What happens when your tax return information doesn’t match the IRS, and how to avoid it
The IRS Automated UnderReporter (AUR) process starts with computer matching. The IRS compares returns with the information provided by third parties. AUR cases are created after potential discrepancies are identified.
The matching begins well after the original return date. The IRS does not send out notices until the year after the tax returns are due. As a result of the delay, substantial amounts of penalties and interest may occur by the time the IRS notice is received by the taxpayer.
The IRS issues a CP2000 Notice or a CP2501 Notice when your tax return information does not match the IRS records. The IRS typically sends out over 6 million CP2000 Notices annually.
The CP2501 is more of a soft Notice. It essentially says, please look at your return and reply; there may be a problem. If you don’t respond, you will receive a CP2000.
The CP2000 Notice says that you have 30 days to respond. In reality, you have 60 days to respond. If you call the phone number on the Notice, it will tell you that you have 60 days.
Your options to the CP2000 are to agree or disagree with the IRS records or not to respond.
If the IRS does not receive a response, Letter 3219A Notice of Deficiency is issued about 90 days after the original notice.
By not reporting all of your income, the taxpayer will be receiving attention from the IRS The IRS may choose to audit the taxpayer even after the CP2000 issue is resolved.
Some people overlook part of their income or mistakenly think that since they lost money in the stock market, they don’t need to report it. Or they had a business which had a loss, so they don’t need to report the income and expenses.
Many business owners make the mistake of basing their income on the total of the 1099’s they receive for the year. If a 1099 gets lost in the mail or the taxpayer loses it, the consequences can be substantial.
The accuracy penalty is normally 20% of the understatement of tax, and in certain cases may be 40%.
How to avoid it:
If you are not certain of all of your income, you can file an extension and access your IRS wage and income transcript before filing your return.
The transcript information is generally available from the IRS by the end of May, but the date varies every year.
By waiting until you have received the wage and income transcripts, you can be certain that your information on your tax return matches the IRS information. If you don’t know how to access your wage and income transcripts from the IRS, you can contact your tax professional.
This allows you to avoid unnecessary scrutiny by the IRS, and you will avoid substantial penalties and interest.
David Zubler is a tax accountant in East Tennessee, the author of three books, and a philanthropist. All of his proceeds from the books go to a charitable foundation he created for underprivileged children. He is also the founder of Your Tax Care which provides tax education. David can be reached for questions and consultation at yourtaxcare.com.