Received IRS notice CP 2000 asking more tax. Need help.

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ram
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Received IRS notice CP 2000 asking more tax. Need help.

Post by ram » Tue Jul 17, 2018 11:52 pm

For 2016 my wife and I filed a joint return by using Turbo Tax. Yesterday I received IRS letter ( notice CP 2000) stating that I need to pay more tax.
The additional tax demanded pertains to two things:
1) Withdrawal from 529 plans:
I have one dependent, my daughter who was a 2nd year medical student for the initial 6 months of the year and 3rd year medical student for the second 6 months of the year.
She has a full tuition scholarship so we pay no tuition.
I used the published living expenses from the university website ( and have a printout). I added 50% of 2nd year expenses and 50% of 3rd year expenses and the total comes to $25,974 for 12 months.
I had withdrawn $ 24,509 from two 529 plans ( my state and Vanguard /Nevada). Of this $9072 was the earnings portion. The IRS has added all of the 9072 as income and so the taxes on it have been added.
My contention is that the withdrawal is lesser than the living expenses and so no additional taxes are due.
(I may have made wrong entries while filling turbo tax)

2. Edit : My mistake : The second pertains to the 10% penalty( $907) for withdrawing 529 funds apparently for non educational purposes. But this is not true as stated above.

[Incorrect information provided in initial post: The second issue pertains to backdoor Roths for both of us. We are not eligible for Roths due to high income. As is commonly discussed on this Board we start our Traditional IRAs with zero balance on Jan 1, then add 6500 in early Jan and flip it to Roth in a day or two. Each account earned $0.07 interest in a money market account in Trad IRA before it was flipped to a Roth. I have been asked to pay a tax of $907 for "Tax on qualified plans including IRA's." There is no further explanation. ( Added: Form 8606 was filled for each of us with the initial tax filing)
I have never withdrawn any amount from 401K, 457 etc in my life. ]

Please advice. I am planning to see a local accountant which some of my colleagues use but would like the advice of the people on this board. I have seen some prior threads about letters for tax on backdoor Roths in the past. Thanks in advance.
Last edited by ram on Tue Jul 24, 2018 10:19 pm, edited 2 times in total.
Ram

47Percent
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Joined: Tue Oct 29, 2013 9:59 pm

Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by 47Percent » Wed Jul 18, 2018 12:12 am

ram wrote:
Tue Jul 17, 2018 11:52 pm
For 2016 my wife and I filed a joint return by using Turbo Tax. Yesterday I received IRS letter ( notice CP 2000) stating that I need to pay more tax.
The additional tax demanded pertains to two things:
1) Withdrawal from 529 plans:
I have one dependent, my daughter who was a 2nd year medical student for the initial 6 months of the year and 3rd year medical student for the second 6 months of the year.
She has a full tuition scholarship so we pay no tuition.
I used the published living expenses from the university website ( and have a printout). I added 50% of 2nd year expenses and 50% 0f 3rd year expenses and the total comes to $25,974 for 12 months.
I had withdrawn $ 24,509 from two 529 plans ( my state and Vanguard /Nevada). Of this $9072 was the earnings portion. The IRS has has added all of the 9072 as income and so the taxes on it have been added.
My contention is that the withdrawal is lesser than the living expenses and so no additional taxes are due.
(I may have made wrong entries while filling turbo tax)

2. The second issue pertains to backdoor Roths for both of us. We are not eligible for Roths due to high income. As is commonly discussed on this Board we start our Traditional IRAs with zero balance on Jan 1, then add 6500 in early Jan and flip it to Roth in a day or two. Each account earned $0.07 interest in a money market account in Trad IRA before it was flipped to a Roth. I have been asked to pay a tax of $907 for "Tax on qualified plans including IRA's." There is no further explanation. ( Added: Form 8606 was filled for each of us with the initial tax filing)
I have never withdrawn any amount from 401K, 457 etc in my life.

Please advice. I am planning to see a local accountant which some of my colleagues use but would like the advice of the people on this board. I have seen some prior threads about letters for tax on backdoor Roths in the past. Thanks in advance.

First, search for topic threads with "CP2000" in this forum.

Welcome to the growing club.

I don't think there is any reason to panic. I am not even sure if you really need to see an accountant -- as long as you are sure everything is okay.
Just get all the documents lined up and respond to the notice -- yourself.

Chin up!

HIinvestor
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Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by HIinvestor » Wed Jul 18, 2018 12:18 am

The IRS seems to be spewing out a lot of notices, trying to get payments this year, even though many of them are WRONG. I received one jointly with my H, plus we each got it individually as well. My CPA says a number of his clients have received similar notices.

