Ask any tax preparer and they are likely to say they've noticed an increase in IRS notices this summer. These notices, called the CP2000, are sent by the IRS to taxpayers after the IRS compares the income, payment, credits and deductions reported on the tax return with the same items reported by third parties such as employers, banks, mortgage companies and brokerage firms. CP2000 notices generally come a year after a return is filed, so this summer's notices relate to the 2010 tax returns. According to the IRS, it sent 4.7 million CP2000 notices documenting 20 million discrepancies. Those are pretty whopping numbers when you consider these notices go out annually, and when you consider that one out of every three notices is inaccurate. Fortunately, the inaccuracy rate dropped from 48 percent to 33 percent over the past few years, but those figures are still intimidating.What's a taxpayer to do when they receive a notice? Immediately step a copy of the notice to your accountant. If you don't have one, it's probably time to enlist the help of a tax professional. Given the high rate of inaccuracies, whatever you do, don't assume the IRS is correct and just blindly pay the bill. The CP2000 generally includes a list of changes that the IRS believes should be made to your return, and while the list appears overwhelming at first, take a deep breath and read with an open mind and the list will start to make sense.The next step is to recheck your documents and figure out who is right. The most common discrepancies are for stock sales. Many taxpayers inadvertently leave the details of stock sales off their Schedule D, and the IRS will list only the sales price of the stocks, not the cost basis. I've seen letters requesting hundreds of thousands of dollars owed, when the taxpayer actually had a loss and just hadn't reported the cost basis and sales prices correctly.Once you've determined the differences causing the letter, you need to document your response back to the IRS. Responses differ greatly based on their requests, and whether or not you agree or disagree with their findings. If you agree, you simply respond to their letter with a check. If you disagree, then you need to provide a copy of a corrected return or an amended return (the jury's still out on which is best) with "Corrected. For CP2000 Response Only. Do Not Process" written at the top.Now for the best part of the process, hurry up and wait. The IRS will have a deadline by which your response is due, however chances are good that you will receive a letter back stating that the IRS needs another 45 days or more to process your return. It's important that if you owe any money you pay it in with the original response, because the interest and penalties will accrue, even if the IRS is behind in processing. But, aside from that, there is very little you can do to speed up the process and patience will be your biggest asset in this process. Once you've responded quickly and thoroughly, there's no use losing sleep over it, because it can take months to get an answer. It's human nature that our hearts will skip a beat when we see a dreaded letter from the IRS in our mailbox. But, if you keep an open mind and approach the response systematically, you'll make it through and generally come out on top! Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. For more info and to contact her, visit www.cpamichele.com.
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