An IRS Notice CP2000 is generated automatically when the IRS Automated Underreporter (AUR) system detects a mismatch between the income reported on your Form 1040 and the information slips (Form W-2, 1099-B, 1099-NEC, 1099-DIV) filed by employers, brokers, or banks. In the vast majority of stock sale mismatches (especially RSUs and ESPP sales), the IRS calculates the tax assuming your cost basis was $0. With proper CPA reconciliation, the proposed liability is routinely reduced to $0.
1. How the Automated Underreporter (AUR) Works
Financial institutions and brokerage houses submit electronic copies of Form 1099-B and 1099-MISC to the IRS Information Returns Master File (IRMF).
Roughly 12 to 18 months after tax filing season, IRS automated computers match these third-party transcripts line-by-line against your filed return. If an employer or broker reported $85,000 of stock sales proceeds, but the computer does not locate the exact figure on your Schedule D, it automatically flags the account and issues a Notice CP2000 proposing additional taxes, late interest, and a mandatory 20% accuracy penalty under IRC § 6662.
2. The Number One Culprit: Unreported RSU Cost Basis
For tech professionals at companies like Microsoft, Amazon, Google, and Meta, company stock grants (RSUs) vest throughout the year. When shares vest, the value is already included in W-2 Box 1 wages, and shares are withheld for statutory taxes.
However, when the remaining shares are sold via Morgan Stanley, E*TRADE, or Fidelity, IRS regulations prohibit the broker from reporting the cost basis in Box 1e of Form 1099-B. Instead, Box 1e is reported as $0 or blank (undetermined basis).
When the IRS computer processes the sale, it treats the entire gross sale proceeds as 100% pure capital gain!
3. The 30-Day Response Window is Critical
Notice CP2000 gives the taxpayer exactly 30 days from the date of the notice (60 days if residing abroad) to respond. You must choose one of three responses on the CP2000 response form:
- I agree with all changes: You sign the consent form and pay the proposed assessment (rarely advisable without CPA audit).
- I disagree with some or all changes: You provide statutory proof, corrected schedules, and a formal CPA rebuttal statement explaining the discrepancy.
Warning: If you fail to respond within the 30-day window, the IRS will automatically issue a Statutory Notice of Deficiency (90-Day Letter), at which point the only remaining forum to contest the tax is the United States Tax Court.
4. The CPA Resolution Protocol
When our firm defends a client against a Notice CP2000:
- We prepare and file IRS Form 2848 (Power of Attorney) to place an immediate hold on IRS collections and speak directly with the assigned AUR unit in Holtsville, Philadelphia, or Ogden;
- We pull the original brokerage Plan Statement & Confirmation Slips showing the fair market value on the vest date;
- We reconstruct a corrected Form 8949 using Adjustment Code "B" to report the basis adjustment already taxed on Form W-2;
- We assemble a comprehensive rebuttal binder with our formal CPA Transmittal Letter;
- We request formal penalty abatement under Treasury Regulation § 1.6664-4 (Reasonable Cause), ensuring complete relief from the 20% accuracy penalty.