The Internal Revenue Service (IRS) has identified improving customer service as one of its major initiatives. As a result, it placed a priority on improving the quality of notices issued to taxpayers. From January through September 2000, the IRS mailed approximately 12.4 million notices to individual taxpayers. These notices were designed to inform them of taxes, interest, and penalties due; errors they made on their tax returns; or adjustments to their tax accounts.

The IRS established a process to identify and analyze potentially incorrect notices. This review was the last point in the IRS’ process where notices could be corrected before they were mailed to taxpayers. From January through September 2000, the IRS identified 4.1 million potentially erroneous notices for review.

The overall objective of this audit was to evaluate the IRS’ process for reviewing potentially inaccurate notices before they were mailed to taxpayers. We focused our review on notices that were prepared for individual taxpayers from January 1, 2000, through September 30, 2000, as a result of processing their tax returns.

From January through September 2000, the IRS reported that it did not review 539,852 (13 percent) of the 4.1 million notices identified as having a high potential for error. If the error rate for these notices is consistent with that found on notices that were reviewed, the IRS may have incorrectly notified 80,702 taxpayers about an additional tax liability, an error on their return, or an adjustment to their account. Wage and Investment taxpayers usually contact the IRS only once a year, when they file their tax returns. However, taxpayers who receive an incorrect notice will, most likely, be forced to make additional IRS contacts.

IRS procedures did not ensure that notices with the highest potential for error were worked first. From January through September 2000, the IRS reviewed approximately 1.5 million notices with error rates of 10 percent or less, while it did not review approximately 77,000 notices with anticipated error rates of 30 percent or higher. Not establishing a priority to review notices with the highest potential for error increased the risk that taxpayers received erroneous notices and refunds.

Prior to October 1, 2000, responsibility for the oversight of the Notice Review Program was assigned to two different IRS operating functions. We identified issues that indicated the national oversight of the Program could have been more effective. For example, the data compiled to monitor and evaluate the Program were not reviewed.