How To Respond To A Cp2000 Notice?

[BUFFALOBT]

I just got this for my 2006 tax return. In a nutshell, my wife never got a 1099 for work she had done for a company in 2006- we assumed all of this work was done in 2005. Now that we spoke about it, she did bill the company for some work in the first part of 2006- for which they paid her in 2006. While we don't think it's for as much as the 1099 that the IRS got from this company- I know it's my fault for not reporting it. Based on the instructions, I assume my best course of action is to determine the true amount of income she got from that company for her work for them in 2006, and send those details along with marking OPTION 2- where I do NOT agree with some of the changes. In this case, do I then wait for the IRS to agree or disagree, and tell me what I now owe based on the new information- if they accept it? Finally, does filing a 1040X save me any money? The way it stands now, I owe penalties and interest on top of the tax increase. Does filing an amended return at this point save me any of those penalty or interest fees? Thanks in advance for your help and advice!

[BUFFALOBT]

Additional Info For My Previous Post

I looked at the numbers, and the IRS does have the correct amount that I did not account for on my 2006 return. Looking at my 2005 return, it looks like we filed a Schedule C to offset my wife's 1099 income from her personal business- which is what I should have done during the first filing. So do I now have the ability to file an amended return, showing those expenses and a lower income amount to be added to determine my new amount that I owe? Thanks again.

[erchess]

The short answer is that

if you have expenses to offset the income you can reduce the amount you owe.

Most tax professionals would write a letter showing the math to go with the properly completed notice instead of sending them an amended return. You could send them an amended return with the properly completed notice but there is specific wording you would write across the top of the 1040X and I would have to look up what that would be. I would suggest that you obtain the assistance of a Tax Attorney, CPA, or Enrolled Agent in this matter. We may be able to help you think of expenses you have forgotten that you had or did not know you could deduct. We can also fill out the forms with much less chance of an error. If you stood to lose significant money on a round of golf would you rather play that round yourself or have a professional play it for you?

[joanmcq]

Erchess is right, and you do not want to amend in response to a CP2000. Also, a tax pro that is familiar with these notices can help you respond in a correct manner. Expenses can be sent in with the response to reduce the amount you owe, as well as the interest and penalties. Amending at this point will NOT reduce interest and penalties, it will only gum up the works. The only thing that will reduce interest and penalties is reducing the amount of tax owed (although if very very lucky and if you get an auditor having a really good day, you may be able to plead and get penalties reduced). but that is unlikely in this day and age of humounguous budget deficits.

[BUFFALOBT]

Thanks for your feedback- I appreciate it! I did talk with an accountant who thinks I should just file an amended return(well he will file for me), and not even try to ask for some waiving of penalties. I like your suggestions better- should I just go with the amended return, or ask him to write a letter and show the math? Thanks again.

[ED SMITH]

I would write a letter of explanation AND attach a Schedule C. Be sure that a copy of CP2000 goes with it.

If you have any doubtsafter all the conflicting advice, call the number on the CP2000 and ask them what they need to correct it.

[joanmcq]

Buff, I have a job where pretty much most of what I do is responding to CP2000s. You don't send in an amended return, but you can and should send in a 'corrected' one; definitely a Sch C, and I would also send in a 1040 showing the additional income and how the tax was computed, since the additional income could affect other items on the return. You don't need a 1040X, and definitely respond to the address on the letter (or fax your response). Don't send in a 1040X through the regular amendment channels...it may not be processed because the CP2000 is issued by the underreporter unit likely at a completely different processing center. You want to respond within the 30 days, or call the number on the notice to get an extension (they will usually grant 30 days). If you don't respond correctly, you will get a Notice of Deficiency, and you really don't want to go there.

[JohnH]

Asking for more time

I like joan's advice.
No need to rush things getting the info back to IRS.

Ask for more time (especially if you have a tax pro involved) in order to give them time to work on it after the Apr 15 rush. Unless the situation is very basic, I always ask for one or more extensions of 30 days because clients are often slow in getting the necessary info together.

I've never had a verbal request for more time denied, and by taking the pressure off you will be better enabled to reflect on your response.

