You go and check the mailbox and realize you’ve received a dreaded letter from the IRS. Scary, right? No one wants to receive a note from the IRS because they aren’t usually friendly or nice.
You were expecting your tax refund to hit your bank account and instead are faced with a potential problem and likely payment delay. But what should be done now?
Slide open the envelope and you see the IRS letterhead with “CP05” written across the top. Read what it says because most of the time you don’t need to take any action on this notice because it’s meant to inform. Receiving this letter, usually, means that your tax return will be delayed by 60 days (between 45-180 days).
If there are instructions in the letter, act on them. Don’t just throw the letter away or ignore it.
What Is a CP05 Notice and Why Did I Receive It?
According to the IRS a CP05 is sent because they are evaluating “income, income tax withholding, tax credits and/or business income.” Now we know that a CP05 notice is a letter from the IRS to tell the tax filer that the tax return needs to be reviewed further.
If you filed already, this means no action is required until 60 days have passed from the date on the letter. If you receive your tax return, the review has concluded. If you receive another notice, that is the next step in your process.
If you haven’t filed a return yet, someone else might have filed a return using your Social Security Number! If this has happened, fill out Form 14039, Identity Theft Affidavit and submit to the IRS immediately.
If you had to file an Identity Theft Affidavit and you normally file your taxes through a tax professional, check with them to see if you need to fill out an IRS Form 2848, Power of Attorney and Declaration of Representative so they can represent you while dealing with the IRS.
Common reasons why a review is initiated include discrepancies with income, tax withholding, tax credits claimed on the return (example: Earned Income Tax Credit or Additional Child Tax Credit), or business income filed with Schedule C.
Is This Telling Me That I’m Being Audited?
No, you are not being audited at this time if you have received a CP05. You would generally be facing an audit of you saw TC420/424 on your transcript and get a CP75 notice.
In recent years, the IRS only audited approximately 0.3% of individual income tax returns. The IRS has 3 years after the tax-filing deadline to start an audit in most cases unless they find you omitted claiming 25% or more of your income on your return and then they have 6 years to start an audit.
What triggers an audit?
- Not reporting all income. The IRS receives copies of all the W-2s and 1099’s that you receive, even from freelance work, second jobs, side gigs, short term jobs, or a job change halfway through the year.
- Taking the home office deduction as an employee. Not everyone that works from home is eligible to take this deduction. In fact, only self-employed filers qualify for this one. The home office must be used “regularly and exclusively” to conduct business. This doesn’t mean that a separate room needs to be set aside but it must be in an area of the house that you don’t use for anything else.
- Reporting business losses. Some filers have tried to set up a business just to benefit from deductions but repeatedly lose money year after year or barely break even many years in a row. A business qualifies as a business according to the IRS if 3 of the last 5 years have made a profit.
- Unusually large business expenses. The IRS will compare your business and expenses to others in your industry and income bracket to look for inconsistences so keep detailed records of business expenses and differentiate between business and personal expenses by creating separate bank accounts for each. Keep a mileage log for recording car usage as a business expense.
- Not reporting all stock trades. Brokerage firms send a 1099-B every year so capital gains and losses need to be reported and taxed according to your tax bracket and how long the stock was held.
- Not reporting cryptocurrency payments. You will be issued a 1099-K or 1099-B for cryptocurrency transactions higher than $20,000 but all cryptocurrency trades should be reported.
- Large charitable donations. Any non-cash donation over $5,000 must have a qualified appraisal certificate as well as a letter from the charity certifying they received and took possession of this donated item.
- Earning a lot of money. Usually, filers making over $1M annually are more at risk for triggering an audit so it’s recommended to work with a CPA to make sure filing is done correctly.
- Errors or basic mistakes. Entering your SSN incorrectly or rounding up to the nearest $100 or $1,000 consistently in the return raises alarm.
See how receiving a CP05 isn’t as scary as an audit?
A CP05 is just a formal IRS notice and is meant to be a layer of protection for taxpayers. The IRS is taking action to make sure your return has been filed properly and is correct with the expectation being that you can amend the return if it’s found to be incorrect.
What Are the Next Steps (CP05A and CP05B notices)?
Check the return address on the envelope that the CP05 came in to make sure it’s from the IRS and not another entity. Next, contact the audit protection department if you filed your taxes with a service online to let them know you received this notice.
Within 60 days of your CP05 notice, the IRS should send follow-up notices, known as CP05A or a CP05B.
This means the IRS needs more information from you before a refund can be issued. When this notice is received, send copies of the requested items on the notice so your income and income tax withholding can be verified by the IRS. Send the response within 30 days of the date on the notice by either mail or fax. Keep copies of anything you send to the IRS.
Common items requested include paystubs, proof of employment, or copies of paychecks.
This notice is sent when the IRS receives a tax return that shows a refund amount, but the IRS can’t match the reported income on the return to the income reported by payers. Read the notice and provide copies of the requested information. There is a voucher on the last page of the notice that needs to be submitted with your response so don’t forget that. Send the information within 30 days of the date on the notice and consult with your tax preparer before sending.
Letter 4464C (IRS 60 day letter)
This letter is sent by the IRS when verifying your income and income tax withholding. It looks quite ominous per the screenshot below, but most times it just informational (to tell you what they are doing) or requires some simple actions and verification by the filer for the IRS to progress your return and refund processing.
This IRS notice will also generally say the IRS needs an additional 60 days to review your return and/or process your refund. This is the statutory number of the days the IRS can ask for to do further reviews, but actual processing could be sooner or later depending on the complexity of the review.
Do I Need to Amend My Return?
After you have sent in the requested information from the CPO5A or B, the IRS may decide that you need to amend your return before they will process it. You will be asked to sign the adjusted return and the amount of refund or taxes owed will be adjusted.
If you don’t agree with the changes requested, you can file an appeal or meet with an IRS examiner, but you have 90 days to reach a resolution or you could get a Notice of Deficiency in the mail.
After the adjusted return has been signed and returned to the IRS, your refund or tax bill should be sent to you within 6-8 weeks. If money is owed, payment plans with the IRS are possible or you can pay in a lump sum amount.
Receiving requests for more information from the IRS can be terrifying but if you are acting in good faith and trying to be as honest as possible then you shouldn’t have anything to worry about.
CP05 is just an IRS correspondence notice that your return is being delayed while information is verified. Follow the instructions in the letter and respond within the time allotted to avoid any confusion or penalties. Consult with your tax preparer to make sure you understand what is happening and your responsibility through the process.