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IRS CP538 Notice

Second Notice — Backup Withholding on Interest or Dividend Income

States a real consequence a first notice does not: if the IRS doesn't hear from you by the date on the notice, backup withholding begins or continues.

What is CP538? CP538 tells you this is the second notice that the IRS hasn't received payment for taxes owed on Form 1040 interest or dividend income.

What This Notice Means

CP538 tells you this is the second notice that the IRS hasn't received payment for taxes owed on Form 1040 interest or dividend income.

What makes CP538 distinct from CP540 is that the IRS states the actual consequence of missing this notice: "If we don't hear from you by the date on your notice, we'll begin (or continue) backup withholding (BWH)." The IRS also states the current backup withholding rate is 28%, and that this rate can increase or decrease with changes in tax law -- check irs.gov's CP538 page or the notice itself for the rate that applies to you, since a rate like this can change after this page was last reviewed.

Why You Received This Notice

  • 1
    The IRS previously sent a notice about unpaid tax on Form 1040 interest or dividend income and hasn't received payment.
  • 2
    This is the second notice in that sequence.

Important Deadline

The IRS states: "If we don't hear from you by the date on your notice, we'll begin (or continue) backup withholding (BWH)." Use the date printed on the notice you received.

What You Should Do

  • Review your filed Form 1040 for underreported interest or dividend income.
  • File Form 1040-X if you need to report additional interest or dividend income.
  • Pay all taxes owed, using your IRS online account per the page's instructions.
  • Respond by the date on the notice to avoid backup withholding starting or continuing.

Resolution Options That May Help

Payment Plan

Taxpayers with steady income who can afford monthly payments

What NOT to Do

  • Do NOT miss the date on the notice. Unlike CP540, this notice states plainly what happens next if you do.

Frequently Asked Questions

What is backup withholding (BWH)?
The IRS states: "This is when we instruct the payers of certain types of income (most commonly interest and dividends) to withhold a percentage of tax from future payments."
What is the backup withholding rate?
The IRS states on its CP538 page (irs.gov, retrieved 2026-08-24): "The current rate is 28% and can increase or decrease with the tax laws." Confirm the rate against the current version of that page or your own notice, since it is stated to change. Note: CP540 and CP542 in this same notice family each state a 24% rate on their own IRS pages, also retrieved 2026-08-24 -- this site has not resolved that discrepancy between IRS's own pages and states each rate only as its own source presents it.
How long does backup withholding continue?
The IRS states payers should continue backup withholding until the IRS tells them to stop, or until you show them written certification from the IRS that you're no longer subject to it.

Need Help With This Notice?

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Related Notices

CP540You May Be Subject to Backup WithholdingCP542Backup Withholding Stopped

Recommended Next Steps

  • Pay the balance or set up a payment plan before the date on the notice, if you can.
  • If backup withholding has already started, CP542 on this site describes the notice you get once it stops.

What this page does not say

  • This page's own source states the current backup withholding rate as 28% (retrieved 2026-08-24); CP540 and CP542 in this same family each state 24% on their own IRS pages (also retrieved 2026-08-24). Both figures are quoted verbatim from IRS's live pages -- this site has not resolved the discrepancy.

Sources and last reviewed

Sourced to primary IRS materials and editorially reviewed on 2026-08-24. Not reviewed by a tax professional. Not tax advice. This page explains a notice in general terms and is not tax or legal advice about your situation. Always use the dates and instructions printed on the notice you actually received. Report a correction.