A client of mine received a CP2000 notice from the IRS alleging that the taxpayer owes nearly $7,000. The IRS states that several stock transactions were not included on the return. My client calls me, I calm him down, and we discover that every single stock transaction noted in the notice was on the return.
A second client of mine received a CP2000 notice alleging that the taxpayers owe about $6,800. The IRS again finds stock transactions that weren’t included on the return, and $3,000 of interest that wasn’t included. Again, all the stock transactions were included. The interest was included, too: The 1099-INT used the full name of the bank (as did the tax return) but the notice used an abbreviated name. Apparently, the IRS computer couldn’t tell the difference.
A third client of mine received a CP2000 notice with missing stock transactions. Here, the client didn’t include several stock transactions (the IRS was correct). After the taxpayer sent me the missing 1099-B and basis (purchase price information), we discovered he lost money on the stock sales. She received a refund.
You may be noticing a pattern: Many IRS notices are wrong. Indeed, of the CP2000 notices I’ve seen this year, at least 80% are wrong. Yet I have clients who just want to pay the IRS to get them off their backs. I cannot overemphasize that most IRS notices are not reviewed by a human before they’re sent to you. You will be the first person to read the notice. Do not assume a notice is correct just because the IRS says so.
You have the right to dispute the notice. Take a look at the underlying issue(s), research the issue(s), and respond with backup paperwork. Make sure you respond timely (call the IRS if you need additional time; they’ll almost always grant an additional 30 days to respond), and use certified mail, return receipt requested so that you have proof that the notice was received.
If you do receive a notice that is correct (that is, you owe the tax), you should pay the tax. Remember, you may need to amend your state tax return as you may owe additional state income tax, too.