What to do when you get a letter from the IRS

An envelope from the IRS shows up and your stomach drops before you've even opened it. That reaction is totally normal, and it's also usually bigger than the letter (and the IRS) deserves. Most IRS notices are routine, resolvable, and not the beginning of an audit. Knowing which kind of letter you're holding changes how urgently you need to act.

Here's how to read the four most common notices, and what each one requires from you.

CP2000: the numbers don't match

A CP2000 shows up when income reported to the IRS by a third party, an employer, a bank, a client who filed a 1099, doesn't match what you reported on your return. It's not a bill and it's not an audit. It's a proposed adjustment based on a mismatch.

You have two options: agree with the proposed change and pay what's owed, or disagree and explain why, with documentation. A common cause is a 1099 that was issued but the income was already reported under a different category, or a form that arrived after you filed. Respond by the date on the notice. Ignoring a CP2000 doesn't make it go away; it just moves you toward a bill that assumes the IRS's numbers are correct.

CP503: the second reminder

If you owe a balance and haven't paid it, a CP503 is the IRS following up on an earlier notice you may have missed or set aside. This is still early in the collection process, but it's the point where waiting starts to cost you.

The fix is usually straightforward: pay the balance, or set up a payment arrangement if you can't pay in full. An installment agreement stops the clock on further collection notices and gives you a structured way to handle it. What doesn't help is letting a CP503 sit in a drawer while you hope the next notice doesn't come.

CP504: the notice of intent to levy

This is where the tone changes. A CP504 means the IRS intends to seize state tax refunds, and it's a formal signal that more serious collection action, including a levy on bank accounts or wages, is close behind. The window between a CP504 and actual levy authority is measured in weeks.

This is not the notice to set aside. Getting into a formal resolution, an installment agreement, an offer in compromise, or currently-not-collectible status if you qualify, stops the escalation. If you've been avoiding a balance because the number felt too big to deal with, a CP504 is the signal that avoiding it is no longer an option, and the sooner you engage, the more options are still on the table.

Letter 2205: your return has been selected for examination

This is the true audit notification, and it's also far less dramatic than it sounds. Letter 2205 tells you your return has been selected for examination and specifies what the IRS wants to look at (a single deduction, a business schedule, or the full return). Selection doesn't mean something was found wrong. Plenty of audits close with no change at all.

The letter includes a deadline and a list of documentation being requested. This is the one notice where we'd tell you plainly: don't handle this alone, and don't handle it by immediately sending the IRS every document you own. Respond to exactly what's asked, on time, ideally with a tax professional managing the communication on your behalf.

What to do the moment a letter arrives

• Open it and read the notice number. It's in the top corner, and it tells you which of the situations above you're in.
• Check the deadline. Every IRS notice has a response window, and it's the most important number on the page.
• Don't call the number on a letter you didn't verify. IRS impersonation scams use fake notices. Cross-check the notice against your IRS online account or call the general IRS line to confirm it's real before sharing any information.
• Don't ignore it and don't panic-pay it either. Some proposed adjustments are wrong. Read what's being claimed before agreeing to anything.
• Get help before you respond, not after. The earlier a tax professional sees the notice, the more options exist for resolving it cleanly.

The bottom line

An IRS notice is information, not a verdict. CP2000 and CP503 are routine and resolvable. CP504 requires prompt action. Letter 2205 requires careful handling, not fear. In fourteen-plus years of doing this work, the pattern holds: the business owners who come out fine are the ones who read the letter, understood what it was asking, and got help early, not the ones who had the cleanest books to begin with.

Got a letter you're not sure how to read?

A Vibe Check is a free, no-pressure conversation. Send us what you received and we'll tell you plainly what it means and what happens next. Schedule yours here.

Keep reading

These posts cover the recordkeeping that keeps most notices from becoming a bigger problem:

• Bookkeeping basics: what you need to track: the documentation habits that make responding to any IRS notice faster and less stressful.
• Common deductions small business owners miss: a mismatch between what you claimed and what the IRS expects is often the root cause of a CP2000.
• When your business structure stops working for you: how structure decisions affect your exposure to certain kinds of notices.

This post is general information, not advice for your specific situation. How to respond to an IRS notice depends on the notice type and your circumstances. Talk to a tax professional before you respond, especially for a CP504 or Letter 2205. That's what we're here for.