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How the IRS Automated Underreporter Unit Works and What It Means for You

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    Key Takeaways:

    • Americans underreport 4% to 5% of their income, on average, and the tax gap continues to be a problem for the IRS
    • The tax gap happens when there is a big difference between the taxes owed versus the taxes actually paid each year
    • The automated underreporter (AUR) unit is a system within the IRS that automatically flags income discrepancies, evaluating what was reported on a tax return versus what was received from employers or businesses
    • Taxpayers will receive a CP2000 Notice from this system if a discrepancy is found, and they may have to pay additional taxes
    • 10 steps to take if you receive a CP2000 Notice:
      1. Never ignore the AUR notice
      2. Check all facts carefully
      3. Gather documents and identify all income sources
      4. Prepare a response if the AUR notice is incorrect
      5. Sign and return the form if you agree
      6. Pay any additional amount owed
      7. Review past tax returns for the same mistakes
      8. Never provide dishonest information
      9. Contact the IRS with questions
      10. Work with a tax professional

    The issue of underreported income continues to be a problem for both the IRS and taxpayers. Failing to pay taxes owed leads to a lot of back and forth with the IRS and can lead to penalties and even charges for the taxpayer. One study found that all groups within the U.S. population underreport an average of 4% to 5% of their income.

    The IRS has implemented the AUR unit to try to address this issue. The AUR unit plays a major role in the agency’s efforts to reduce the tax gap, which is the difference between the amount of tax owed and the amount of tax actually paid. This unit has the power to identify discrepancies between taxpayer records and the data reported to the IRS by third-party sources, such as banks, employers, and investment firms.

    How does AUR work, though, and what does AUR stand for? This guide covers what the AUR unit is, how it works, and what to do if you receive an underreported income notice, also known as a CP2000 Notice.

    What Is the AUR Unit?

    This unit is the automated underreporter system. It is part of the IRS underreporting department and aims to detect underreported income in a more efficient way. The unit first receives data from various third-party sources, like employers, which is then matched with the income reported on taxpayers’ tax returns. The AUR unit then automatically generates an underreporter notice, or CP2000 Notice, if a discrepancy is found. This notice informs taxpayers of the mismatched information and outlines any additional taxes, penalties, or interest that may be owed.

    The AUR unit also works with tax examiners to analyze data and identify patterns of noncompliance or areas where additional guidance may be needed. The AUR unit, in some cases, may be incorrect or may have mismatched data due to third-party errors, and taxpayers do have the right to dispute the findings. Underreporter notices are usually accurate, however, and taxpayers may owe additional taxes, penalties, or interest. 

    One important note is that the automated matching system is only instigated if what you reported on your tax return is lower than what other parties reported to the IRS. You will not be notified by this system if you reported an excess of income. 

    You need to work closely with the IRS to develop a plan to pay the owed amount, adjust future tax withholdings or estimated payments if necessary, and avoid similar discrepancies in the future.

    Purpose of the AUR Unit

    The AUR unit is an essential tool for the IRS to ensure all taxpayers are paying their fair share of taxes. The tool identifies discrepancies and holds taxpayers accountable so the IRS is able to reduce the tax gap, which ultimately benefits everyone. 

    IRS data shows that only about 85% of taxes are paid on time and voluntarily. The IRS states that “sustaining and improving taxpayer compliance is important because small declines in compliance cost the nation billions of dollars in lost revenue and shift the tax burden away from those who don’t pay their taxes onto those who pay their fair share on time every year.” Underreported income is a big component of the tax gap, alongside taxpayers failing to file and underpaying what they owe.

    The IRS AUR department helps level the playing field for honest taxpayers, who may feel disadvantaged when others underreport their income. The IRS is able to maintain the integrity of the tax system and promote a sense of fairness by improving the likelihood that all taxpayers pay what they owe. The AUR unit also allows the agency to sift through tax returns much faster to flag discrepancies so they can be resolved in a timelier manner.

    10 Steps to Take if You Receive an AUR Notice

    Dealing with the IRS in any capacity is never fun. You may be anxious that you did something wrong when you receive an AUR notice regarding underreported income on your tax return. Here are 10 steps to take if you get a CP2000 Notice in the mail from the IRS:

    1. Never Ignore an AUR Notice

    It is critical not to ignore an underreporter notice if you receive one. The notice typically includes a deadline to respond, and it’s essential to reply quickly to avoid further penalties. Review everything on the notice carefully to ensure you understand what the issue is and how to resolve it.

    2. Check All Facts Carefully

    Verify the accuracy of the notice. Ensure the discrepancies are indeed errors and not just misunderstandings. Check your records to reconcile the discrepancies. Think about if there is an income stream you may have forgotten and look through your bank statements. It is critical that you confirm whether or not the AUR notice is accurate before preparing your response.

