The IRS uses an automated system to verify that taxpayers accurately report income listed on 1099 forms. This system, called the Automated Underreporter (AUR) Program, cross-checks income reported by businesses, banks, and other entities against what individuals report on their tax returns. If a mismatch is detected, the IRS may take action.
1. How the AUR System Works
Each year, businesses and financial institutions submit 1099 forms to the IRS, reporting payments made to independent contractors, freelancers, and investors. The IRS matches this data with individual tax returns using Social Security Numbers (SSN) or Taxpayer Identification Numbers (TIN).
If the IRS finds a discrepancy—such as missing or underreported income—the AUR system flags the return for review. The taxpayer may then receive a CP2000 Notice, which outlines the discrepancy and proposes additional tax owed.
2. What Happens If the IRS Detects a Mismatch?
If the AUR system identifies income that wasn’t reported on a tax return, the IRS may:
- Send a CP2000 Notice proposing adjustments to the return.
- Assess additional taxes, interest, and potential penalties.
- Allow the taxpayer to respond with corrections, documentation, or disputes.
The CP2000 is not an audit, but failure to respond can result in automatic tax assessments.
