Navigating the IRS Automated Underreporter Program: What You Need to Know

The IRS Automated Underreporter (AUR) Program can catch many taxpayers off guard. If you receive a notice from the IRS about underreported income, it often comes from this program. Understanding how the AUR works and what steps to take can help you respond effectively and avoid unnecessary penalties.

What Is the IRS Automated Underreporter Program?

The IRS Automated Underreporter Program is a system designed to identify discrepancies between the income and payment information taxpayers report on their tax returns and the information the IRS receives from third parties. These third parties include employers, banks, and other financial institutions that submit forms such as W-2s, 1099s, and other information returns.

When the IRS detects a mismatch, the AUR program generates a notice to the taxpayer asking for clarification or additional information. This process helps the IRS ensure that taxpayers report all their income accurately.

How Does the AUR Program Identify Underreporting?

The IRS receives millions of information returns each year. The AUR program compares these forms against the income reported on individual tax returns. For example:

• If your employer reports $50,000 in wages on your W-2, but your tax return shows only $40,000, the AUR program will flag this difference.

• If a bank reports $500 in interest income on a 1099-INT, but you do not include this on your return, the program will notice the omission.

  
  

The IRS then sends a notice, often called a CP2000, which outlines the discrepancies and proposes additional tax owed.

What to Do If You Receive an AUR Notice

Receiving an AUR notice can be stressful, but it is important to respond promptly and carefully. Here are steps to follow:

1. Read the Notice Carefully

   The notice will detail the income the IRS believes you underreported and the proposed changes to your tax liability.

   
   

1. Compare With Your Records

   Check your tax return and the information returns mentioned in the notice. Sometimes the IRS has incorrect data, or you may have made a reporting error.

   
   

2. Respond by the Deadline

   The notice will include a deadline for your response. Ignoring it can lead to additional penalties and interest.

   
   

1. Agree or Disagree

   • If you agree with the IRS’s findings, you can sign the response form and pay the additional tax.

   • If you disagree, provide documentation such as corrected forms, receipts, or explanations to support your position.

   
   

2. Seek Professional Help if Needed

   Tax professionals can help you understand the notice and prepare a response, especially if the situation is complex.

   
   

Common Reasons for Underreporting

Understanding why discrepancies occur can help you avoid AUR notices in the future. Common reasons include:

• Missing Income

Forgetting to include income from freelance work, side jobs, or investment earnings.

• Incorrect Reporting

Errors in entering amounts from W-2s or 1099s on your tax return.

• Mismatched Social Security Numbers

If the Social Security number on the information return does not match your tax return, it can trigger a notice.

• Timing Differences

Income reported in one tax year by a third party but claimed in another year by the taxpayer.

How to Prevent Issues With the AUR Program

Preventing problems with the AUR program starts with accurate and complete tax reporting:

• Keep Good Records

Maintain copies of all W-2s, 1099s, and other income documents.

• Double-Check Your Return

Verify that all income matches the information returns you received.

• Report All Income

Include income from all sources, even if you do not receive a form.

• Correct Errors Promptly

If you discover a mistake after filing, consider filing an amended return.

What Happens If You Don’t Respond?

Ignoring an AUR notice can lead to the IRS assessing additional tax, penalties, and interest without your input. The IRS may also file a substitute return on your behalf, which often results in a higher tax bill. Responding promptly gives you the chance to correct errors and avoid unnecessary costs.

IRS Automated Underreporter Program notice with calculator

Understanding Penalties and Interest

If the IRS finds you owe additional tax through the AUR program, you may also face penalties and interest. Penalties can include:

• Failure-to-Pay Penalty

Charged if you do not pay the tax owed by the due date.

• Accuracy-Related Penalty

Applied if the underreporting is due to negligence or disregard of rules.

Interest accrues on unpaid tax from the original due date until payment is made. Paying promptly or arranging a payment plan can reduce these costs.

Final Thoughts on the IRS Automated Underreporter Program

The IRS Automated Underreporter Program plays a key role in ensuring tax compliance by matching third-party income reports with tax returns. If you receive a notice, take it seriously and respond with accurate information. Keeping thorough records and reporting all income can help you avoid these notices. When in doubt, consulting a tax professional can provide clarity and peace of mind.

Taking control of your tax situation after receiving an AUR notice can prevent further complications and help you stay on good terms with the IRS. Stay informed, stay organized, and respond promptly to protect your financial well-being.