IRS Notice CP2000: Income Discrepancy - How to Respond

The IRS receives copies of income documents from third parties:

• W-2s from employers
• 1099-INT/DIV from banks and brokerages
• 1099-NEC/MISC from clients (freelance income)
• 1099-B from stock sales
• 1099-R from retirement distributions
• 1098 forms for mortgage interest, tuition

The IRS Automated Underreporter (AUR) program compares these documents to your return. If there's a mismatch, you get a CP2000. Common triggers include:

• Forgetting to report a 1099
• Employer reported different figures than you did
• Stock sales not reported or basis not calculated correctly
• Retirement distribution coding issues

You have three options when responding:

Option 1: Agree Completely

If the IRS is correct, sign the response form and return it. You can pay the additional tax or request a payment plan.

Option 2: Disagree Completely

If you believe the IRS is wrong, send a written explanation with supporting documentation. Common reasons to disagree:

• You already reported the income (IRS missed it)
• The income belongs to someone else (identity issue)
• The 1099 amount is incorrect (issuer made a mistake)
• You have offsetting deductions or basis (stock sales)

Option 3: Partially Agree

If some adjustments are correct but others aren't, you can agree to part and dispute the rest. Explain clearly which items you accept and which you contest.

Here are the most frequent CP2000 situations:

Stock Sale Basis Problems

The IRS often shows $0 basis for stock sales, making it look like your entire sale price is profit. Solution: Provide brokerage statements showing your actual purchase price (basis).

Retirement Distribution Rollovers

If you rolled over a 401(k) or IRA, the IRS may think it's taxable income. Solution: Provide documentation of the rollover.

1099 for Someone Else

If a 1099 has your SSN but isn't your income, contact the issuer to correct it and explain to the IRS.

Already Reported Income

Sometimes the IRS's matching program misses income you did report. Point to the specific line on your return.

If you ignore CP2000:

1. The IRS assumes you agree with their proposed changes
2. They issue a CP3219A (Notice of Deficiency / "90-day letter")
3. You have 90 days to petition Tax Court - this is your only chance to dispute in court
4. If you don't petition, the tax is assessed and collection begins
5. You'll receive CP14, CP501, etc. for the new balance

Important: Responding to CP2000 is much easier than dealing with a Notice of Deficiency. Don't ignore it.