In recent years, the IRS has been sending taxpayers more computer generated "notices" and relying less on IRS employees to get directly involved in issues including collections. Many state and local governments are following suit and sending out more notices to taxpayers.

New Report: Sending IRS Balance Due Notices Faster Could Increase Collections When a taxpayer has a balance due on his or her account, the IRS can send out a series of up to three notices -- each 35 days apart. But if the IRS sent the notices out 28 days apart, it could collect more money, according to a recent report from the Treasury Inspector General for Tax Administration (TIGTA). During the 2010 fiscal year, the IRS sent out about 21.9 million balance due notices to individuals to try and collect $67.9 billion. The results: More than $11.2 billion was collected, nearly $9.5 billion was abated, and $2.1 billion was offset by taxpayer refunds. Taxpayers entered into installment agreements with the IRS for another $8.4 billion -- leaving $32.4 billion uncollected. The TIGTA report cited research that shows collections diminish as accounts age. Therefore, TIGTA recommended reducing the time between each notice by seven days.

Common IRS Notices IRS notices cover specific issues about an account or tax return. Here is a list of some common IRS notices (there are more than 100) and the reasons why they are issued. CP number Tax reason CP12 The IRS made changes to correct a miscalculation on your return. CP14 First notice that you have a balance due. CP31 Your refund check was returned to the IRS. Need to update address. CP42 The amount of your refund has changed because the IRS used it to pay your spouse's past due tax debt. CP49 All or part of your refund was used to pay a tax debt. CP-90/CP-297 Final notice -- notice of intent to levy and notice of your right to a hearing. CP-91/ CP-298 Final notice before levy on Social Security benefits. CP 161 Request for payment or notice of unpaid balance. CP 501 First reminder notice that you have a balance due. CP 503 Second reminder notice that you have a balance due. CP 504 Final balance due notice. If amount is not paid immediately, the IRS will seize (levy) a state tax refund and search for other assets to levy. CP 523 Notice of default on installment agreement and imminent seizure (levy) of assets. CP 2000 Notice of proposed adjustment for underpayment or overpayment.

The result: You may receive a tax notice in your mailbox. (IRS notices are never sent via e-mail.) Many of these notices are routine and can be dealt with easily. If you receive a notice and want more information about how to respond, contact your tax adviser.

Making IRS notices clear and efficient is one of IRS Commissioner Doug Shulman's priorities. In 2010, the agency began redesigning notices to look less like legal documents. The language is easier to understand, according to the IRS. Shulman has said he wants to take advantage of more streamlined, technological processes to improve tax compliance.

Federal Level Notices

In the last decade, the agency has ramped up its collection intensity after a 2001 study revealed a $345 billion tax gap exists between the amount owed by taxpayers and the amount the IRS actually collected. The study pinpointed a complex and ever-changing tax code that is ripe for abuse.

Significantly, the number of automatic notices mailed to taxpayers increased by 670 percent from 2001 to 2009. In 2010 alone, the IRS issued 201 million notices to taxpayers. Considering there were only 155 million taxpayers, this is an astounding number.

But that doesn't mean you should panic if you receive one of these prevalent missives. Many of them are routine. Only 1.4 million of the notices were for audits, while approximately 50 million were account discrepancies and return adjustments (see the box for the most common notices). In most cases, you can address the issue with relative ease, especially if you rely on a tax professional to represent your position.

Although the IRS still conducts audits and face-to-face meetings, its compliance strategy appears to be shifting. It is focusing more on certain resources, such as tax preparers and information systems, to help close the tax gap.

Face-to-face audits versus audits through the mail: The IRS conducts more "correspondence" audits than "field" audits. In other words, you are much more likely to get a letter in the mail than see an IRS auditor at the door.

Typically, a correspondence audit is limited to one or two items on your return. These matters may be resolved by mailing the IRS copies of receipts, checks or other records requested.

In fiscal 2010, there were 1,272,952 correspondence audits and 462,131 field audits. To illustrate how the IRS uses the mail more often these days, let's look back at the 1998 fiscal year when the IRS conducted 625,021 correspondence audits and 567,759 field audits.

State and Local Level Notices 

Individual states appear to be taking a different collection approach. Increasingly, states are eliminating sales tax holidays in an attempt to drum up more revenue. A report from the Aberdeen Group, a research firm, also found a dramatic increase in state government audit activity in the past 12 months.

The cost of a negative audit remains high with companies continuing to struggle with various compliance requirements. However, companies that leverage real-time sales and use tax management processes and technology may reduce their audit cost and penalties. The Aberdeen Group also reported that sales and use tax compliance often receives less attention than other business taxes, such as corporate income taxes.

Another aspect drawing attention is the so-called "Amazon law" in the state of New York. This new law essentially creates a "presumption of nexus" for an out-of-state seller when it enters into an agreement with an affiliate who has nexus in New York if the affiliate referrals result in sales of $10,000 or more in the prior year. Amazon filed a lawsuit challenging the constitutionality of the new law, but the New York Supreme Court ruled that in favor of the state.

For some states, another possible tax revenue opportunity is to introduce Streamlined Sales Tax (SST) legislation that would bring their laws in conformity with the Streamlined Sales and Use Tax Agreement (SSUTA).

Although the SST appears to be losing some momentum among non-member states, it could benefit from the proposed "Main Street Fairness Act" introduced in Congress. This proposed legislation is designed to level the playing field between e-commerce and traditional "brick-and-mortar" stores by giving authority for SST states to collect taxes from remote sellers doing business in the state (if not covered by a small business exception).

Individual and business taxpayers must remain on their toes. If you receive a federal, state or local tax notice, don't ignore it. If you want information on how to respond, contact your tax adviser for assistance.