This is the time of year that many taxpayers receive what is called a CP2000 letter from our dear folks at the IRS. These letters are a bit scary - usually many pages long with calculations of proposed changes to your tax returns. I'm not sure of the actual statistics, but I would venture to say that at least 90 percent of these notices are inaccurate.
The notices are a result of the IRS computers matching the income and deductionsreported on the return with the information reported to them by payers on Forms 1099, W-2, etc. While taxpayers do occassionally overlook an item of income, the usual explanation is that the item was reported elsewhere on the return or in a different amount and the computers aren't smart enough to make the match.
The important thing to do with these notices is not to ignore them! They won't go away and tend to get pretty smelly with age. We generally recommend to our clients that they provide us with a limited power of attorney allowing us to communicate with the IRS on their behalf to resolve the issue.
To the extent adjustments to the return, a similar adjustment must be reported to the state. This is generally handled via an amended state return.
This matching process is now the primary enforcement tool of the IRS. The current audit rate is less than 1 percent of all taxpayers. Those taxpayers that are self-employed or have large incomes have a higher chance of audit than the general population.