Underreporting income tax
Credit and debit cards are nearly as common as cash. Nearly everyone in the USA has at least one in their wallet, including business owners. Customers often swipe a card to pay for their purchases. This seemingly simple act could help attract unwanted attention from the IRS. If your business has low cash sales the IRS may send you a “Notification of Possible Income Underreporting.” The IRS has sent the letter to thousands of small business employers, asking them to review and confirm that they accurately reported their income on last year’s tax returns. So far, some 20,000 employers across the country have received the letter, according to The Washington Post.
IRS Notice Underreporting Income
The IRS Notice CP 2000 is referred to as the Notice of Proposed Adjustment for Underpayment and is the most common notice sent out by the IRS. The IRS reports that document mismatch inquiries were sent to more than 4.3 million taxpayers in the 2010 fiscal year; more than $7.2 billion in additional taxes were assessed. The IRS compares informational returns filed by companies on Forms W-2, 1098, 1099, etc. with information as reported by the taxpayer on their return, and issues a CP 2000 if they find differences in income, deductions, credits, and/or payments.
30 day response
Once you receive notification from the IRS you must reply with an explanation usually within 30 days. Your explanation could mean more taxes, interests or penalties. If the IRS doesn’t receive a timely response, the agency assumes the proposed changes are correct and continues processing the notice and the proposed additional tax to an assessment. Then the IRS can begin attempts to collect it.
Be detailed about your response
When the IRS employee eventually gets to your response and it’s methodical and organized, it will probably progress smoothly. If your response is confusing or incomplete, the IRS will likely disregard the response and will instead simply send out a final report of the adjustment. If there is no response or the examiner finds the response unsatisfactory, a statutory notice of deficiency (or 90-day letter) is sent, putting in motion a formal assessment of additional tax. At that point, the taxpayer has no other recourse than paying the tax or petitioning the U.S. Tax Court.