Why this matters

Accurate income reporting matters because the IRS doesn’t rely solely on what you type on Form 1040. Employers, payers, brokers, and payment platforms send copies of information returns directly to the IRS. The agency’s computerized systems then compare those reports to what taxpayers file. If the numbers don’t line up, you’ll usually receive a notice and a proposed adjustment. Knowing how the process works helps you prevent, spot, and fix problems before they become audits or penalties.

How the IRS obtains the income data it uses to verify returns

  • Employer and payor information returns: Employers file Form W-2s for employees and a variety of 1099 forms for nonemployee payments (for example, 1099-NEC, 1099-MISC, 1099-B, 1099-INT, and 1099-DIV). The IRS receives copies directly from the payors (see IRS guidance on Form W-2 and the 1099 series) (IRS, About Form W-2 https://www.irs.gov/forms-pubs/about-form-w-2; IRS, About Form 1099 https://www.irs.gov/forms-pubs/about-form-1099).
  • Financial institutions and brokers: Banks, brokerages, and payment processors submit information returns reporting interest, dividends, sale proceeds, and certain payment-card and third-party network transactions.
  • Third-party data sources and government databases: The IRS also pulls data from state tax agencies, Social Security Administration wage records, and other federal benefit/payment sources.

In my practice I treat the arrival of third‑party forms as a trigger to reconcile records: don’t assume a platform or client always files correctly — verify.

What automated matching means (and how it works)

The IRS runs programmed comparisons that pair the taxpayer’s identifying details (name, SSN/ITIN, and address) and the income amounts reported on returns with the amounts reported on information returns. When automated matching finds a difference beyond certain tolerances, the case moves into a notice workflow rather than immediate audit. Common examples:

  • Wages shown on a W-2 don’t match wages on the Form 1040.
  • A 1099-NEC or 1099-MISC shows nonemployee compensation that isn’t on Schedule C.
  • Broker-reported sale proceeds on Form 1099-B do not appear on Schedule D or Form 8949.

The IRS uses this matching to generate proposed adjustments and notices (for example, the CP2000 series of proposed changes), which give taxpayers a chance to agree, explain, or dispute the difference.

Typical notices and what they mean

  • CP2000 (Notice of Proposed Changes): Suggests income, credits, or payments on file with the IRS differ from what you reported. It’s not a bill yet — it’s a proposal and explains how to respond.
  • Other letters and notices: The IRS has several letter and notice types that request identity verification, additional documentation, or payment. Responding promptly reduces the chance of enforced collection or escalation.

If you receive a notice, read it carefully, compare the IRS numbers to your records, and gather supporting documents before responding. If you disagree, you can provide documentation or file an amended return (Form 1040-X) — filing an amendment quickly can reduce penalties and interest.

Common causes of mismatches

  • Missing or duplicated forms: You may have received a 1099 but failed to include the income, or you included an amount that was already reported elsewhere.
  • Name/SSN errors: Typos or using an incorrect SSN/ITIN cause the IRS to treat a match as a mismatch.
  • Timing differences: A payment issued late in the year may generate a 1099 for a different tax year than you expected.
  • Misclassification: Payers sometimes issue a 1099-NEC when a worker should be an employee (W-2), or vice versa.
  • Platform reporting variance: Marketplaces and third‑party networks report using specific rules; their reporting can differ from how you categorize income for tax purposes.

Practical steps to avoid and fix verification problems

  1. Reconcile every information return you receive against what you file. Keep a single folder (digital or paper) for W-2s, 1099s, 1098s, and broker statements.
  2. Check name and SSN/ITIN on every form the payer sends you. Request a corrected form (W-2c, corrected 1099) if there’s an error. See FinHelp’s guide to correcting W-2/1099 errors for employers and employees.
  3. If you discover an omission after filing, file Form 1040-X to amend. Amending promptly may reduce penalties. (IRS.gov has instructions for Form 1040-X.)
  4. When you get a CP2000 or similar notice, respond by the deadline and include documentation (pay stubs, year-end statements, invoices, canceled checks, bank statements, contracts) that support your position.
  5. For identity theft or suspicious activity, request an Identity Protection PIN (IP PIN) from the IRS and follow the IRS process to protect your account.

Practical examples from my work

  • Example 1: A freelance client reported all payments but one client also issued a 1099-NEC for payments paid through a payment processor that later issued a 1099-K. The overlapping reporting created duplicate income on the IRS side and triggered a notice. We obtained corrected forms from the payer and documented payments to reconcile the records.
  • Example 2: An employer transposed two digits on a W-2. The mismatch caused a proposed change. The employer issued a W-2c and the IRS adjusted the record after the taxpayer submitted the corrected form with the response to the notice.

These issues are common and usually resolvable with clear documentation and timely responses.

Records to keep (how long and what)

  • 3 years: Records supporting most items on a return (good rule of thumb for typical individual returns).
  • 6 years: If you omitted more than 25% of your gross income, the IRS can go back six years.
  • Keep paystubs, year-end summaries, invoices, bank statements, canceled checks, and any corrected forms (W-2c, corrected 1099s).

Maintaining a multi-year folder helps when matching or responding to notices.

What the IRS can (and can’t) do with third-party data

The IRS can compare and propose changes based on third‑party data it receives, but it doesn’t instantly assess fraud or start an audit every time there’s a mismatch. Many mismatches are simply data-entry or timing issues. However, repeated or large unexplained differences can trigger more extensive examinations.

When to get professional help

  • You received a CP2000 or audit notice and the math or underlying data is complex.
  • You suspect identity theft or that another taxpayer used your information.
  • The mismatch involves business income, multiple 1099s, payors in different states, or large capital gains.

In my practice I frequently help clients prepare a written response, assemble corroborating documentation, and, when needed, submit amended returns.

Useful sources and internal reading

(IRS pages updated regularly; always confirm current procedures and thresholds on IRS.gov.)

Quick checklist if you get a notice

  • Don’t ignore it — note the deadline.
  • Compare IRS totals to your records line-by-line.
  • If the IRS is wrong, gather proof and respond in writing; request correction of the payer’s form if needed.
  • If you’re missing income, pay or agree and, if appropriate, consider an installment agreement.
  • Consider professional help for complex disputes.

Disclaimer

This article is educational and reflects common procedures and my professional experience as a financial planner and tax advisor. It is not a substitute for personalized tax or legal advice. For decisions that depend on your specific facts, consult a qualified tax professional or the IRS directly.

Final note

The IRS’s income‑verification system is powerful but procedural: most mismatches are routine and resolvable. Staying organized, confirming third‑party forms, and responding promptly to IRS notices will limit stress, penalties, and follow‑up examinations.