IRS Audit & Refund Notice Assistance for Ecommerce and Online Sellers in Austin

A CP2000 notice reaches an ecommerce seller because the IRS computer matched a third party information return, almost always a Form 1099-K, against the income you reported and found a gap. This is where IRS audit and refund notice assistance starts, because the gap is usually not real unreported income, it is a reconciliation problem baked into how marketplaces report. The 1099-K shows gross payments, the entire amount buyers paid before any deduction, so it includes the platform referral and fulfillment fees, the refunds you issued to customers, the sales tax the marketplace collected and remitted for you, and the shipping charges you collected and passed to carriers. Your actual revenue is much lower than that gross, so the automated match flags a discrepancy and proposes tax on it.

The important thing to understand is that a CP2000 is a proposal, not a bill, and it is frequently wrong for online sellers precisely because the matching program does not know about your fees and refunds. It sees a big number reported by Amazon and a smaller number on your return and assumes the difference is income you hid. It is not, but you have to prove that with a documented reconciliation, and you have to do it within the response deadline printed on the notice, usually 30 days, or the proposal becomes an assessment you then have to fight much harder to undo. The notice also lists proposed penalties, most often the 20 percent accuracy penalty, which we can often remove entirely once the reconciliation shows there was no real underreporting in the first place.

Here is a worked example. Your Amazon 1099-K reports $250,000 of gross payments. Of that, $45,000 was Amazon fees, $15,000 was customer refunds, and $12,000 was sales tax Amazon collected on your behalf. Your true product revenue is about $223,000, and the fees and refunds are legitimate business reductions. The CP2000 might propose tax on a phantom gap of $60,000 or more. At federal rates plus self employment tax for a sole proprietor, the proposed tax plus penalties can run several thousand dollars on income you never actually earned. Here the Austin base helps, because Texas has no income tax return, so unlike a New York seller you do not also grow a matching state income bill on the same phantom number while the federal notice is open, which is one of the few times the tangle of marketplace reporting is a little less punishing.

We fix this by reconciling the 1099-K line by line to your books, showing the gross, subtracting each category of fee, refund, and pass through, and arriving at the revenue you correctly reported. We draft the response with that documentation attached and file it before the deadline, we request abatement of any accuracy penalty, and because the reconciliation is built during the year through your bookkeeping, the answer usually already exists rather than being rebuilt under pressure. If more than one platform reported you, we net all of them together so a second 1099-K from Shopify or PayPal does not create a fresh mismatch after the first is resolved. The IRS explains the notice on its Understanding Your CP2000 Notice page, and the reporting form is detailed on the Understanding Your Form 1099-K page. General audit procedure is in IRS Publication 556.

A sales tax nexus audit is one of the most serious pieces of IRS audit and refund notice assistance for an Austin ecommerce seller, though it comes from the Texas Comptroller or another state rather than the IRS, since sales tax is a state and local matter. The audit turns on economic nexus, the rule from South Dakota v. Wayfair that lets a state require you to collect its sales tax based purely on how much you sell into it, with no physical presence needed. Texas sets its threshold for out of state sellers at more than $500,000 of Texas revenue in the prior twelve months, higher than the $100,000 or 200 transactions most other states use. When a state sees that your shipments crossed its line and you never registered or collected, it opens an audit or sends a nexus questionnaire, and the exposure is real because the tax you failed to collect from customers becomes a liability you owe yourself.

For a seller based in Austin, the risk runs in two directions. Your home state, through the Texas Comptroller, audits whether you correctly collected and remitted Texas sales tax on your taxable direct sales, the Shopify and own website orders that no marketplace facilitator covered, since Amazon and Etsy already collect on the sales they process. That means the 6.25 percent state tax plus local sales tax that pushes the combined rate in most of the Austin area to about 8.25 percent, which is the state cap, and Texas sourcing rules determine which local rate applies. Other states, meanwhile, pursue you for the periods after you crossed their economic nexus threshold. Because the duty to collect starts on the date you cross the line, not the following year, the back exposure can reach across multiple years by the time a state notices.

