Many things are happening inside the Internal Revenue Service which make this summer of 2011 the perfect time for an update on this fast-growing form of IRS communication.

There are so many letters now that a new software product has been developed to help tax professionals cope with the staggering increase.  Its called "Beyond415".  Get it?  It's for use after the Tax Season.

Here are 2 recent statistics about the CP 2000: 

IRS will mail 200 million notices this year.  All of us could get one!

That's a 670% increase since 2001.

IRS has an extensive computer matching program for all the ways we receive income, and in several cases, expenses, from someone else.

Here's what happens.  Every year we all receive W-2s, 1099s (and there are 17 kinds of 1099s!), 1098s (5 kinds of those), SSA-1099s, and some other forms.  These forms, taken together, make up the heart of our tax returns.

Unbeknownst to many of us, the data on these forms are also reported to IRS, which promptly sets them up in a computer program called the Automated Underreporting Program. 

These forms just sit there for a year or more.  IRS electronically puts them in our individual files, and then sits on them for a year.  IRS has to do it that way, because these forms come in at different times during the year, and sometimes they come in late or come as corrected copies.

But IRS - or really, its computers--hasn't forgotten all these numbers.

After about a year, when they think they've gotten all the forms they're going to get, they start matching the data in the forms to the data reported on the individual returns.

When something doesn't match, the notices - letters, really - go out.

There are several reasons for this huge growth of CP 2000 correspondence.

First, the volume of information the IRS receives on all of us is staggering.  Think of all those documents that go into the makeup of your tax return, and multiply that number by all the taxpayers in the country.

There really is no other way for Big Brother to accurately keep up with all the information generated by the most complex tax system on earth.

Secondly, the IRS knows - it's not even subject to dispute - that we are more likely to report income if we know they already know about it.  That's human nature.

If no one tells on us, most taxpayers forget to report that income, or possibly don't report the full amount.

The people in Washington whose job it is to run things and to pay the Governments bills worry about this underreporting.  It's called the Tax Gap, and is estimated to be at least $75 billion dollars a year.

If you do get such a letter the first thing you must do is to open it!  Many, many people are so afraid of IRS communications that they don't open the letter for weeks or months.

In most cases, this is really not the time to push the panic button.  The Service is just asking for a response, because after all, they could be wrong, too.

They could have received some erroneous information.  Or they could have placed it in the wrong account. 

Think about it.  They've been told that you have a W-2 reporting $108,000 of income from an employer you have never heard of.

And that employer somehow mixed your name and Social Security Number up with someone else, and you're about to get taxed on money you never saw.

These things can be fixed, but it's not going to happen until you open the letter and take action.

The main point is this - open the letter!  They are only asking for information at this point, and the ultimate action just might be in your favor.

Think of the CP notice as the IRS trying to say very politely, Excuse me, but can you please explain this?  They're just doing it with a computer-generated letter.  No people have reviewed the notice at this point.

If you've got a good reason why you didn't report the income, and you've got documentation, and most importantly, if you respond, the IRS people will bend over backward to help you out.

It's when you don't respond that you can get in trouble.  Their feelings get hurt, you see, and the computers are programmed to keep sending letter after letter.  And that's when the letters start using nasty words like lien and levy.

One last comment.  IRS will always contact you with a letter.  If you get an email, it's not IRS.  It's someone trying to scam you.  Never respond to an official-looking IRS email.

Author: Bill Belchee
Beacon Small Business Solutions, LLC
www.beaconsmallbiz.com