I’d double-check that you’ve properly submitted everything the 1st time, resubmit with their notice advising them that you are resubmitting, and wait patiently. You don’t need to see a local accountant unless it makes you more comfortable to do so—IRS won’t reimburse your time or the expenses of proving you fix everything correctly. :-(

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ram
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Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by ram » Wed Jul 18, 2018 12:35 am

Thanks 47 percent and HI investor. This is reassuring.
Ram

123
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Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by 123 » Wed Jul 18, 2018 12:56 am

I sort of wonder if the IRS even looks at the actual return before it sends the CP 2000 in cases like these. The CP 2000 could well just be relesed as a result of a computer records (un)matching program. It may be the IRS only looks at the actual tax return if there is an inquiry or protest after the CP 2000 is released. After all the IRS has little to lose by sending the notices first and mayb looking at the return later if a fuss is raised.
The closest helping hand is at the end of your own arm.

47Percent
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Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by 47Percent » Wed Jul 18, 2018 1:09 am

123 wrote:
Wed Jul 18, 2018 12:56 am
I sort of wonder if the IRS even looks at the actual return before it sends the CP 2000 in cases like these. The CP 2000 could well just be relesed as a result of a computer records (un)matching program. It may be the IRS only looks at the actual tax return if there is an inquiry or protest after the CP 2000 is released. After all the IRS has little to lose by sending the notices first and mayb looking at the return later if a fuss is raised.
You know that the CP in CP2000 stands for Computer Program, right?!

123
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Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by 123 » Wed Jul 18, 2018 1:22 am

47Percent wrote:
Wed Jul 18, 2018 1:09 am
123 wrote:
Wed Jul 18, 2018 12:56 am
I sort of wonder if the IRS even looks at the actual return before it sends the CP 2000 in cases like these. The CP 2000 could well just be relesed as a result of a computer records (un)matching program. It may be the IRS only looks at the actual tax return if there is an inquiry or protest after the CP 2000 is released. After all the IRS has little to lose by sending the notices first and mayb looking at the return later if a fuss is raised.
You know that the CP in CP2000 stands for Computer Program, right?!
I do now.
The closest helping hand is at the end of your own arm.

MikeG62
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Location: New Jersey

Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by MikeG62 » Wed Jul 18, 2018 6:40 am

ram wrote:
Wed Jul 18, 2018 12:35 am
Thanks 47 percent and HI investor. This is reassuring.
ram, I got one too relating to qualified expenses and the AOTC. See here:

viewtopic.php?f=2&t=253141&p=4004768&hilit=IRS#p4004768

Responded on May 24th (one day after I received the notice) with a detailed response. Two weeks ago received a notice that they were "reviewing my response" and would get back to me within 60 days. Still no word back. I did write a detailed response and provided backup documentation to support Tuition paid (copies of University account statements with notes in the margin to tie things together).

I am hoping that will suffice, but 7 weeks in still await their final response.
Real Knowledge Comes Only From Experience

NotWhoYouThink
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Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by NotWhoYouThink » Wed Jul 18, 2018 6:55 am

Note my reply to MikeG62's post linked above. No receipts, no back-up documentation, just the letter stating the dollar amount of college expenses. I figured if the IRS asked for details we could provide them, but no reason to answer a question they hadn't asked. That was enough to settle the issue.

You Know What I Mean
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Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by You Know What I Mean » Wed Jul 18, 2018 7:06 am

Hi Ram,

I want to provide some reassurance and also provide a rare shout-out to an IRS phone representative.

A few years ago, we received a thick envelope from the IRS containing a similar CP2000 notice and book of instructions. After wading through everything, it became clear the IRS didn’t understand my two sons’ college expenses, so they thought we had some unqualified 529 withdrawals. (Like you, I may have entered data in the wrong place in TurboTax; still not sure about that.) They added some of the withdrawals to my taxable income. That increase then affected the partial deductibility of IRA contributions we had made because we were in the phase-out range. So, that further increased our taxes due, in their calculations. To make matters worse, for some unknown reason the IRA-related tax increase was listed twice, doubling the amount due for that. It was confusing at first, particularly since we had never received a CP2000 before.

After I figured out what was happening, I got my records together and went through them, including my separate spreadsheet for college expenses, so that I was well-versed in the details of what had happened two years prior. That was kind of like studying for an oral exam.