Here is a worked example. Your Shopify store shipped $130,000 of product into Georgia across 900 orders before anyone flagged it. That is well past the $100,000 threshold, so Georgia can assess the sales tax you should have collected, roughly $9,000 at about 7 percent, plus penalties and interest, and all of it is payable by you because you never charged customers. Spread that across several states you grew into unnoticed and the total becomes a genuine threat to the business, which is exactly why this cannot be ignored when the first questionnaire arrives. Left alone, a single state audit often triggers letters from the others once the seller shows up on the radar, and the fact that Texas spares you a state income tax does nothing to shield you from these sales tax bills.

We handle these audits by reconstructing your complete sales by state history from marketplace and Shopify reports, determining exactly when and where you actually crossed each threshold, quantifying the real liability rather than the state opening guess, and pursuing voluntary disclosure agreements where they fit, which often limit the look back period and waive penalties. We also separate the marketplace facilitated sales the platforms already remitted, so you are not assessed twice on Amazon orders that were never your responsibility. Then we set up ongoing collection so the problem stops growing, coordinated through your tax compliance. The Texas sales and local tax rules are on the Texas Comptroller site, and the decision that created economic nexus is the Wayfair opinion.

Surviving an IRS income tax audit of your ecommerce business, a central part of IRS audit and refund notice assistance, comes down to records, and for an online seller the records that matter most are inventory and cost of goods sold. Auditors focus there because it is where sellers most often go wrong, by expensing inventory when they pay for it instead of deducting it as cost of goods sold when the items actually sell. If your deductions were taken on the wrong basis, the auditor will recompute cost of goods sold using the standard formula, beginning inventory plus purchases minus ending inventory, and any overstatement gets disallowed and added back to taxable income. For an Austin seller this is a federal exam only, with no Texas income tax return in play, which removes one layer a New York seller would also have to defend, though a large entity can face a separate Texas franchise tax review on the same numbers.

The ending inventory figure is the pressure point. Because cost of goods sold falls as ending inventory rises, an auditor who doubts your ending inventory count can effectively increase your income. If you never counted or valued the product sitting in your warehouse or in Amazon fulfillment centers at year end, you cannot support the number, and unsupported numbers lose. This is compounded for sellers who never chose a consistent valuation method, because first in first out and weighted average produce different results and the auditor will not accept a method you cannot show you actually followed. Importers get a second layer of scrutiny, and many Austin sellers bring product in from overseas, because customs duties, freight, and inbound shipping have to be capitalized into inventory as landed cost rather than expensed separately, and an auditor who finds those costs written off directly will move them back into inventory and raise income again.

Here is a worked example. Suppose you reported $190,000 of cost of goods sold, but your records do not document the $60,000 of unsold product on the shelf at December 31. The auditor treats the ending inventory as understated, disallows $60,000 of the deduction, and raises your taxable income by that amount. The federal income tax plus self employment tax on a $60,000 adjustment can approach $18,000 for a sole proprietor before penalties and interest, a painful result from a recordkeeping gap rather than any real overstatement of business performance. In New York the same seller would owe a state income assessment on top, so the Austin base does soften the total, but $18,000 of federal tax and penalties from one unsupported number is still a serious hit.

The defense is built long before the audit. We keep contemporaneous inventory counts, tie purchases to supplier invoices and landed cost, maintain a clean cost of goods schedule, and reconcile marketplace settlement reports to bank deposits so revenue and expenses both hold up. When the exam comes, we represent you, present the records in the format the auditor expects, and keep the discussion anchored to documented figures rather than estimates, which also narrows the audit so it does not wander into other years. Because this support is produced through your monthly financial reporting, it exists before an examiner asks rather than being assembled in a scramble, and the same clean COGS figure defends a franchise margin as well. The audit process and your rights are described in IRS Publication 556, and the inventory and accounting method rules are in IRS Publication 334.

The moment a notice arrives, the most valuable part of IRS audit and refund notice assistance for an Austin ecommerce seller is simple and often ignored, do not sit on it. Every notice has a deadline, and the consequences of missing it are severe. A CP2000 left unanswered turns into an assessment, meaning the proposed tax becomes a bill you now have to contest through a harder process. An unanswered Texas Comptroller or other state nexus questionnaire escalates into a full sales tax audit. An unanswered examination letter can lead to the auditor deciding the adjustments without your input. Time is the one asset you cannot recover, and interest on any real liability runs from the original due date, so delay literally adds cost.

