A tax return isn't the only source of information the IRS uses to determine tax liability. The agency also receives reports from employers and financial institutions via forms such as a W-2 and 1099-MISC.

The IRS Automated Underreporter Program (AUR) is the name for the computer program that reviews and compares tax returns against information supplied by third parties to the IRS about that taxpayer. The AUR includes all types of reportable income, ranging from wages to dividends.

While every tax return can be reviewed by AUR, at present, the IRS doesn't run every return through the AUR. Certain higher-risk tax returns, as well as a random sampling of returns, are checked via the AUR. The AUR will then flag any inconsistencies.

CP2000 Notice

The initial, automated AUR review will generate a CP2000 notice if the program detects inconsistencies. The IRS will send the CP2000 notice to inform the taxpayer of the flagged issue.

The CP2000 notice is simply informing taxpayers that the AUR noticed a difference between what was reported on a tax return and what information third parties submitted to the IRS. The notice will include the IRS's suggested revision to the return, which may mean a taxpayer owes additional tax or is due for a refund. In some cases, even with the difference, the taxpayer's liability will remain the same.

Unlike many IRS forms and communications, the CP2000 notice isn't a bill. If taxpayers don't respond to the initial notice and if additional review shows the flagged issue should be pursued, the IRS will follow up with additional notices and letters.

To respond to a CP2000 notice, Taxpayers should review the instructions for how to proceed. If taxpayers agree with the notice, they can follow its instructions, which will allow them to avoid having to file an amended return. In other situations, they may wish to respond and state why they agree or disagree with the notice.

If you have questions about reporting income and how to respond to a CP2000 notice, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.