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Underreported income, part 1: What happens when you get a notice?

You open your mailbox and find a notice from the IRS called CP-2000. Looking it over, it appears to be about underreporting of income. If you are like most people, you will probably have many questions.

In this post, we will touch upon some of the most common questions regarding assertions by the IRS about underreported income.

First of all, if you made a good faith effort to report your income and take proper deductions, it is only natural to wonder why you got a notice like this is the first place.

After all, willfully underreporting income is a quite different issue than underreporting that wasn't willful. If willfulness is involved, tax penalties may be on the table. Allegations of tax evasion could be as well.

But let's suppose you tried to comply with your tax obligations and still got a notice for underreporting income. This may have occurred, for example, because you didn't remember to include all of your miscellaneous income.

The IRS has a computer-driven program that compares information about income it receives from third parties like banks, employers and payment services with income reported by taxpayers. This program is called the Automated Underreporting Program (AUR).

This means that when you get a CP-2000 notice, it may not have been reviewed by a human being before it was sent. This is because the IRS does not have the resources to investigate all of the apparent income reporting discrepancies that its computers detect. 

Keep in mind, then, that receiving a CO-2000 notice does not necessarily mean there was something wrong with your tax return.

You do, however, need to respond to the notice. If you agree with the notice, you can simply sign it, send it back and make arrangements to pay the additional tax you owe. But if you don't agree with the IRS, you need to consider your next steps carefully.

In part two of this post, we will discuss those steps. We will also take note of a recent report by the Treasury Inspector General for Tax Administration (TIGTA) on the AUR program and tax penalties for underreporting income.

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