What Are CP2000 and CP2057 IRS Notices?
Receiving an IRS notice is one of the things taxpayers dread most about. Yet, each year, CP2000 and CP2057 notices are issued by the IRS to 4 to 5 million taxpayers under the Automated Underreporter (AUR) Program to propose changes to individual income tax returns filed when income and deductions declared do not match those reported by third parties (e.g. employers, banks, brokerages, etc.) to the IRS.
Significance of CP2000 and CP2057 IRS Notices
In FY 2013 alone, the IRS closed 4.88 million of these notices and generated approximately $7.84 billion in additional assessments, which represent a whopping 31% of the $25.1 billion in total assessments for that year!1 Although many of these notices could be effectively managed and resolved without complication, overwhelmed taxpayers sometimes let their anxiety take hold and put off responding to these notices or become over-zealous in their responses. It does not help that taxpayers find it difficult to understand these notices and what actions to take in response.2 Engaging a licensed tax professional to respond to your notice on your behalf is, of course, an option. But understanding how you may avoid these IRS notice in the first place is even better!
Top Reasons Taxpayers Receive an IRS Notice
A new survey just released by the National Association of Enrolled Agents (NAEA) sheds light on the most common reasons taxpayers receive a CP2000 notice from the IRS. Nearly 2,300 NAEA members, all federally licensed enrolled agents, two thirds of whom have more than 20 years of professional experience preparing and filing taxes, participated in this survey. In this article, we will look at the top three reasons identified by the survey respondents:
1. Failing to Report Payment Received for Work Performed as Independent Contractor
Well over half of the respondents (60.2%) indicated that Americans working either full or part-time as independent contractors are among those most likely to miscalculate taxes owed, leading to an IRS notice. Participants in the growing “gig economy” should familiarize themselves with not only the various tax reporting requirements but also the prescribed rules related to record-keeping. Since on-going maintenance of proper records is fundamental to accurate tax filing at year-end and successful defense of IRS queries/audits, independent contractors should seek professional guidance early on, where necessary, in order to minimize professional fees and avoid potential penalty and interest charges.
2. Improper Management of Form 1099-B and/or Schedule K-1
A similar percentage (59.7%) of the respondents pointed to mismanagement or improper handling of IRS Form 1099-B and Schedule K-1 as among the three most common reasons taxpayers misreport income. Form 1099-B summarizes the proceeds of stock transactions or barter income. Schedule K-1 is the report of income from a partnership, corporation, or trust. These are generally among the last tax documents received by taxpayers. Those whose Form 1099 and/or Schedule K-1 contain technical information they do not fully comprehend should consider taking the advice from the typical disclaimer on these forms “to consult your tax advisor with any tax questions you may have regarding the preparation and filing of your federal income tax return(s).”
3. Filing Early Without Having All Necessary Financial Documents
The third most common reason (cited by 38.5% of the respondents), ironically, is that taxpayers are too eager to file early, often in anticipation of a refund. They rush to file early before they have all the necessary tax documents. Employers, banks and other institutions are required by law to send the necessary statements to taxpayers by January 31 but sometimes delays occur. If taxpayers have not received all of the statements they need in advance of the April deadline, they should file an extension and consider making an extension payment to avoid interest and late payment penalty from accruing on the balance due, if any.
Biggest Mistakes Taxpayers Make in Responding to an IRS Notice
When asked to identify the three most common mistakes taxpayers make upon receiving an IRS notice, more than 65% of those surveyed responded “all of the above” when presented with the following options:
- Waiting too long to respond
- Not responding at all
- Simply agreeing to the updated total without consulting a tax professional
- All of the above
While it is understandable why waiting too long to respond or not responding at all would be a mistake, one may ask why it would be a mistake to agree to the IRS’ proposed changes without first consulting a tax professional. The answer lies in the IRS’ own finding that “the complexity of the CP 2000 notice contributed to taxpayers agreeing to incorrect assessments of additional tax liability.”2 Taxpayers should recognize that the issuance of a notice with proposed changes does not necessarily imply that the IRS is correct or that the return filed is erroneous. Verifying the proposed changes against one’s return and records would a key step to determining how one should response to the notice, depending on whether the difference is in the reconciliation of income or deductions, tax treatment, omission, or IRS error.
Do I Really Need a Tax Professional for Tax Notices?
Plenty of taxpayers competently resolve their own notices with the IRS. We recommend that you limit the scope of your response to the issues identified by the notice, keep it factual and succinct, and be cordial. In the event you find yourself the subject of unwelcome IRS scrutiny and require professional support, however, we are uniquely qualified to assist and represent you with over 20 years of international experience with global executives and high profile clients.
1 Treasury Inspector General for Tax Administration Audit Report 2015-30-037
2 FY 2007, customer satisfaction surveys for the Wage and Investment Division AUR Program
3 Online member survey was conducted by the National Association of Enrolled Agents between June 21, 2017 and July 7, 2017. The survey yielded responses from 2,285 NAEA members, all enrolled agents, two thirds of whom have more than 20 years of professional experience preparing and filing taxes.
American Expatriate Tax is a part of Contexo Global Mobility Solutions & Tax Consulting Ltd. registered in Hong Kong. Together, we help companies and individuals navigate through the complexities of global mobility and related tax issues. Here is where you will find a blend of expertise from Big 4 accounting firms and Fortune Global 500 companies but the attention of a boutique consulting practice. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.