IRS Notice CP23 — Estimated Tax Payment Mismatch

What Is IRS Notice CP23?

IRS Notice CP23 is sent when the estimated tax payments shown on the taxpayer's return do not match the payments the IRS has on record for that taxpayer's account. The mismatch can go in either direction: the IRS may show fewer payments than the taxpayer reported (resulting in a balance due) or more payments than reported (resulting in a refund) [IRC §6654].

Estimated tax payments are quarterly prepayments of federal income tax made by self-employed individuals, business owners, investors, and others who do not have sufficient withholding to cover their tax liability. Payments are due April 15, June 15, September 15, and January 15 of the following year. The IRS tracks these payments by SSN and tax year [IRC §6654(c)].

Common causes of CP23: (1) Payment applied to wrong tax year — the taxpayer paid for 2025 but the IRS applied it to 2024; (2) Payment applied to wrong SSN — a joint filer's payment was applied to the wrong spouse's account; (3) Payment not yet posted when the return was processed — a late payment crossed in the mail with the return; (4) Payment made to wrong IRS address or with incorrect information; (5) Taxpayer reported estimated payments on the return that were not actually made.

If CP23 shows a balance due, the taxpayer must respond within 21 days. If CP23 shows a refund, no action is required. In either case, the practitioner should verify the IRS's payment records against the client's payment receipts before responding.

How to Respond to IRS Notice CP23

Step 1: Gather all estimated tax payment receipts for the tax year. This includes: IRS Direct Pay confirmation numbers, EFTPS transaction records, canceled checks, and bank statements showing the payments. The IRS payment records are the authoritative source — if a payment is not in IRS records, it may not have been properly applied.

Step 2: Compare the payments shown on the CP23 to the client's payment records. Identify any discrepancies: missing payments, payments applied to the wrong year, or payments shown on the return that were not actually made.

Step 3: If a payment is missing from IRS records, call the IRS at the number on the notice and provide the payment confirmation number or check number. Request that the payment be located and applied to the correct account and tax year.

Step 4: If the balance due is correct (the client underpaid estimated taxes), pay the balance within 21 days to avoid additional penalties and interest. Consider whether a penalty abatement request is appropriate under First Time Abatement (FTA) or reasonable cause [IRC §6654(e)].

Step 5: For future years, set up EFTPS (Electronic Federal Tax Payment System) for all estimated payments. EFTPS provides real-time confirmation and a complete payment history, eliminating the risk of misapplied payments.

Implementation Guide: Responding to IRS Notice CP23 for Tax Professionals

CP23 is common for self-employed clients and business owners who make quarterly estimated payments. The key is to quickly reconcile the client's payment records against IRS records and either correct a misapplication or pay the balance due.

Step 1: Pull Payment Records (Day 1)

Request from the client: all EFTPS transaction records, Direct Pay confirmation numbers, canceled checks, and bank statements for the tax year. Also pull the IRS account transcript for the tax year using Form 4506-T or the IRS online account portal. The transcript will show all payments the IRS has on record [IRS Account Transcript, TC 610/660].

Step 2: Reconcile Payments

Compare the client's payment records to the IRS transcript. For each payment the client made, verify: (1) The payment appears on the IRS transcript; (2) The payment is applied to the correct tax year; (3) The payment amount matches. If a payment is missing from the transcript, it was either not received by the IRS, applied to a different year, or applied to a different SSN [IRS Account Transcript analysis].

Step 3: Correct Misapplied Payments

If a payment was applied to the wrong year, call the IRS at the number on the notice and request a payment reallocation. Provide: the payment date, amount, confirmation number, and the correct tax year it should be applied to. The IRS can reallocate payments between tax years. Document the call: date, time, agent ID, and confirmation of the reallocation [IRS Payment Procedures].

Step 4: Address Underpayment Penalty

If the balance due is correct (the client genuinely underpaid), calculate the §6654 underpayment penalty. The penalty is calculated on each quarterly shortfall at the federal short-term rate plus 3%. Consider requesting First Time Abatement (FTA) if the client has a clean compliance history for the prior 3 years. FTA is available for the failure-to-pay penalty but not directly for the §6654 underpayment penalty — however, reasonable cause abatement may apply [IRC §6654(e)(3)].

Step 5: Future Prevention

Set up EFTPS for all future estimated payments. EFTPS provides: real-time payment confirmation, complete payment history, ability to schedule payments in advance, and direct linkage to the IRS payment system. Eliminate paper checks for estimated payments entirely. Also review the client's withholding — increasing W-4 withholding from wages can reduce or eliminate the need for estimated payments [IRS Publication 505].

Advanced Considerations: §6654 Penalty Exceptions and Safe Harbors

The §6654 underpayment penalty can be avoided if the taxpayer meets one of the safe harbor rules: (1) 100% of Prior Year Tax: Pay estimated taxes equal to 100% of the prior year's tax liability (110% if prior year AGI exceeded $150,000); (2) 90% of Current Year Tax: Pay at least 90% of the current year's actual tax liability; (3) Annualized Income Method: Calculate each quarter's payment based on actual income earned through that quarter [IRC §6654(d)].

Reasonable Cause Exception: The §6654 penalty may be waived if the underpayment was due to casualty, disaster, or other unusual circumstances [IRC §6654(e)(3)(A)]. Document the circumstances and file a written reasonable cause request with the CP23 response.

Retired or Disabled Taxpayers: The penalty may be waived for taxpayers who retired after age 62 or became disabled in the tax year or the prior year, if the underpayment was due to reasonable cause [IRC §6654(e)(3)(B)].

EFTPS Strategy: For clients who consistently receive CP23 notices, implement a quarterly payment review: 2 weeks before each estimated payment due date, review the client's income for the quarter, calculate the required payment, and submit via EFTPS with the correct tax year designation.

Client Script: Explaining CP23

(Setting: Client calls about CP23 showing a balance due)

Tax Pro: "CP23 means the IRS's records of your estimated tax payments don't match what was on your return. Before we pay anything, let me pull your payment records and compare them to what the IRS has. Sometimes payments get applied to the wrong year."

Client: "I made all my payments. Why do I owe more?"

Tax Pro: "That's exactly what I want to verify. Can you send me your EFTPS confirmation numbers or bank statements showing the payments? I'll pull your IRS account transcript and we'll find out exactly what happened. If the IRS misapplied a payment, I can get it corrected. If the balance is legitimate, I'll look at whether we can get the penalty waived."