Ask HN: How to deal with IRS CP2000 letter for $xx,xxx tax due?
IRS is telling me they want tens of thousands of dollars in tax for 2015.
Up to 2015, I operated a credit card merchant account (First Data) where I would process event ticket sales on behalf of clients, and ACH transfer them their funds. Of the money processed, perhaps 3% is income. I no longer do this model (for many reasons) and use Stripe instead.
Naturally, First data sent me a 1099 saying I made a bunch of money. IRS knows that. I don't report 1099's on my returns directly, because I have an accounting system that includes all of that income.
So clearly, I can explain to a layman why this money is not income, but what is the proper way to respond to this letter and prove it, hopefully avoiding an audit?
Thanks. CP2000 doesn't mean all of that is income, part of that money is expense, so FD will tell IRS say you made $50,000. Then you need to say 97% $48500 is expense and pay tax on $1500. Have your records ready if you get audited. You can't avoid getting audited. Best assume you will get audited and be ready. The way I set this up in my accounting system was to pile all first data deposits into an asset clearing account, create a bill to pay the client, and then record a payment from that clearing account. Since the IRS only sees income & expenses, I can understand the trigger for the CP2000. I didn't see a logical way to report this activity on my return. I guess I need to write a short letter explaining it, saying I don't do it anymore, and include highlighted bank statements of the money coming in, and the money going back out. Unfortunately I don't have tax numbers for the clients. You might be able to get away with handling this on your own, but you should really have an experienced accountant deal with the IRS on your behalf.