You Got an IRS Notice. Here's What Actually Happens Next

IRS mail has a look. The address block in the window, a notice number in the corner, a first line written by committee. If one landed on your counter this week, take a breath before you do anything, especially before you pay it. A surprising share of IRS notices aren't bills at all. They're proposals, and proposals can be wrong.

Where notices come from

Every W-2, 1099, and K-1 you receive also goes to the IRS, and its computers spend the following year matching those forms against filed returns. When something doesn't line up, the system generates a notice: no agent assigned, no investigation, no judgment call. That's why a notice can be confident and wrong at the same time. The computer knows what your broker reported. It doesn't know what you paid for the shares, or that the distribution was rolled over, or that a corrected 1099 exists.

The CP2000, translated

The workhorse of the matching program is the CP2000. By its own text it's "not a bill": it proposes changes to your return, shows a proposed amount due, and gives you a response window, typically 30 days from the notice date (60 if you're outside the country). You can agree, disagree with documentation, or agree in part. The CP2000s I see most often trace to missing cost basis: a broker reported the sale proceeds, the notice computes tax as if you paid nothing for the shares, and the real number is a fraction of the proposed one.

The one deadline you never blow

Ignore a CP2000 and the follow-up is usually a CP3219A, the Statutory Notice of Deficiency, which tax people call the 90-day letter. From its date you have 90 days (150 if you're abroad) to petition the U.S. Tax Court, and the law doesn't allow extensions. Miss it and the proposal hardens into an assessed tax. Everything before that letter is a conversation. The 90 days is a legal boundary, and it's the one deadline in this process to treat as immovable.

If the number is actually right

A CP14, by contrast, is a real bill: the first notice of a balance due, requesting payment within 21 days. If you owe it and can't pay all of it, don't let it sit. The failure-to-pay penalty runs 0.5% a month (topping out at 25%) but drops to 0.25% a month once an installment plan is approved. Online plans take minutes to set up: up to 180 extra days if you owe under $100,000, or monthly payments over as long as 72 months if you owe $50,000 or less. And a clean three-year compliance history often qualifies you for first-time penalty relief, though usually you have to ask for it.

So open it the day it arrives. Find the notice number and the tax year, pull your records, and check the IRS's story against yours before you accept it. Respond in writing by the printed date and keep copies of everything. And the moment a notice says "deficiency" or "levy," hand it to a professional. This is the corner of tax where a one-page letter, sent on time, does the most work.