You’re browsing through the usual ads and flyers that come in your mail every afternoon, and then you see it – that envelope with an IRS return address on it. With trembling fingers and a sinking feeling in your stomach, you open it expecting a notice that you are under audit. But wait, this isn’t an audit notice. So, what is it? You look at the top and see the notice type is CP2501. What does that even mean? Scanning through the rest of the pages, you realize the IRS is asking about what you reported as income on your return. If you’re not sure if your notice is a CP2501, you can see a sample of one here.
The CP2501 notice is just one way IRS asks you about the income you reported on your return and where they feel you may have omitted something. It will generally list the income that is reported to them on another page and compare it with the items they believe were reported on your return. Sometimes, they are also asking you to verify credits or deductions that you claimed that might have a third-party reporting source, such as the American Opportunity Tax Credit, where they expect to receive a Form 1098-T verifying your education expenses. Unlike its sister notice, the CP2000, the CP2501 does not include a computation of potential taxes which may be due. The CP2501 is a type of pre-assessment notice which gives you the opportunity to verify the accuracy of your return and respond to the IRS before they propose a tax assessment. If you do not respond to them in the required amount of time, they generally will then issue a CP2000 notice. Depending on the amount of income that is missing, that notice can be more upsetting.
What should you do if you receive a CP2501? First, review the items that the IRS believes are missing and check your return against that list. Sometimes, you have included the income, but it isn’t obvious where it was reported in the return. For example, if you received a 1099-MISC from a client for services you rendered to them, they may have reported that payment in the “other income” box on the form, but you reported it in your gross receipts on your Schedule C. It is also not unusual for the issuer of the reporting form to report it to the wrong person or entity, especially if your business is incorporated or a limited liability company, in which case the income should be reported on that entity’s return, not your personal return. And sometimes, income is reported to you by a company you have never heard of and have no idea why they are reporting the income to you.
If you know where the item the IRS is questioning is listed on your return, the next step is fairly easy. You can complete the “I don’t agree with some or all of the changes” section and mail back the form along with an explanation and supporting documents. Generally, the IRS will correct their records, and you will get a later notice saying they have resolved the matter.
But what if you aren’t certain, or you realize that you forgot to include that item on your return because the 1099 came to you after you filed? If you think you made a mistake, you can take the easy route out – sign the response form and wait for the IRS to send you a bill for the balance due. But that may not be the best solution. Penalties and interest will also be assessed; however, in many cases, the penalties can be abated if you know how to ask for that. If you think you reported the income but aren’t sure you reported it correctly, you may want to have a professional review the notice and return with you to verify whether the notice is correct. It’s not unusual for some of the items in the notice to be correct and others to be incorrect, and not knowing how to respond to the IRS in those situations makes responding on your own a little trickier. This is a situation where having pre-paid audit defense makes your life much simpler and less stressful.
There is also the possibility that the income reported on the notice is because you are the victim of identity theft. In some cases, another person may be using your social security number to obtain employment, or has used your social security number to open credit accounts or obtain loans. If you believe this happened to you, first call the issuer of the form and ask for more information on why they sent you the form to determine if it’s truly ID theft, or if you just forgot something. You can file an Identity Theft Affidavit with the IRS to dispute the notice, but you should definitely consider seeking help from a tax professional as the process of unwinding this type of situation can take a long time and many letters to the IRS.
If you aren't sure what to do about your CP2501 letter, consider having a professional help out so you don't have to face it alone. If you've purchased an Audit Defense membership for the year in question, TaxAudit’s experienced tax professionals would be happy to help! They have a wealth of knowledge regarding the perils and pitfalls of working with tax agencies, thoroughly understand your rights, and are experts on tax rulings and regulations.