What to Do if You Get an IRS Notice

Getting an IRS notice is always a jolt. But whatever you do, don't reach for your checkbook—especially if the bill is for $600 or less.

According to the Government Accounting Office (GAO), 48% of these notices are "incorrect, unresponsive or incomplete—"in other words, many audit notice bills are bogus. So, if many notices are wrong, why does the IRS keep sending them? Because IRS research has shown that, rather than fight the IRS, most taxpayers would rather cough up the money—as long as it's less than $600!

Here are the four types of mail audits that are the biggest revenue generators:

1. Correction notices. The IRS says they found an error on your return. And they (through the goodness of their heart) corrected it for you. The punchline—"Please remit $x more."

Don't automatically pay the IRS if the correction notice is for an underestimated tax penalty. As long as you had 100% of the previous year's taxes withheld for the tax year in question, you likely don't owe the IRS anything. For example, you had $4,500 in taxes withheld but your total tax bill for this year was $8,000. As long as your total tax bill for the previous year was $4,500 or less, you're in the clear. Look at your previous tax return before you write a check.

2. Unreported income notices. The IRS tells you that you never reported income from some source, often a company you never heard of, or income that was reported a year earlier.

3. Penalty notices. The IRS assesses you with a penalty for no reason.

4. Interest assessment notices. The IRS often incorrectly calculates the interest you owe. If you receive one of these notices and you think the IRS is wrong—fight back! The IRS works on 90% bluff. To call the IRS' bluff, send a letter and copies of your supporting documents (receipts, canceled checks, etc.) via certified mail, return receipt requested to the IRS office which issued the notice. In your letter tell the IRS you don't owe the tax and why. Ask them to quickly clear up this mistake. The problem should be resolved in a matter of a few weeks. If it isn't, call the IRS' Problem Resolution Department (800/829-1040). This department has access to all IRS information and can work with you to get the problem taken care of for good.

Click on any of the links below for even more helpful tax information:

• What to do if You Get Audited
• 7 Simple Tax Moves for 2008
• What to do With Your Tax Rebate