fixes rather than prosecution.
Common causes of mismatches (and how to avoid them)
1) Missing forms: Perhaps you received a 1099 or W‑2 you overlooked. Tip: Keep a central folder or digital folder for every payor’s tax forms and reconcile them when you prepare your return.
2) Multiple forms for the same activity: Freelancers often receive multiple 1099s for work done for different clients. Make a line‑by‑line reconciliation: total the 1099s and compare to the business income you reported.
3) Incorrect or duplicate reporting by payers: Payers sometimes send duplicate or incorrect information returns to the IRS. If the IRS sent a CP2000 but you never received a matching 1099, contact the payer to request a corrected form and keep written records of the request.
4) Unreported cash or gig income: Income from side work or cash payments is taxable, even if the payer doesn’t issue a 1099. Keep records (invoices, bank deposits) and report that income. The IRS may infer income when business patterns don’t match reported figures.
5) Broker/dealer reporting issues: 1099‑B and similar broker reports can be complex — basis, wash sales, and short‑term vs. long‑term treatment matter. Use broker cost‑basis statements and year‑end 1099s to reconcile capital gains correctly.
6) Identity theft and TIN errors: If someone fraudulently uses your SSN, their wages or payments could be reported against your record. If you suspect identity theft, contact the IRS Identity Protection Specialized Unit and follow IRS instructions to correct your record.
What to do if you get a CP2000 or other mismatch notice
1) Read the notice carefully: A CP2000 shows the information return(s) the IRS used and the proposed changes. It gives a deadline for response.
2) Don’t ignore it: If you agree with the proposed change, sign and return the response form and pay any tax due or set up a payment plan. If you disagree or have documentation, follow the instructions to dispute the change.
3) Gather supporting records: Pay stubs, bank statements, broker statements, Form W‑2/1099 copies, and correspondence with payers can prove your position.
4) Amend if necessary: If the IRS is correct, file Form 1040‑X, Amended U.S. Individual Income Tax Return, to correct your previously filed return. Filing an amendment proactively can reduce penalties and interest compared to waiting.
5) Seek professional help if complex: If the proposed adjustment is large, relates to investments, business income, or you believe the IRS has misapplied cost basis or withholding, consult a CPA or tax attorney.
Practical examples
- Freelancer example: You received three 1099‑NEC forms totaling $18,000 but reported $12,000 business income. The AUR match flags the $6,000 difference and the IRS sends a CP2000 proposing additional tax on the $6,000. You can provide receipts, invoices, or corrected 1099s to resolve the issue.
- Investment example: Your broker reported $5,000 in gross proceeds on Form 1099‑B but you reported a $1,000 gain because you accounted for $4,000 of cost basis. If the broker failed to report basis or used different basis values, the IRS may propose a larger gain. You must submit broker cost‑basis statements to prove your calculation.
Record retention recommendations
Keep tax records at least three years after the date you filed the return (or two years from the date you paid the tax), which is the common IRS statute of limitations. However, if you omitted more than 25% of your gross income, the IRS can go back six years; keep records longer (six to seven years) in those cases. For suspected fraud or identity theft, retain records until the issue is resolved.
Reducing the chance of a mismatch
- Reconcile all 1099/W‑2s and broker statements to amounts you report before filing.
- Use reputable tax software that imports and matches payers’ forms electronically.
- Provide correct TIN/name information to payers — a mismatched TIN or name triggers automated comparisons and delays.
- Ask payers for corrected forms (e.g., Form W‑2c, corrected 1099) when they report errors.
Rights and appeals
A CP2000 is only a proposed change — you have the right to challenge it. If you still disagree after providing documents, you can pursue IRS appeals or administrative review. For more about appeals and taxpayer rights, see FinHelp’s guide on “Navigating a Tax Audit: From Initial Letter to Resolution” and “Your Rights During a Tax Audit.” (See internal links below.)
Useful links
- IRS: About Form 1040‑X, Amended U.S. Individual Income Tax Return — https://www.irs.gov/forms‑pubs/about‑form‑1040‑x
- IRS: Understanding a CP2000 notice — https://www.irs.gov/individuals/understanding‑a‑cp2000‑notice
FinHelp related articles (internal links)
- How to prepare for an IRS audit — https://finhelp.io/glossary/how-to-prepare-for-an-irs-audit/
- Audit triggers — https://finhelp.io/glossary/audit-triggers/
- Navigating a tax audit: From initial letter to resolution — https://finhelp.io/glossary/navigating-a-tax-audit-from-initial-letter-to-resolution/
Bottom line
The IRS’s data‑matching programs are efficient, automated and a primary way the agency identifies underreported income. Most mismatches reflect honest errors, payer mistakes, or incomplete records and can be resolved by providing documentation or filing an amended return. Staying organized, reconciling information returns, and responding promptly to IRS notices are the best ways to avoid escalation and extra taxes, penalties and interest.