What a CP2000 is
The IRS’s Automated Underreporter program compares every return to the W-2s, 1099s and other forms filed by employers, banks, brokers and payment apps. When something on those forms is missing from your return, or reported differently, the system calculates the tax on the difference and mails a CP2000. It lists each item it could not match, the proposed tax, interest, and sometimes a penalty. It is a proposal. Nothing is final until you respond or the time to respond runs out.
The date that matters
Respond within 30 days of the date printed on the notice, or 60 days if you live outside the United States. If you need more time, call the number on the notice before the date passes. If the IRS does not hear from you, it sends a statutory notice of deficiency, CP3219A. That letter gives you 90 days to go to Tax Court. After that the tax is assessed and moves to collection.
Your three options
- Agree. Sign and date the response form and pay, or ask for a payment plan. Paying the proposed amount within 30 days stops more interest from building.
- Partly agree. Check the box on the response form, say which items are right and which are not, and attach the documents for the ones you dispute.
- Disagree. Check the box, write a signed explanation and attach the proof: the broker’s cost basis records, a rollover confirmation, a corrected form.
Do not file an amended return for the items on the notice. The IRS corrects the return from your response. A Form 1040-X belongs with the response only when you have other changes the notice does not cover, with “CP2000” written at the top.
What usually causes it
- Stock sales with no cost basis. Brokers report basis only for covered shares: stock bought after 2010, and mutual fund shares bought after 2011. For older shares the 1099-B may show only the sale price, and the IRS taxes the entire amount as gain.
- Form 1099-K. Payment apps and online marketplaces report gross payments. Reimbursements from friends, or personal items sold for less than you paid, can look like income.
- A rollover left off the return. A Form 1099-R reports the distribution. If the return does not show it as rolled over, the IRS treats it as taxable.
- Income reported in a different place. 1099 income included in a business’s gross receipts, or a corrected W-2 matched as if it were a second one, can look missing or doubled.
- A form that really was missed. An old brokerage account, a small 1099-INT, a state refund. Then the question is only whether the IRS math is right.
A worked example
Isabella sold mutual fund shares she bought in 2008 for $60,000 and left the sale off her return. The fund company’s 1099-B reported the $60,000 but no cost basis, because the shares were bought before basis reporting began. Her records show she paid $48,000 for them over the years, including reinvested dividends. The example assumes the gain is long-term and taxed at 15%, and that her income is under the 3.8% net investment income tax threshold.
| Gain in the notice: $60,000 sale, $0 basis | $60,000.00 |
| Proposed tax at 15% | $9,000.00 |
| Proposed accuracy-related penalty at 20% | $1,800.00 |
| Total proposed, before interest | $10,800.00 |
| Correct gain: $60,000 − $48,000 basis | $12,000.00 |
| Correct tax at 15%, no penalty | $1,800.00 |
| Difference | $9,000.00 |
The proposed increase of $9,000 is more than the greater of $5,000 or 10% of her correct tax, so the notice adds the 20% penalty. Once the basis is documented, the increase is $1,800. That is under $5,000, so the penalty for a substantial understatement no longer applies. Isabella partly agrees: she owes tax on the $12,000 gain, plus interest on $1,800 from the original due date, and not $10,800 plus interest.
Penalties and interest
- The accuracy-related penalty is 20% of the underpayment. For most individuals it applies when the understatement is more than the greater of $5,000 or 10% of the tax that should have been shown. It can also be removed for reasonable cause. See penalty abatement.
- Interest runs from the original due date of the return, regardless of extensions, until the balance is paid. The IRS also charges interest on penalties.
New Jersey comes next
If the IRS changes your federal return and the change affects your New Jersey tax, New Jersey expects an amended return, Form NJ-1040X. New Jersey taxes capital gains at the same rates as wages, so Isabella’s $12,000 gain belongs on her New Jersey return too. If no amended return is filed, a New Jersey notice often follows the federal one. We answer both. More on IRS notices and audits.
This guide is general information based on the law as of the date above, not advice for your situation. Tax rules change, and the right answer depends on your numbers.