Understanding IRS “Warning Letters” to Taxpayers

The IRS has estimated that U.S. taxpayers underpay their taxes by around $300 billion each year. Each taxpayer is responsible for calculating their own tax bill, but the IRS also uses other sources of information. It compares the information provided on taxpayer returns to that other information. If it finds a discrepancy, it sends a notice to the taxpayer. For years, the IRS used a form known as the CP2000 Notice, or the “Notice of Underreported Income.” The IRS recently began to use another form, the CP2057. Taxpayers should be aware of both notices, and our California tax advisors urge you to be aware of what you should do if you receive either one.

Warning Letters

Federal law gives the IRS extensive authority to collect unpaid taxes, but the process involves a lengthy series of notices. CP2000 and CP2057 are preliminary notices. They are not “bills,” in the sense that receiving one of these notices does not immediately trigger an obligation for the taxpayer to send money to the IRS. Instead, they are ways for the IRS to notify a taxpayer about discrepancies in their file, and to give them an opportunity to correct the information.

In order for the IRS to pursue a collection action against a taxpayer, they must send a formal notice and demand for payment, known as a CP501 Notice. This notice identifies a specific amount owed and gives a deadline for payment. If the taxpayer fails to pay by the deadline, or otherwise fails to respond to the notice, the IRS can file a tax lien. If the IRS intends to levy the taxpayer’s property, it must send a CP504 Notice.

Tax Underreporting

The IRS receives information about taxpayers from employers, banks, other financial institutions, and other sources. For example, employers must send a Form W-2 to each of their employees by January 31 each year, and they must also send a form to the IRS that contains the same information. The IRS Automated Underreporter System (AUR) identifies discrepancies between taxpayers’ returns and third-party information. Tax examiners review cases identified by the AUR system. Some of these lead to the issuance of warning letters.

CP2000

The purpose of the CP2000 is to notify the taxpayer about the discrepancy in their file, and to give them an opportunity to make corrections, or to dispute the accuracy of the IRS’ information. The document includes a response form, which a taxpayer can use to tell the IRS whether they agree or disagree with the notice. It also includes a payment voucher indicating how much additional tax the IRS believes the taxpayer owes. Failing to respond to a CP2000 can result in a formal finding of a deficiency, followed by the collection procedures described above.

CP2057

The main difference between the CP2057 and the CP2000 is that the CP2057 does not require a response by the taxpayer to the IRS. It provides much of the same information as the CP2000, showing the discrepancies between the taxpayer’s return and third-party information. It does not, however, identify a specific amount owed to the IRS. Instead, it directs the taxpayer to take one of two actions:  (1) file an amended return, or (2) contact the third-party information providers to make corrections.

If you have questions or need assistance with a tax problem in California, the tax advisors at the Enterprise Consultants Group are available to help. Contact us today online or at (800) 575-9284 to schedule a consultation to see how we can help you.

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