The IRS attempts to match items on your tax return to the amounts reported by third parties (e.g., wages reported on your 1040 to the forms W-2 you received from your employer). When there is a discrepancy, the IRS sends you notice CP 2000 which shows proposed changes to your income tax return. This proposal is based on a comparison of the income, payments, credits, and deductions reported on your tax return with information on these items reported to us by employers, banks, businesses, and other payers. The CP 2000 also reflects any corrections made to your original return when the IRS processed it.
The notice will often reflect a balance due but it could also reflect a refund if you under-reported your withholdings. If it shows a balance due, you may not owe the full amount reported especially if the CP 2000 relates to under-reported proceeds from the sale of stock on form 1099B. The IRS assumes your cost basis in the securities sold is zero, the holding period is short term, and assesses tax on the short-term capital gain calculated. Your cost basis is very likely greater than zero and your holding period could be long term. Both of these will reduce the amount of tax calculated by the IRS and may even result in a refund.
If you disagree with IRS, you should send in documents supporting your position and, if necessary, amend your Federal and State returns to reflect any items that were not originally reported.
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