Notice of Underreported Income

This is the letter that the IRS sends to you when the IRS has evidence that you may have left some income off of the tax return.

The IRS compares the documents that they have received from employers or companies that have sent you money against what has been reported on your tax return.

This might be a simple misunderstanding. An example of this would be where the IRS expects to see an amount on one line of the return, and you put it on another line of the return.

**** Accuracy Related Penalties ****

You should almost always fight Accuracy Related Penalties that appear on your CP2000 notice. You have an excellent chance, depending on your circumstances, to have this penalty eliminated. Your best bet is to have your CPA contact the IRS about this. If you do not have a CPA, you are welcome to contact us at 1-720-493-4804 (or 1-800-326-6686).

What You Should Do When You Get A Notice Of Underreported Income (CP 2000 Notice)

Notice of Underreported Income and Stock Sales (1099-B)

Brokerage firms notify the IRS how much you received from the sale of stocks. They do not notify the IRS what your cost is in the stock. Thus, you could have lost money in the stock, but the IRS only knows how much you sold it for.

For example, you bought $300,000 of Microsoft stock and sold it for $100,000. You lost $200,000. The IRS knows from your brokerage firm that you received $100,000 from the sale of Microsoft. If you reported your $200,000 loss on Schedule D of your Form 1040, the IRS will know what happened with your Microsoft stock, and they will not bug you about it. If you don't report that loss on your tax return, the IRS will think you had a $100,000 gain! Then they will send you a Notice of Underreported Income.

We have helped people in this situation. Please call us [720-493-4804 or 1-800-326-6686]. At no charge, we would be happy to discuss this with you. Keep in mind that "free consultations" are very limited between January 15th and April 30th. We have clients all over the US. (If you call the IRS, plan to be put on hold for a long time!)

I have seen this happen for stocks when the stock is sold at its purchase price. Since there is no gain or loss, some decide that they don't need to report the sale. The IRS will send a CP 2000 in this case, because they only know about the sale.

You will need to disagree with the Notice of Underreported Income, and provided the IRS with the cost figures on the appropriate form.

Also, if a broker omits a small sale or if you have a worthless stock deduction (think GM in 2009), the IRS will not give you a deduction for such a loss, unless you bring this to their attention. [This is where experience comes in.] Note that a small sale could be a big loss. I had a client with a $0.01 stock sale in 2007, but the cost was about $2,500 (this is a $2,500 loss).

I have caught the IRS treating long-term stock sales as short term stock sales. If the IRS has misclassified your gain, this could make a huge difference. A short-term gain can be taxed as high as 39.6%, but a long-term gain should not be taxed more than 20%, if the Alternative Minimum Tax is not involved.

Another mistake the IRS makes is not using prior year capital losses to reduce current capital losses. If you have a $100,000 capital loss carryover from 2011 to 2012 and a $50,000 gain for 2012 capital transactions, there is no tax on the $50,000 because of the 2011 losses. The IRS is not picking this up. You need to make sure that the IRS is not missing this.

Notice of Underreported Income and Independent Contractor (1099-MISC)

Sometimes people have business losses and choose not to report that. If you have received a 1099-MISC form for your business income, you can count on the IRS receiving the same form.

You should have reported your expenses against this income on Form 1040, Schedule C.

If you receive a CP 2000 for underreported income for business income, you need to disagree with the form and provide the IRS with the expenses.

Circular 230 Disclosure

To ensure compliance with requirements imposed by the IRS, we inform you that (i) any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Notice of Underreported Income - CP 2000 Notice

What is an IRS CP 2000 Notice (AUR) - Notice of Underreported Income?

What You Should Do When You Get A Notice Of Underreported Income (CP 2000 Notice)