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Automated notices about underreported income: the IRS isn't always right

If IRS computers spit out a notice saying that you underreported income or overstated your credits or deductions, that doesn’t mean those computers are right. But it is important to know how to respond if you receive such a notice.

In this post, we will explain how the IRS uses an automated program to generate those notices. The Treasury Inspector General for Tax Administration (TIGTA) recently reviewed the program and noted several concerns.

The program is called the Automated Underreporter Program. It matches information about income and deductions submitted on taxpayers’ returns with information reported by third parties such as employers and banks. The goal is to identify possible discrepancies between income reported by a taxpayer and income that is reported by these other sources.

Notice of Underreported Income

The Automated Undereporter (AUR) finds about 20 million of these discrepancies on individual returns every year. If the discrepancy indicates there was an underpayment of tax, the IRS will send a notice proposing the assessment of additional taxes, along with applicable interest and penalties.

This notice is called Notice CP-2000.

TIGTA Study on the AUR Program

Tax assessments under the AUR program have increased significantly in recent years. From Fiscal Year 2006 to Fiscal Year 2013, they increased by 85 percent. For FY 2013, the total amount of assessments was $7.84 billion.

TIGTA’s study found, however, that there are several issues with the administration of the program. These issues include lack of clear standards about when penalties for inaccurately reporting income should be waived. TIGTA also called for the IRS to continue to evaluate how effective Notice CP-2000 is in communicating to taxpayers what their options are when receiving such a notice.

How Should You Respond to Notice DP-2000?

Notice CP-2000 is a formal notice, but it doesn’t mean the IRS is always right. If there are good reasons to support your position, you don’t have to agree with a proposed assessment of additional taxes. If you have received a notice about underreported income and are unsure how to respond, talk with a knowledgeable tax attorney.


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