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CP540 notice: what it means and what to do
Got an IRS CP540 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 CP540 notice freeWhat the IRS says this notice is about
You’re receiving this notice because you may be subject to backup withholding. This can occur if you haven’t filed Form 1040, U.S. Individual Income Tax Return , to report interest or dividend income and pay any taxes owed on that income.
What you need to do
- File Form 1040 , if you haven’t done so already.
- Review your Form 1040 for any underreported interest or dividend income.
- File Form 1040-X, Amended U.S. Individual Tax Return, if you need to report additional interest or dividend income.
- Pay any taxes owed on the interest or dividend income reported on your Form 1040 or Form 1040-X.
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
Stock, fund or crypto sales: check your cost basis
You owe tax on the gain, the sale price minus what you paid, not on the full sale price. If the notice counts the full sale price as income, send your broker statements that show what you paid. This often lowers the amount a lot.
Payment app income (Form 1099-K): check personal payments
Money from friends and family, reimbursements, and personal items sold for less than you paid are not taxable income. If the notice counts them, list them and send your records.
Retirement distribution (Form 1099-R): was it rolled over?
Money moved into another retirement account within 60 days is generally not taxable. If that is your case, send the statement that shows it.
Self-employment income (Form 1099-NEC or 1099-MISC): count your expenses
If this was business income, your business expenses lower the taxable amount. Send a Schedule C with your expenses and keep your receipts.
State tax refund (Form 1099-G)
A state tax refund is generally taxable only if you itemized deductions the year before. If you took the standard deduction, say so in your answer.
You can agree with some items and not others
The response form lets you agree with part of the changes. Explain each item you disagree with and attach a document for each one.
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
- Learn more about backup withholding .
- Review Publication 1335, Backup Withholding Questions and Answers PDF .
- Visit your personal tax account to view your payoff amount, payment history, or order transcripts.
Common questions
What is backup withholding? (updated Oct. 21, 2024)
Backup withholding is a tax that applies mainly to interest and dividend income. It occurs when the IRS instructs payers to withhold a percentage of payments to ensure that taxes are collected.
What is the backup withholding rate? (updated Oct. 21, 2024)
The current rate is 24%, though this may change with tax laws.
How long will the payer continue backup withholding? (updated Oct. 21, 2024)
Backup withholding will continue until the IRS instructs the payer to stop or you provide written certification from the IRS stating you’re no longer subject to backup withholding.
How do I report backup withholding when I file my taxes? (added Oct. 21, 2024)
You would report backup withholding as you would with any other withholding on your return.
Helpful information
- Publication 17, Your Federal Income Tax (For Individuals)
- Full list of tax forms, instructions and publications