On Friday, the Internal Revenue Service announced that it discovered an error on CP2000 notices mailed to taxpayers during the weeks of July 1 and July 8. A CP2000 notice, or underreporter inquiry, is sent to taxpayers when there is a discrepancy between the information reported on the taxpayer's return and the information provided to the IRS by third parties, such as employers, banks and other payers. The CP2000 notice reflects any proposed changes to credits, deductions or payments reported on the tax return. It is important to review the proposed changes to the original return as there may be certain credits that do not get adjusted or are eliminated in error. It is frequent that when a client brings a CP2000 to my office for review, the changes made are not correct as credits taken on the original return were not recalculated.
Typically, CP2000 notices propose an increase in taxes, along with penalties and interest. The CP2000 notices sent in the first two weeks of July contained incorrect interest calculations on the proposed increase in taxes from underreported income.
The amount of the error varied, but according to the IRS Automated Underreporter Unit, most of the notices showed either no interest or a total of $1 in interest. Currently, the interest rate should be 3 percent for each year of the proposed additional tax.
Since discovery of the error, the IRS has corrected the interest calculation issue. The IRS plans to send letters to the recipients of the incorrect notices, later this month. The letters will ask taxpayers to call a special toll-free number or write the IRS to obtain the corrected interest assessment.
If you received one of the incorrect CP2000 notices and paid some or all of the additional proposed taxes, you will still owe additional interest.
There is relief for penalties if the taxpayer has a history of compliance in filing with the IRS. In effect, the IRS rewards taxpayers with a history of compliant behavior with a one-time penalty relief. For individuals, this relief applies to two of the most common penalties: failure to file (delinquency) and failure to pay. For businesses, this relief also applies to the failure-to-deposit penalty for payroll taxes. The IRS can abate both penalties under certain circumstances. Relief from these penalties is generally granted to taxpayers who show they exercised ordinary care and prudence, and failure to file or pay was because of reasonable cause and not because of willful neglect.
For more information on penalties and interest, visit the IRS website and type "penalty abatement" in the search engine.
Tracy Bunner is an enrolled agent and tax preparer with an office in Harrisville. She can be reached at 801-686-1995 or at firstname.lastname@example.org.