    3. Gather Documents and Identify All Avenues of Income

    Gather all supporting documents related to your case. This may include receipts, statements, and other documentation that support your tax return and the information provided. Types of income the IRS may match include:

    • W-2 income
    • 1099 income (1099-MISC, 1099-NET, 1099-INT, 1099-DIV, 1099-S, 1099-R, and more)
    • K-1 for partnerships or S corporations
    • HSA distributions

    It’s important to note that the review can be fairly comprehensive. Tax deductions on your return will also be evaluated by the IRS in these cases, for example. 

    4. Prepare a Response if the AUR Information Is Incorrect

    You will need to respond to the IRS if you find that the information is incorrect on the notice. Follow instructions on your notice to submit that you disagree. You can usually either fax or mail your response to the address provided on the notice. Respond to the notice in writing and include supporting documentation to argue against the discrepancies as highlighted on the notice. This may include your W-2 or 1099s, or other missing forms that prove your calculations are correct. Keep copies of all documents you submitted to the IRS, including written responses, supporting documentation, and any other communication.

    5. Sign and Return the Form if You Agree

    You’ll need to sign the included response form if you find the IRS is correct and your original tax return information was incorrect. Follow the instructions on the notice. You usually just need to sign and send the form back by the deadline provided on the form.

    6. Pay Any Additional Amount Owed

    You may owe additional tax if the AUR unit was correct in finding the discrepancy. Consider how you’ll pay for this amount and whether you can pay it all at once or need to apply for an installment arrangement. Know that you may also owe a penalty for underreporting your income. Pay what you owe the IRS as soon as you can. You may start to build interest on your balance otherwise, which you want to avoid if possible.

    7. Review Past Tax Returns for the Same Mistake

    It’s also wise to go through your past tax returns looking for the same error you made this time around. Perhaps you forgot about an income stream for multiple years. You can correct mistakes on tax returns for up to three years from your original file date, or within two years of paying the tax owed, whichever is later. You will submit an amendment using Form 1040-X, Amended U.S. Individual Income Tax Return.

    8. Never Provide Dishonest Information

    The IRS is already aware of your tax return and potential issues if they are sending you a CP2000 Notice. Never make things worse by trying to lie to the IRS. You always need to be honest, thorough, and timely when you respond. You don’t want to get yourself in deeper trouble that could lead to more money being owed or even a criminal charge against you. It is always best to stay open with the IRS, even if you are afraid you can’t pay your tax bill. The agency will typically work it out with you, as long as you’re honest.

    9. Contact the IRS With Questions

    You may have questions about your underreported income notice or you may want more time to investigate the situation. Whatever the issue is, you have options and can reach out to someone. Contact the IRS to get your questions answered. Call the phone number you see on your notice or letter, or follow other instructions for contacting the agency as provided.

    10. Work With a Tax Professional

    Always work with an experienced tax professional, like a tax attorney, when you get a notice in the mail and you’re not sure what to do. You never want to risk taking a misstep or doing something that will lead to more penalties and issues with the IRS. A tax expert will help you get back in good standing with the IRS in no time.

    Try not to worry if you receive a CP2000 Notice from the IRS that was generated from the AUR unit. These notices are quite common and are usually fairly easy to resolve. Just be sure to follow these steps and do your due diligence in your research and response. 

    Contact the Tax Attorneys at Silver Tax Group With Questions

    The AUR unit is responsible for identifying discrepancies on a tax return, which can ultimately result in additional tax liabilities, penalties, and interest. Understanding the AUR unit of the IRS is crucial for any taxpayer. 

    Receiving an underreporter notice from the AUR unit may be stressful, but it’s important to approach the situation with a willingness to work with the IRS to resolve any discrepancies. You can then avoid further penalties and promote a sense of fairness and equity in the U.S. tax system. Knowing how the unit operates and what they are looking for can save you a lot of trouble and stress in the long run. 

    Dealing with the IRS in any capacity, however, can still be a difficult and time-consuming process for an individual. This is where a tax professional comes in. An expert like a tax attorney can help you navigate the AUR process and identify and correct any issues before they become major problems for you.

    Seek help from the tax attorneys at Silver Tax Group if you receive a notice from the AUR unit or suspect you may have an issue on your tax return. We provide valuable guidance and expertise to help you minimize your tax liabilities and maximize your financial well-being. We also help with tax debt resolution, emergency tax services, audit defense, IRS investigations, and much more. We’re always here for general tax consulting, too. Reach out to Silver Tax Group to speak to a tax expert about the AUR and any IRS notices you receive.

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