How to Respond to an IRS Notice: A Startup Guide to CP2000, CP14, CP05, CP161 and Penalty Letters

Find the notice code, find the response date, and do not ignore it. The code (CP2000, CP14, CP161 and so on) sits in the top or bottom right corner of the first page, and the response or payment date is printed on page one. Everything else follows from those two facts.

Then do three things before you call anyone:

1. Confirm the notice is real. Log in to the IRS business or individual online account, or call the number printed on the notice after checking it against irs.gov. Scam letters exist; genuine notices come by mail, not by text or social media.
2. Pull the return the notice refers to, plus the bank statements and payment confirmations for that period. Most startup notices turn out to be a payment that was applied to the wrong tax period or a form that never reached the IRS.
3. Put the date on your calendar with a one-week buffer. Mail to the IRS is slow, and a reply that arrives late is treated the same as no reply.

We usually tell founders to forward any IRS letter to their CPA the day it arrives. A two-minute scan saves weeks of interest, and many notices have appeal rights that expire quietly.

A CP05 means the IRS is holding your refund while it verifies the income, withholding, credits or business income on your return, and the IRS asks you to allow up to 60 days from the notice date before contacting it. That 60-day window is the practical answer to the common search for a CP05 refund time limit. It is not a statutory deadline; it is the review period the IRS states on its CP05 page.

If you filed the return, you do not need to send anything. The IRS says the review does not mean you made an error. Founders most often see a CP05 on a personal Form 1040 that reports a large refund from estimated payments, a refundable credit, or withholding that the IRS cannot yet match to a W-2.

If you did not file the return, treat the CP05 as a possible identity theft signal. The IRS instructs you to complete Form 14039 (Identity Theft Affidavit) on paper and mail it to the address on the notice.

If 60 days pass with no refund and no further letter, call the number on the notice. Have the return, the notice and your W-2s or 1099s in front of you. If the IRS later sends a letter asking for documents, that letter will have its own response date, and you should answer it in writing.

A CP2000 is a proposal, not a bill: the IRS matched third-party forms (1099s, W-2s, 1099-B, 1099-K) against your return and found income it thinks you left out. The response is generally due 30 days from the notice date, or 60 days if you live outside the United States, and the exact date is printed on page one.

You get a response form with three paths. You can agree and pay, partially agree, or disagree. If you disagree, write a short, specific explanation and attach proof. Common founder examples:

• A 1099-B reported stock sale proceeds with no cost basis, so the IRS taxed the entire proceeds. Attach the closing statement and basis records.
• A 1099-NEC or 1099-MISC was issued to you personally for work your company did. Show the company invoiced and reported it.
• An exercise of nonqualified options appears on a 1099 and again on your W-2. Show the income was already included in box 1.

If you need more time, ask before the due date. Under the Internal Revenue Manual, a caller who asks for more time before the due date is generally given an additional 30 days. Do not let it lapse. If the CP2000 goes unanswered, the next step is a statutory notice of deficiency, which gives you 90 days to petition the Tax Court and cannot be extended.

A CP14 (individuals and some businesses) and a CP161 (common for corporate and employment tax accounts) both say the same thing: the IRS shows an unpaid balance, and it wants payment by the date on the notice. If you pay in full by that date, the IRS will not add more interest after it.

Before you pay, check the math. A common cause of a balance-due notice at a startup is a payment that landed on the wrong form or period. A Delaware C-corp might make an extension payment through EFTPS coded to Form 941 instead of Form 1120, or to tax year 2025 instead of 2026. The money is at the IRS, just not where the notice looks.

If you find a misapplied payment, call the business line printed on the notice (800-829-4933 for businesses) with the EFTPS confirmation number, or reply in writing with a copy. The CP161 page advises contacting the IRS within 10 days of the notice date if you think it made a mistake.

If the balance is correct and you cannot pay in full, ask for a payment plan before the due date. A balance-due notice that is ignored escalates to a notice of intent to levy, and at that stage your options narrow and you start the clock on collection due process rights.

