The IRS' computers and clerks grind out millions of notices demanding more tax. Here's how to deal with them.

 
Do you fear being grilled by an Eliot Ness-wannabe from the Internal Revenue Service? Unless you have a secret offshore account, are running a cash business mostly off the books or are earning millions a year, that shouldn't be a worry. If you're a reasonably law-abiding taxpayer, fear instead the IRS' computers and its vague letters demanding more cash.

In 2008 IRS agents and examiners audited only 310,000 individual taxpayers--one in 450--in person. But lower-paid, lesser-trained IRS employees, working largely off computer data, performed 1.1 million "correspondence audits," sent out 3.2 million "math error notices" and mailed another 3.5 million "CP-2000" letters stating that taxpayers seemed to have left some bit of income off their returns.

 

Since 2000 the IRS has tripled the number of correspondence audits. In her 2009 annual report National Taxpayer Advocate Nina E. Olson pegged them as one of the most serious problems facing taxpayers. Now, with the IRS widening its use of "math error" notices, too, she'll be adding those to her 2010 list of taxpayer horrors, she tells us.

While they may sound innocuous, the math notices are sometimes more vexing than the correspondence audits. In a correspondence audit, the IRS zeroes in on an issue or two that stand out on a 1040--say, big deductions for charity or unreimbursed employee business expenses--and sends a letter asking the taxpayer to produce documents supporting those deductions within 30 days. According to the Treasury's auditors, mail-handling problems at the IRS sometimes mean taxpayer responses don't get to the right person in time. But in theory, at least, the taxpayer has a chance to make his case.

Likewise with a CP-2000 notice--based on a mismatch between the taxpayer's return and the W-2s and 1099s sent by employers, banks and brokers to the IRS--the taxpayer is told what he supposedly omitted and given 30 days to explain. In some cases you can call the IRS and point out where the income was included on your 1040. If, that is, you don't mind holding--the IRS' "service goal" during this tax season is to answer 71% of calls and only after an average taxpayer wait of 12 minutes (that is the IRS' goal, which they are not meeting).

But with math error notices, the IRS skips a step: It adjusts the tax owed before asking the taxpayer to explain. The current math notice doesn't even disclose that a taxpayer has 60 days to ask for an "abatement," although Jodi Patterson, director of the IRS' Office of Taxpayer Correspondence, promises that a new notice form due out this summer will mention it. "Eventually, we'll get to all of those notices that are still a disaster," she says.