You Got an IRS Letter. Here’s Exactly What to Do Next.
Key takeaways
- Most IRS letters are automated matching notices, not audits: the notice number in the top-right tells you which.
- A CP2000 is a proposal, not a bill. A meaningful share are wrong, usually because cost basis was not reported.
- The response deadline is the only truly urgent element. Missing it converts a proposal into an assessment.
- Never ignore it and never pay automatically: verify the claim against your own records first.
- First-time penalty abatement is granted routinely to taxpayers with a clean three-year history. Most people simply never ask.
An envelope arrives with a Department of the Treasury return address. Your stomach drops, and the letter sits unopened on the counter for four days.
Understandable, and the worst possible response, because the only genuinely urgent thing in that envelope is a deadline.
Here is how to handle it.
First: it is probably not an audit
The IRS sends an enormous volume of correspondence, and the overwhelming majority is automated. Common reasons:
- A figure on your return did not match a 1099 or W-2 the IRS received
- A payment was applied to the wrong year or the wrong account
- A balance is outstanding, or a refund amount was adjusted
- A return the IRS expected has not been filed
- Identity verification is required before a refund is released
Genuine examinations arrive differently, and they say so explicitly. Most letters are a computer noticing a mismatch.
Find the notice number
Top right corner. It will look like CP2000, CP14, CP501 or Letter 525. That code tells you precisely what kind of letter this is.
| Notice | What it means | Urgency |
|---|---|---|
| CP2000 | Proposed change from an income mismatch, not a bill | Respond by the deadline |
| CP14 | First notice of a balance due | Respond or pay |
| CP501 / CP503 | Reminder of an unpaid balance | Escalating |
| CP504 | Notice of intent to levy state refunds | High |
| LT11 / Letter 1058 | Final notice of intent to levy, with appeal rights | Very high: get help |
| Letter 525 / 566 | Examination correspondence | Get representation |
| CP80 | Credit on file but no return received | File the return |
If it is a CP2000, read carefully
This is the most common notice we see, and the most misunderstood. A CP2000 is a proposal, generated when third-party reporting does not match your return. It is not a bill, and it is not final.
A meaningful proportion are wrong, and the reasons repeat:
- Cost basis not reported. A broker reports $80,000 of stock sale proceeds. The IRS assumes $80,000 of gain. You actually paid $74,000 for it. The real gain is $6,000, and the proposed tax is wildly overstated. This is the single most common CP2000 error.
- Duplicate reporting. The same income reported on both a 1099-K and a 1099-NEC.
- Correctly reported, differently located. The income is on your return, just not where the matching program expected to find it.
- Not your income. A genuine misreport by the payer, or identity theft.
The notice includes a response form where you can agree or disagree. Disagreeing is entirely normal: attach the documentation, explain plainly, and send it before the deadline.
The deadline is the only urgent part
Most notices give 30 days from the date on the letter. That date is when the letter was generated, not when it reached you, so you have less time than it appears.
Missing the deadline on a CP2000 means the proposed change is assessed as if you agreed. You can still contest it afterwards, but the path is longer and considerably more expensive.
If you need more time, call the number on the notice and ask. Extensions are frequently granted and cost nothing to request.
Two things never to do
Never ignore it. Notices escalate automatically toward liens and levies, and each stage removes options.
Never pay automatically. Paying an incorrect assessment is treated as agreement, and reclaiming it afterwards is far harder than disputing it now.
Verify before you respond
Pull the relevant return and compare it line by line against what the notice asserts. Three outcomes:
- The IRS is right. Agree, arrange payment, and move on. If you cannot pay in full, an installment agreement is straightforward to set up.
- The IRS is wrong. Respond with documentation. Be brief and factual. Include a copy of the notice and reference the tax year on every page.
- Partly right. Common, and worth the effort of separating the correct portion from the incorrect one.
Ask about penalties: genuinely, just ask
If penalties have been assessed, they are frequently removable.
First-time abatement is available where you have filed and paid on time for the prior three years. It is granted routinely, often on a single phone call. The overwhelming reason people do not get it is that they never ask.
Reasonable cause relief covers serious illness, death in the family, natural disaster, or records destroyed beyond your control. It requires an explanation and, where possible, supporting evidence.
Interest is rarely abated. Penalties frequently are.
When to stop handling it yourself
A CP14 for an amount you agree with needs no professional. Pay it.
Get representation when:
- The letter is an examination notice (Letter 525, 566, or similar)
- It is a final notice of intent to levy (LT11 or Letter 1058)
- The amount is large enough to matter materially
- Multiple years are involved
- You have unfiled returns
- You have already responded once and it did not resolve
A CPA, enrolled agent or attorney can file Form 2848 and deal with the IRS directly on your behalf. The correspondence starts arriving at their office instead of yours, which changes how the whole thing feels more than you would expect.
Afterwards, fix the cause
A resolved notice with an unaddressed cause simply returns next year.
If it was a missing 1099, build a process to capture them all. If it was cost basis, make sure your broker statements reach your preparer. If it was a missed filing, put the deadline in a calendar that will actually alert you.
Most people who receive one IRS notice receive another. Most people who fix the underlying cause do not.
Dariel Kingsley
Managing Director · Kingsley Accounting Group
Dariel Kingsley has led Kingsley Accounting Group since 2017. Before founding the firm she managed audit and advisory services at PM+M Accounting LLP, served as Chief Financial Officer at Bekaert & Holland Accounting LLP, and worked in finance at Whitley Penn Accounting LLP. She holds a BS in Accounting and Finance from California State University, Fresno.
