Don't panic if the IRS sends you a letter

By Jeff Schnepper

Let's pretend you've just received a letter from the Internal Revenue Service.

Relax. Most letters from the IRS involve minor issues. It's possible that you made an arithmetic error on your return and the IRS actually owes you money. Alternatively, you might owe the IRS some money and interest. The interest rate is calculated by adding 3% to the Federal Reserve's short-term rate, currently 0.25%. The rate can be recalculated every three months. It's currently 4%.

So if you owe $100 for one month, the interest is only 33 cents ($100 times 0.04, divided by 12). If you owed $1,000, the total interest would only be $3.33.

The biggest reason people receive letters from the IRS is human error. Each year, more than 1 million letters are sent to people because they failed to sign their returns. Or maybe they made a mathematical error. Or even better: The IRS made the mistake. For example, in 1998, the IRS sent out apologies to 20,000 taxpayers for mistakes it made in handling their accounts.

Math errors rarely result in audits

Sometimes, the IRS errors are ridiculous. A few years ago, Kenneth Steen of Chattanooga, Tenn., expected a refund of $513. Instead, he received a letter from the IRS demanding payment of more than $300 million. An IRS official later confirmed that about 3,000 people around the nation got similar erroneous notices.

According to the General Accounting Office, about half of the 10 million notices the IRS issues each year are because the information is "incorrect, unresponsive or incomplete."

If it's a math mistake, these errors rarely lead to a full audit. Check the numbers. Sometimes, the IRS misreads one of your numbers or the number is keyed incorrectly into the IRS computer. If it's wrong, send a letter with a printout of your calculations.

Mismatched interest and dividend reporting is the No. 2 cause for a letter from the IRS. Payers of interest and dividends are required to report those payments both to you and to the IRS on a Form 1099. If the amounts reported don't match the amounts on your return, you can bet you'll get a letter from the IRS.

Continued: Never represent yourself

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