I then called the IRS and was eventually connected with a good phone rep. We went over the CP2000 notice together. The IRS rep quickly agreed with me that the double IRA-related tax was an obvious duplication error. Regarding the college expenses, I explained them and at one point said something like, the IRS should have received two 1098-T’s for my sons, so somewhere you should be able to verify that. He asked me how much we spent in total for college expenses that year. Since I had my records in front of me, I answered him immediately. (Like you, I had included cost of living expenses from the college’s published data.)

He then closed the case over the phone. I didn’t have to send in anything! I was a little worried about not replying in writing by their CP2000 deadline, but he said it wasn’t necessary. He said he would take care of it, and he did. That conversation took less than 15 minutes, once I got to the right IRS guy.

This particular phone rep obviously had the authority to make decisions. And it appeared to me he was motivated to get things done and not waste time on fruitless pursuits. Well done.

So, my advice is to get your ducks lined up, and then call the IRS. Oh, the horror!

Best of luck to you.

Sincerely,
You Know What I Mean

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by livesoft » Wed Jul 18, 2018 7:15 am

I can see that the IRS has programmed its algorithms so that any living expenses for a student of more than $15,000 a year would create a need for a special explanation and the easiest way to get that explanation is to send a CP2000 to the taxpayer. Probably only 3 tax returns nationally every year would get hit with that.
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Wagnerjb
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Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by Wagnerjb » Wed Jul 18, 2018 8:28 am

ram wrote:
Tue Jul 17, 2018 11:52 pm
For 2016 my wife and I filed a joint return by using Turbo Tax. Yesterday I received IRS letter ( notice CP 2000) stating that I need to pay more tax.
The additional tax demanded pertains to two things:
1) Withdrawal from 529 plans:
I have one dependent, my daughter who was a 2nd year medical student for the initial 6 months of the year and 3rd year medical student for the second 6 months of the year.
She has a full tuition scholarship so we pay no tuition.
I used the published living expenses from the university website ( and have a printout). I added 50% of 2nd year expenses and 50% of 3rd year expenses and the total comes to $25,974 for 12 months.
I had withdrawn $ 24,509 from two 529 plans ( my state and Vanguard /Nevada). Of this $9072 was the earnings portion. The IRS has added all of the 9072 as income and so the taxes on it have been added.
My contention is that the withdrawal is lesser than the living expenses and so no additional taxes are due.
(I may have made wrong entries while filling turbo tax)
Hi Ram: I have received that same CP2000 letter from the IRS for three different tax years (2012, 2013 and 2015). Three years ago I responded in a thread and included the letter that KPMG composed to respond to the IRS in regards to this CP2000 letter. Feel free to use their language in your response if you desire.

viewtopic.php?t=159770

It is clear that the IRS doesn't have any information on the college expenses that you incurred, but that is true for most taxpayers. My belief is that a large distribution from the 529 account (maybe along with no tax deduction for college costs) triggers this letter. In each of the three years for which I received the IRS letter, my 529 distributions were over $25k....and I earned too much to qualify for college tax deductions.

The fact that you received the letter simply means that the IRS would like you to confirm that you had college expenses that exceed the amount you withdrew from the 529 account. A simple response letter will settle the issue, without any further tax obligation on your part.

Best wishes.
Andy

Wagnerjb
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Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by Wagnerjb » Wed Jul 18, 2018 9:13 am

MikeG62 wrote:
Wed Jul 18, 2018 6:40 am
ram wrote:
Wed Jul 18, 2018 12:35 am
Thanks 47 percent and HI investor. This is reassuring.
ram, I got one too relating to qualified expenses and the AOTC. See here:

viewtopic.php?f=2&t=253141&p=4004768&hilit=IRS#p4004768

Responded on May 24th (one day after I received the notice) with a detailed response. Two weeks ago received a notice that they were "reviewing my response" and would get back to me within 60 days. Still no word back. I did write a detailed response and provided backup documentation to support Tuition paid (copies of University account statements with notes in the margin to tie things together).

I am hoping that will suffice, but 7 weeks in still await their final response.
Mike: I got the same CP2000 letter for the 2015 tax year. I responded to the IRS on September 15th. On October 24th, the IRS responded with their "we got your letter, let us review it" statement. On January 2nd, I got the final letter from the IRS with their "All is good, you don't owe anything" letter.

Don't worry once you have sent them the appropriate documentation and information. The ball is in their court.

Best wishes.
Andy

Nowizard
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Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by Nowizard » Wed Jul 18, 2018 9:37 am

I have received two of these over the years, both unsubstantiated when responding. Good luck. Hopefully, it was an error in entering data in TT or something simple like that. Congratulations on your daughter being in med school on full scholarship.