Late-filing penalty notices for corporations usually involve two different penalties, and they get very different treatment.

The Form 1120 failure-to-file penalty is 5% of the unpaid tax for each month or partial month the return is late, up to 25%. For returns due after December 31, 2025 that are more than 60 days late, the minimum is the lesser of $525 or 100% of the unpaid tax. A pre-revenue startup with a net loss usually owes no tax, so this penalty is often zero even when the return is late.

Form 5472 is the trap. A 25% foreign-owned US corporation, or a foreign-owned single-member LLC filing a pro forma 1120, owes a $25,000 penalty for each Form 5472 that is not filed on time or is substantially incomplete. If the failure continues more than 90 days after IRS notice, another $25,000 applies for each 30-day period. The penalty does not depend on tax owed, so a dormant company with $40,000 of founder loans can still receive a $25,000 notice.

Foreign founders get these notices more than anyone, often years after a formation service said no return was needed. If that is you, file the missing return and form immediately, then request relief as described below. Our post on Form 5472 for foreign-owned LLCs covers the filing itself.

First-time abatement (FTA) is an administrative waiver that removes failure-to-file, failure-to-pay and failure-to-deposit penalties if you have a clean recent history. The IRS criteria are:

• The same return type was filed on time for the prior three years (or prior 12 quarters for payroll returns).
• No penalties were assessed in that period, other than an estimated tax penalty, or any that were assessed were later removed for reasonable cause.
• For businesses, the failure-to-deposit penalty was not waived four or more times in that period.

FTA has gaps. It does not apply to event-based filings or to information reporting that depends on another filing, and the IRS does not list international information return penalties such as the Form 5472 penalty as eligible. For those, you need a reasonable cause request: a dated, signed statement explaining what happened, why you exercised ordinary business care, and when you fixed it. Reliance on a professional who told you no filing was needed, serious illness, or a natural disaster are the classic grounds. Not knowing the rule, by itself, rarely works.

You can request FTA by phone for many penalties, which is fast. Reasonable cause requests go in writing, usually in response to the notice or on Form 843. If the request is denied, you can appeal to the IRS Independent Office of Appeals.

Form 2848 (Power of Attorney and Declaration of Representative) lets a CPA, enrolled agent or attorney talk to the IRS for you, see your transcripts and negotiate on your behalf. Form 8821 gives someone read-only access to your account information but no authority to represent you. For any notice involving a penalty or a disputed balance, a signed 2848 is worth having on file before the call.

Call when the issue is simple and factual: a misapplied payment, a request for first-time abatement, a request for 30 more days on a CP2000, or a question about what the notice means. Write a note in your file with the date, the agent's ID number and what they agreed to.

Write when the issue involves a judgment: a reasonable cause request, a disagreement with a CP2000 adjustment, or any response the notice tells you to mail. Send it by certified mail or through the IRS document upload tool if the notice offers one, and keep proof of delivery.

If you are stuck (no response after repeated attempts, or a levy that threatens payroll), the Taxpayer Advocate Service can step in. Request help on Form 911.

The strategy that works best is boring: answer every notice on time, in writing when it matters, with documents attached. A few habits make that easier.

• Use one address. Keep the IRS address on file current through Form 8822-B for the company. Notices sent to a former registered agent or co-working space are a common reason startups miss a response date.
• Keep payment records by form and period. EFTPS confirmations, labelled by form and tax year, solve most balance-due notices in one call.
• File even when you owe nothing. Many penalties are based on the filing, not the tax, so a loss-year 1120 with Form 5472 attached still has to go in on time.
• Do not pay a CP2000 just to make it go away. If the IRS taxed gross proceeds instead of gain, paying it can cost you real money.
• Track appeal deadlines. The 90-day Tax Court window after a notice of deficiency and the 30-day collection due process window after a final notice of intent to levy are hard limits.

This is general information, not tax advice for your specific facts. If a notice involves a five-figure penalty or a foreign-owned company, have a professional review it before you respond.