Warning - Attention Needed

IRS CP540 Notice

You May Be Subject to Backup Withholding

The trigger notice for backup withholding on interest or dividend income, tied to an unfiled return or unreported income.

What is CP540? CP540 tells you that you may be subject to backup withholding.

What This Notice Means

CP540 tells you that you may be subject to backup withholding. The IRS states this can occur if you haven't filed Form 1040 to report interest or dividend income and pay any taxes owed on that income.

Backup withholding is a different mechanism from a levy: instead of the IRS taking money you already have, it instructs payers of your future interest or dividend income to withhold a share of each payment and send it to the IRS. CP538 on this site describes what happens if a follow-up notice like this one goes unresolved, and CP542 describes what the IRS sends once withholding stops.

Why You Received This Notice

1
The IRS states you haven't filed Form 1040 to report interest or dividend income, or haven't paid the tax owed on it.

Important Deadline

The CP540 page does not publish a specific deadline for responding before backup withholding begins. Use the date on the notice you received.

What You Should Do

File Form 1040 if you haven't already.
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 any taxes owed on that income.

Resolution Options That May Help

Payment Plan

Taxpayers with steady income who can afford monthly payments

What NOT to Do

Do NOT ignore the notice on the assumption backup withholding only affects future income you don't expect to receive -- it applies to interest and dividend payments going forward until resolved.

Frequently Asked Questions

What is backup withholding?

The IRS states: "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?

The IRS states on its CP540 page (irs.gov, retrieved 2026-08-24): "The current rate is 24%, though this may change with tax laws." Note: CP538 in this same notice family states a 28% rate on its own IRS page, also retrieved 2026-08-24. TRC did not resolve that discrepancy between the IRS's own pages -- use the rate printed on the notice you actually received, and confirm the current rate directly with the IRS.

How long will the payer continue backup withholding?

The IRS states: "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?

The IRS states: "You would report backup withholding as you would with any other withholding on your return."

Need Help With This Notice?

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Recommended Next Steps

File or amend the return the notice references.
Pay any resulting balance, or read our payment-plan entry if you can't pay in full.

What this page does not say

The page does not state a specific deadline by which you must act before backup withholding begins.
The page does not describe a Collection Due Process or formal appeal right.
This page's own source states the current backup withholding rate as 24% (retrieved 2026-08-24); CP538 in this same family states 28% on its own IRS page (also retrieved 2026-08-24). Both figures are quoted verbatim from IRS's live pages -- this site has not resolved the discrepancy and states each rate only as its own source presents it.

Sources and last reviewed

Understanding your CP540 notice — Internal Revenue Service, retrieved 2026-08-24

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.