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CP2000 doesn't mean all of that is income, part of that money is expense, so FD will tell IRS say you made $50,000. Then you need to say 97% $48500 is expense and pay tax on $1500. Have your records ready if you get audited. You can't avoid getting audited. Best assume you will get audited and be ready.

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The way I set this up in my accounting system was to pile all first data deposits into an asset clearing account, create a bill to pay the client, and then record a payment from that clearing account. Since the IRS only sees income & expenses, I can understand the trigger for the CP2000. I didn't see a logical way to report this activity on my return.

I guess I need to write a short letter explaining it, saying I don't do it anymore, and include highlighted bank statements of the money coming in, and the money going back out. Unfortunately I don't have tax numbers for the clients.

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