The second step is to read what the notice actually is, because they are not all the same and the right response depends on the type. A CP2000 is a proposed adjustment from automated matching, usually fixable with a reconciliation. An audit or examination notice requests records and is a broader review. A math error notice corrects an arithmetic issue and has different appeal rights. A balance due notice like a CP14 asserts you owe money now. A Texas sales tax notice concerns collection and remittance rather than income. Each has its own deadline and its own correct response, and treating one like another wastes the limited time you have. This is exactly where a professional read saves you, because we can tell within minutes whether the notice has merit and whether it even applies to an ecommerce fact pattern, which many automated notices do not.

Here is a worked example of why speed pays. Suppose a CP2000 proposes $9,000 of additional federal tax on a phantom 1099-K gap. Answered within the 30 day window with a clean reconciliation, the entire $9,000 disappears. Ignored past the deadline, it becomes a $9,000 assessment plus penalties and accruing interest that you must then fight to reverse, spending far more effort to undo what a timely response would have prevented outright. Worse, an assessment can trigger a lien or a levy on the very bank account your marketplace payouts land in, freezing the cash flow the business runs on. Because Texas has no income tax, there is no parallel state income bill growing alongside the federal one, which is a real Austin advantage, but a federal assessment is damaging enough on its own to make a timely response worth it.

So the practical protocol is this. Send us the notice the day it arrives, do not respond to it yourself in a panic, and do not throw it in a drawer. We read it, tell you plainly whether it is right or wrong, rebuild the numbers, draft the response with documentation, and file it within the deadline, and when the notice is actually in your favor or reveals an overpayment, we pursue the refund or abatement rather than leaving money on the table. We also calendar the follow up, because the IRS does not always process a correct response on the first pass and a second contact is sometimes needed to close it. We connect the fix to the broader work we do for small businesses so a one time notice does not become a recurring problem. The IRS explains notice response and deadlines on its CP2000 page, and taxpayer rights during examination are in IRS Publication 556.

Yes, IRS audit and refund notice assistance is not only about defending against proposed tax, it also covers recovering money you overpaid, which happens to Austin ecommerce sellers more often than you would think given how tangled marketplace reporting is. Overpayments arise in several ways. You may have reported the gross from a 1099-K without deducting fees and refunds, overstating income and paying tax on money you never kept. You may have failed to claim cost of goods sold correctly, understating deductions. You may have paid sales tax to a state where you did not actually have nexus, or double paid tax a marketplace facilitator already remitted. Each of these is a recoverable overpayment if it is identified and claimed in time.

The key constraint is the statute of limitations for refunds. Generally you have three years from the date you filed the return, or two years from the date you paid the tax, whichever is later, to claim a federal refund, and states have their own windows for sales tax. That deadline means an overpayment sitting undiscovered can expire, so part of what we do when we take on a seller with messy prior years is review those returns for recoverable money before the window closes. In Austin the recoverable amount on the income tax side is purely federal, because there is no Texas income tax that could have been overpaid, which actually simplifies the review, though a seller who overpaid Texas sales tax or double remitted on marketplace facilitated orders can also recover that from the Comptroller.

Here is a worked example. Suppose two years ago you reported your Shopify and Amazon income straight from the 1099-K gross of $300,000 without subtracting $70,000 of fees and refunds, because you did not know better. You overstated income by $70,000. At a blended federal income and self employment rate that can exceed 30 percent for a sole proprietor, that overstatement cost you well over $20,000 in federal tax you did not owe. By amending the return with a proper reconciliation, we can recover that overpayment, provided we act within the refund statute of limitations, which is why reviewing prior years promptly matters. If the same error ran across two open years, the recoverable amount can approach $40,000, which is real working capital back in the business, and because Texas has no income tax there is no state income refund to chase, only the federal one.

We identify overpayments by reconciling prior year 1099-K forms to what should have been reported, checking that cost of goods sold and inventory were handled correctly, and confirming sales tax was only paid where genuinely owed. Where we find an overpayment, we file the amended return or refund claim with documentation and track it to payment, following up with the IRS or the state until the check or credit actually posts. Where a notice itself is wrong in your favor, we say so and pursue the correction rather than just accepting it. We build the ongoing records through your bookkeeping so future returns are right the first time and no new overpayments accumulate. The refund and examination rules are in IRS Publication 556, and the 1099-K reporting that drives many of these overpayments is explained on the IRS Understanding Your Form 1099-K page.