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CP321O notice: what it means and what to do
Got an IRS CP321O notice? Here is what it means, your deadline, what to check before you answer, and how to reply. Check your own letter free: it stays on your phone.
Check my CP321O notice freeWhat the IRS says this notice is about
Our records show you claimed the Schedule 1-A qualified tips deduction. Our initial review of your 2025 Form 1040 federal tax return suggests that you may have claimed too much of a qualified tip deduction on Schedule 1-A. You must ensure you qualify for all deductions and the amounts you claim.
If you made an error in your Schedule 1-A deductions, you may need to amend your return. This notice has been sent to inform you of this potential discrepancy and to help you verify if you claimed this deduction correctly. For more information on how to correctly claim these deductions, see the instructions for Schedule 1-A , found starting on page 101 of the 2025 Form 1040 Instructions PDF .
Your deadline
Answer by the date printed on your notice. If there is no date, answer as soon as you can, and call the number on the notice if you need more time.
What to check before you answer
Is this letter really from the IRS?
The IRS writes first by mail. A real letter shows a notice or letter number, your name and part of your tax ID number. The IRS does not ask for payment by gift card, crypto or wire transfer. If in doubt, sign in to your IRS online account, where many notices are listed.
You may want to
Review your 2025 Form 1040 and make sure you correctly claimed all deductions. If you made an error:
- File an amended return . If you filed electronically, you may file your amended return electronically. You can get help at an IRS Taxpayer Assistance Center .
- Share this letter with anyone helping you with preparing your returns.
- If you file an amended federal tax return, you may also need to file an amended state or local tax return.
Failure to review and address any incorrect or incomplete information could result in additional communication from the IRS.
Common questions
What is the qualified tips deduction?
For tax years 2025-2028, under Working Families Tax Cuts , taxpayers may be eligible for a new deduction if they received qualified tips. For tipped workers, the maximum annual deduction is $25,000, which phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
Who is eligible for the qualified tips deduction?
An eligible individual may deduct qualified cash tips if you have tip income from specific occupations that customarily and regularly receive tips. Workers can take the deduction only for qualified tips that are included in the amounts reported in box 1 of Form W-2 or Form 1099-NEC, in box 3 of Form 1099-MISC, in box 1a of Form 1099-K, or reported by the employee on Form 4137.
Helpful information
Follow the links below to read more about topics related to the qualified tips and other new provisions:
- Working Families Tax Cuts - Individuals and workers
- IRS published schedule taxpayers will use to claim deductions on no tax on tips, no tax on overtime, no tax on car loans, no tax on seniors
- One, Big, Beautiful Bill: How to take advantage of no tax on tips and overtime
- Treasury, IRS provide guidance for individuals who received tips or overtime during tax year 2025
- IRS updates FAQs on qualified overtime deduction
- What to know about the No Tax on Overtime deduction
- Questions and answers about the new deduction for qualified overtime compensation
- Treasury, IRS provide guidance on the new deduction for car loan interest under the One, Big, Beautiful Bill
Follow the links below to read more about filing an amended return or making a payment:
- Form 1040X Frequently asked questions
- 1040 (2025)
- IRSvideos: Amending a Return (youtube.com)
- Make a payment
- Get help with tax debt
- Online account for individuals