Tim

TheAccountant
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Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by TheAccountant » Wed Jul 18, 2018 9:51 am

Pretty sure you have to use actual expenses with the 529. You can't just use estimates from the school's website.

Your registrar/billing transcript would be a better source doc. If you can match the expenses on that with allowable 529 expenses then you're fine.

NotWhoYouThink
Posts: 1964
Joined: Fri Dec 26, 2014 4:19 pm

Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by NotWhoYouThink » Wed Jul 18, 2018 10:04 am

It doesn't have to be an error. If all of your 529 withdrawals are for qualified educational expenses, and you are not claiming any educational tax credits or deductions, then there is no required reporting with the tax filing. If the IRS sends you a CP2000, you can report expenses at that time.

While it is certainly advisable to keep good records of expenses, and may be necessary in the case of a full audit, it is not necessary to provide all of those details in the CP2000 response letter. My decades of Megacorp experience taught me the valuable lesson that when auditors are around you answer the specific questions asked, but volunteer nothing. For the CP2000 the name of the student and the school, and a high level summary showing the qualified nature of the expenses is enough. If they have further questions they can ask.

Noalani
Posts: 44
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Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by Noalani » Wed Jul 18, 2018 2:42 pm

You Know What I Mean wrote:
Wed Jul 18, 2018 7:06 am
Hi Ram,

I want to provide some reassurance and also provide a rare shout-out to an IRS phone representative.

A few years ago, we received a thick envelope from the IRS containing a similar CP2000 notice and book of instructions. After wading through everything, it became clear the IRS didn’t understand my two sons’ college expenses, so they thought we had some unqualified 529 withdrawals. (Like you, I may have entered data in the wrong place in TurboTax; still not sure about that.) They added some of the withdrawals to my taxable income. That increase then affected the partial deductibility of IRA contributions we had made because we were in the phase-out range. So, that further increased our taxes due, in their calculations. To make matters worse, for some unknown reason the IRA-related tax increase was listed twice, doubling the amount due for that. It was confusing at first, particularly since we had never received a CP2000 before.

After I figured out what was happening, I got my records together and went through them, including my separate spreadsheet for college expenses, so that I was well-versed in the details of what had happened two years prior. That was kind of like studying for an oral exam.

I then called the IRS and was eventually connected with a good phone rep. We went over the CP2000 notice together. The IRS rep quickly agreed with me that the double IRA-related tax was an obvious duplication error. Regarding the college expenses, I explained them and at one point said something like, the IRS should have received two 1098-T’s for my sons, so somewhere you should be able to verify that. He asked me how much we spent in total for college expenses that year. Since I had my records in front of me, I answered him immediately. (Like you, I had included cost of living expenses from the college’s published data.)

He then closed the case over the phone. I didn’t have to send in anything! I was a little worried about not replying in writing by their CP2000 deadline, but he said it wasn’t necessary. He said he would take care of it, and he did. That conversation took less than 15 minutes, once I got to the right IRS guy.

This particular phone rep obviously had the authority to make decisions. And it appeared to me he was motivated to get things done and not waste time on fruitless pursuits. Well done.

So, my advice is to get your ducks lined up, and then call the IRS. Oh, the horror!

Best of luck to you.

Sincerely,
You Know What I Mean
I bit the bullet and did the same thing. After a few months of having sent documents by mail and only a form-letter response, I called the IRS phone rep. Our 529 tax matter was also resolved by phone. Basically, he asked what our college expenses were, verified that they exceeded our withdrawals, and he ended it then and there. We received a refund check that had been due us about a month later. Initially horrified at the thought of calling the IRS, I was greatly relieved upon hanging up. It was the best decision I could have made. Be ready to be on hold for a while!
P.S. I found the IRS rep to be friendly and helpful-very service oriented.

Noalani

livesoft
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Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by livesoft » Wed Jul 18, 2018 3:58 pm

TheAccountant wrote:
Wed Jul 18, 2018 9:51 am
Pretty sure you have to use actual expenses with the 529. You can't just use estimates from the school's website.

Your registrar/billing transcript would be a better source doc. If you can match the expenses on that with allowable 529 expenses then you're fine.
The registrar is not going to have off-campus room & board (living expenses) for a medical school student.
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ram
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Re: Received IRS notice CP 2000 asking more tax. Need help.

Post by ram » Wed Jul 18, 2018 6:09 pm

Thank you all for all the reassuring replies. I will keep you posted.
Ram

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