IRS begins the process of checking whether taxpayers have reported the correct tax liability on their tax returns as the returns are being processed at IRS Service Centers. An example of such checking is when returns are reviewed for computational errors. IRS’ checking process also includes computer matching of information reported by taxpayers on their returns with information reported to IRS by third parties (e.g., a bank report of interest earnings). Based on the results of such checks, IRS sends computer-generated notices to communicate with taxpayers about discrepancies it has found and adjustments it has made to their tax returns. In 1999, IRS sent 31 million such notices to individual taxpayers.

The notices IRS sends have long been a source of taxpayer complaint and misunderstanding, especially those that involve relatively small amounts of money. Recognizing that taxpayers spend time and resources to deal with these notices, even when small amounts of money are involved, you asked us to develop information about computer-generated notices involving (1) amounts due of less than $5 or (2) refunds of less than $1. As agreed with your office, we met with IRS officials and used IRS data on notices sent during tax year 1999 to determine

• the number and type of computer-generated low-dollar notices IRS sends to individual taxpayers;
• IRS’ cost to prepare and send these notices, respond to taxpayer inquiries related to them, and process any resulting payments; and
• the reasons IRS sends these notices and any plans it might have regarding them.

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