[BUFFALOBT]

Thanks Ed, Joan and John for the great advice! I've got an accountant doing an amended return for me, but I don't like the idea of being so "passive" about it. I would at least like to have a letter written by a pro to possibly lesson the penalty part of what I now owe.

[Zee]

Thanks Ed, Joan and John for the great advice! I've got an accountant doing an amended return for me, but I don't like the idea of being so "passive" about it. I would at least like to have a letter written by a pro to possibly lesson the penalty part of what I now owe.

I'm confused. Joan & Ed both strongly suggested not preparing an amended return, but you're having an accountant prepare an amended return anyway? Why?

[Burke]

Thanks Ed, Joan and John for the great advice! I've got an accountant doing an amended return for me, but I don't like the idea of being so "passive" about it. I would at least like to have a letter written by a pro to possibly lesson the penalty part of what I now owe.

Take the advice given on this board and DO NOT FILE AN AMENDED RETURN! The posters here have given you the correct way to handle a CP2000. Sorry you got bad advice from your "accountant."

[joanmcq]

If the accountant prepares an amended return, fine, but don't bother with the 1040x; they should also prepare a 1040 with any applicable schedules that have changed (like the Sch C, Sch SE, and perhaps a Sch A, if the increase in income changes limits on itemized deductions, etc. Send in any corrected forms with the CP2000 (I recommend faxing the whole thing, the mail gets lost a lot) check option 2, with a letter explaining the changes (the area they give you isn't much space) something like We agree the income was left off the return, but we also have expenses against the income. Enclosed is a corrected Sch C showing the income and expenses. With these changes, tax due should be $_______. (the difference in what it was and what it is on the new return).

Now, if the new balance is less than $5000, there shouldn't be any penalties; the penalty you most commonly see on notices is the accuracy related penalty, and it isn't assessed if the balance due is less than $5k. Interest you will NEVER get out of; you had the use of the money, so you owe it. If the balance due is over 5K, you can add a line to the letter explaining how you thought it was included on your 2005 return, etc. However, since you got a 1099, and didn't report or dispute it with the company at the time, and apparently didn't keep good enough books and records, then it is unlikely that you have reasonable cause for a penalty reduction. For a while, if you had good filing history, always filed timely and didn't make mistakes, didn't pay late, they would grant a one time exemption from the penalty. But that aint cutting it anymore, since the powers that be have decided that the budget deficits are due to undercollection of taxes, not overspending, or the war, or tax cuts or anything else. So the IRS is under a lot of pressure to step up collections. Good luck!

[BUFFALOBT]

Zee...this particular accountant recommended that we do an amended return, which I agreed to in order to make sure I address this issue within the 30 day window. After five days of not hearing anything from him regarding my return, what expenses I would want to add to offset the 1099 income, etc...I thought I had better re-think my strategy since nothing has been done yet.

[BUFFALOBT]

Burk and Joan...thanks again for the advice! It's obvious that I need to put a "hold" on the amended return, and find a pro who can properly address the notice along with asking for some penalty reduction. Joan- the accuracy penalty alone is $1,670...the new tax owed is $8,000...the interest is $760. I don't have much in expenses to offset, but will have some. Anyone interested in helping me out with this? Does it have to be a tax pro registered or licensed in my home state of Indiana? I lived in Arizona during the time of my 2006 filing- if that makes a difference. Please let me know, along with your fee- thanks!

[Bees Knees]

I’m confused

Joan,

Instructions for Form 1040X say you use it to make corrections on a previously filed return. The previously filed return was in error.

When you owe additional tax on a CP2000 notice, how is it you are not liable for penalties?

In Buffalo’s scenario, he says they have unreported income, although that income is less than reported on the CP2000, due to additional legitimate expenses. In such a case, I have always prepared a 1040X along with the corrected Schedule C (per IRS instructions), and attached all of that to the CP2000 letter and mailed all of it to the address on the CP2000 letter.

You seem to do a lot of these. How is it that by NOT doing a 1040X, you get penalties abated, when clearly the taxpayer owes the penalty for unreported income? And why would an accuracy related penalty be any different doing a 1040X verses not doing one?

Educate me, please: what is WRONG with doing a 1040X (per IRS instructions) and sending it to the CP2000 letter address, like Buff's accountant wants to do?