Dear IRS,

It is that time of year, the CP2000 notices for 2006. They’re a little late this year, but with the AMTĀ  and rebates messes, that is understandable. This and a few more posts will cover issues that have arisen from the notices I have seen.

I call a CP2000 notice an oops! letter. After all the W-2s and 1099 have been submitted by employers and payers and most of the returns have been filed, the IRS begins matching what the payer says they paid to what we put on our returns. This isn’t a problem for most of us since we report all our income. But sometimes we forget something, or it comes in after the return is filed and we never get around to amending the original return, or the math or data entry on the original return is wrong, or we deliberately leave income off the return. That is when we will get a letter from the IRS nicely telling us that we (oops) forgot something or made a mistake and here is what they think we still owe them (or they owe us.)

If you get a letter, don’t panic. You have plenty of time to respond and if you need more time a polite request will do. The next thing is to take the letter to your tax professional. If you did your own return, take the time to really read the letter. Is it right? Is that your income? Don’t assume that the IRS is either right or wrong until you have studied that letter. The letter will tell you exactly what was missing from the original return. If the letter is correct (and that income is not the sale of securities or properties), then all you have to do is mark that you are accepting the changes to your return and make payment arrangements and mail the letter back to the IRS. An amended return might be in order if you forgot to report a sale securities or property since your tax is based on the gain or loss on the sale and not the sale price. All the IRS has is the sale price not the taxable amount.

If you disagree with the proposed changes, then it is up to you to prove to the IRS why your return should not be changed. On the CP2000, there is a check box to mark that you are disagreeing. You then want to sent your documentation to the IRS with a copy of the notice.

Whatever you do, don’t panic but also don’t blow off this notice. It is not going away. If you don’t deal with this now, you will deal with it later and in the meantime the interest and penalties will grow.

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