What IRS CP Notices Mean and How to Respond

The arrival of a notice from the Internal Revenue Service (IRS) can cause anxiety. While some notices may simply inform you of a minor correction to your tax return, others might indicate a tax liability. IRS CP Notices fall into the latter category, and understanding them is crucial to possibly avoid penalties and ensure a smooth resolution.

What are IRS CP Notices?

CP stands for “computer paragraph,” and these notices alert taxpayers about potential discrepancies on their tax returns. CP Notices are triggered by certain actions or balances due and sent out by the Service’s automated notice system. There are numerous CP notices, each with a specific code that denotes its purpose. Some common examples include:

• CP2000: This notice informs you of a proposed change to your tax return based on information the IRS received from third parties like your employer or bank, typically regarding underreported income. It might result in a tax bill or a reduction in your refund.
• CP11: This notice tells you the IRS has made adjustments to your tax return and you now owe additional tax.
• CP12: This notice informs you of a correction made to your tax return, resulting in a larger refund or a smaller tax liability.
• CP14: This notice tells you that you owe money on unpaid taxes.
• CP501, CP503, CP504: These notices can be final reminders before the IRS levies (seizes) your wages, bank accounts or other assets to collect an unpaid tax debt. Receiving a CP504 requires immediate action, as it can be the most urgent and final of the notices.

When to Take Action on a CP Notice

The most important takeaway from any CP Notice is the response deadline. This deadline is prominently displayed on the notice and is typically 30 days from the date of issuance, or 60 days if you live outside the United States. Failing to respond within this timeframe could result in the IRS finalizing the proposed adjustments or taking further collection actions.

Here’s a breakdown of when to take action based on the type of CP Notice:

• CP2000: You should respond by the deadline if you disagree with the proposed changes. The notice will explain how to submit documentation to support your claimed deductions or credits.
• CP11: If you agree with the adjustments, you can pay the amount due by the deadline to avoid further penalties and interest. If you disagree, you have the right to request a formal review or even an audit. However, act swiftly to initiate the process.
• CP12: While receiving a larger refund is a pleasant surprise, you should still review the notice for accuracy. If you believe the adjustment is incorrect, contact the IRS within the deadline.
• CP501, CP503, CP504: These are serious notices. To avoid wage or asset seizure, you should immediately contact the IRS to discuss payment options. There might be ways to set up an installment agreement or explore other solutions.

How Much Time Before the Next Notice?

CP Notices are typically the first step in the IRS’s communication process. If you respond within the deadline and address the issue effectively, you might not receive any further notices. However, the course of action depends on your response:

• If you agree with the adjustments: Once you pay any amount owed or accept the reduced refund, the matter is usually resolved, and you likely won’t receive further notices.
• If you disagree with the adjustments and request a review: The IRS will typically send you a follow-up notice after reviewing your response and documentation. This notice might propose a revised assessment or schedule an audit.
• If you fail to respond: The IRS will likely send a final notice before taking further collection actions like wage or asset seizure.

Additional Tips for Responding to CP Notices

• Read the notice carefully: Understand the specific issue raised in the notice and the proposed adjustments.
• Gather documentation: If you disagree with the adjustments, collect documents like receipts, canceled checks or employment records to support your claims.
• Respond by the deadline: This is crucial to avoid penalties and interest accrual.
• Consider professional help: If the notice is complex or you’re unsure how to respond, consider consulting with a tax professional or an enrolled agent. They can guide you through the process and represent you before the IRS.
• Pay or set up a payment plan: If you owe additional tax, make arrangements to pay by the deadline or set up an installment agreement to avoid further penalties. The IRS offers various payment options online and over the phone.

Get the Help of a Tax Controversy Professional

If you receive a CP Notice and have cause for concern, don’t panic just yet. Windham Brannon’s Tax Controversy Practice can help you assess the requirements of the notice, respond promptly and work to help resolve the issue with the IRS. For questions or more information, contact your advisor today or reach out to Tomika Bullet.