Understanding the CP120 Notice: Your Guide
Okay, so you got a letter from the IRS, and it’s called a CP120 Notice. Don’t panic! It’s not usually a sign of something terrible. Think of it as the IRS’s way of saying, “Hey, we made a little adjustment to your tax return.” But what does that really mean? Let’s break it down.
What Triggers a CP120 Notice?
The IRS sends out CP120 notices for several reasons. It’s not that you’ve necessarily done something wrong, but that the IRS has identified something that needs correction or clarification. Here are some common triggers:
Math Errors
Sometimes the IRS finds a simple math mistake on your tax return, maybe addition or subtraction gone wrong, or an incorrect calculation of a tax credit or deduction. The CP120 will show the original entry you made, and the change they’ve made along with a detailed computation.
Incorrect Credits or Deductions
You might have claimed a deduction or credit that the IRS believes you’re not eligible for or used incorrectly. For instance, maybe you used the wrong filing status or miscalculated the amount you can deduct for student loan interest.
Information Mismatch
The IRS matches the information on your return with information from third parties like your employers or financial institutions (using W-2s or 1099s). If there’s a mismatch, you might receive a CP120. This is common when reporting income.
Changes by the IRS
Occasionally, the IRS may find something in your return that requires them to make a direct change to your overall tax. The CP120 will also detail any resulting changes to your refund or payment due.
How Does a CP120 Notice Work?
So, the IRS spots something on your tax return that needs a tweak. They’ll make the change on their end and then send you a CP120 Notice. This notice includes several key elements to help you understand what happened:
Explanation of the Change
The notice will explain, in clear terms (as much as the IRS can be clear, anyway!) what exactly they changed on your return. They’ll identify the specific line item(s) or part(s) of your tax return that were adjusted.
Calculations and Adjustments
You’ll see the calculations the IRS used to arrive at the new result. This helps you understand how they got from the figures you provided to the new numbers. They typically give both the old numbers and the corrected ones.
Impact on Your Refund or Balance Due
The most important part: The notice will tell you how this change impacts your refund or the amount you owe. If you’re now due a larger refund, the notice will usually say so. If you owe more, they’ll tell you how much and provide instructions on payment.
Your Rights
The notice will also inform you of your rights to disagree and how to appeal the adjustment if you believe it is incorrect.
Payment Instructions
If you owe additional tax, the CP120 will include instructions on how to pay the balance. This may be through check, electronic payment, or some other method, along with any relevant deadlines.
What Should You Do When You Receive a CP120 Notice?
Okay, you have the CP120 Notice in your hands. Don’t toss it aside! Here’s what you should do:
Review Carefully
Read the notice very, very carefully. Take your time and make sure you understand what the IRS changed, why, and what the impact is.
Compare with Your Records
Compare the information on the notice with your original tax return and all supporting documents. Check for errors you may have made or any missing information. Check for documentation related to the areas the IRS made adjustments.
Verify the IRS’s Calculations
Double-check that the IRS’s calculations are correct. If they made an error, you’ll want to catch it.
If You Agree with the Changes
If you agree with the changes the IRS made, you may not have to do anything other than keep a copy of the notice for your records. However, if you owe additional tax, you need to pay it by the due date specified in the notice to avoid penalties and interest.
If You Disagree with the Changes
If you disagree with the changes, you can challenge them. The IRS will explain in the notice how to dispute the change, usually through a written explanation or other documentation. Do not ignore the notice, even if you disagree with it. It’s always better to respond rather than let the IRS assume you agree with the change.
Here are a few general steps to take when you disagree with the CP120:
- Act promptly: Respond by the deadline shown on the notice, usually 30 days.
- Gather information: Collect and organize all relevant information related to your dispute, like receipts, cancelled checks, or other documentation that supports your original tax return.
- Write a letter: Write a letter to the IRS that clearly explains why you believe the adjustment is incorrect. Include copies of your documentation, and include your name, social security number, tax year and the notice number to ensure your case is linked to the proper return.
- Mail your documentation: Send all your documentation via certified mail to the address listed on the notice, so you can track it.
Seek Help if Needed
If you’re feeling overwhelmed, or if you’re not sure how to respond to a CP120 notice, consider consulting a tax professional. A tax preparer, enrolled agent, or CPA can review the notice, help you understand the changes, and guide you through the process of resolving the issue.
Common Mistakes and Misconceptions
Let’s clear up some common misunderstandings about the CP120 Notice:
It’s Not Always Bad News
Sometimes, the change can actually result in a larger refund for you. It’s important to read the notice carefully, because you might even be pleasantly surprised.
Ignoring It Won’t Make it Go Away
Ignoring the CP120 notice won’t make the issue disappear. If you disagree with the change, you need to respond by the date on the notice. Ignoring the notice may result in penalties, interest, and further actions by the IRS.
It’s Not a Penalty
The CP120 notice itself is not a penalty. It is a notification of a change to your tax account. However, you might incur penalties or interest on underpayments identified in the notice, if not handled in time.
IRS Isn’t Always Right
The IRS does make mistakes too. Sometimes the CP120 notice is based on an incorrect interpretation of the tax code or on missing information from their end. It is important to review the information and provide the correct response to ensure your tax return is correctly assessed.
Tips for Avoiding a CP120 Notice in the Future
While you can’t completely eliminate the possibility of a CP120 Notice, here are a few tips to minimize your chances of receiving one:
Double-Check Your Return
Carefully review your tax return before submitting it. It might be a good idea to have another set of eyes, such as your tax preparer review your information prior to filing.
Keep Good Records
Maintain accurate and organized records of your income, deductions, and credits. This will help you prepare your tax return more accurately and will be useful if you ever need to provide backup to the IRS.
Be Aware of Tax Law Changes
Stay informed about changes to tax laws that may affect your returns each year.
File Electronically
E-filing can help reduce mathematical errors.
Use Reputable Software or Tax Preparers
Consider using tax software or consulting with a reputable tax preparer who can help ensure you’re claiming everything correctly.
In Conclusion
A CP120 Notice can feel confusing and maybe even a bit scary, but it’s not something to be afraid of. It simply means the IRS made a change to your tax return. The key is to understand the notice, respond appropriately, and take steps to avoid similar issues in the future. By doing so, you can keep your tax situation in good standing.