(MONEY Magazine) – Tis April, and soon 112 million individual tax returns for 1989 will be deep in the bowels of Internal Revenue Service processing centers like the one in Andover, Mass., shown here. Then silence. But not for long. Beginning late this month, peaking in May and then again in August and continuing throughout the rest of the year, if 1989 is a guide, 36 million notices of additional tax and penalties due will appear in mailboxes around the country. The feds' annual fiscal mop-up will be on. If you are among the elect, the IRS will likely be after you for one of four common failings that together account for more than 35% of those notorious notices. Last year 6 million of them accused taxpayers of having made math errors. Another 1.5 million charged that tax returns had been filed late without the benefit of an official extension. Also, 3.5 million taxpayers got a CP-2000, the notice that informs you that the amount of income, interest or dividends you declared was different from what your employer, broker or bank reported paying to you. And finally, 1.7 million taxpayers who pay estimated taxes on a quarterly basis were told that they had failed to send in the right amount. In 1989 the IRS' letter-writing blitz took in an estimated $15.3 billion in taxes and penalties -- an average of $425 for every notice mailed. Yet behind that apparent triumph of tax law micro-enforcement lurks a sloppy little secret: a convincing case can be made that at least $7 billion of that money should never have been collected at all because around half of those imposing official notices were inaccurate. Consider the following: -- A 1988 study of IRS letters to taxpayers by the federal watchdog General Accounting Office turned up so much evidence of errors that at a congressional hearing on the matter, Republican Representative Christopher Shays of Connecticut declared: ''I am a little breathless. I am not used to these kinds of hearings where I learn that 47% of all the written responses to taxpayers are incorrect . . . How can we even contemplate prosecuting anybody?'' -- Interviews by MONEY with leading tax lawyers and accountants as well as IRS officials support the GAO findings. Charles Peoples, IRS assistant commissioner for returns processing, admits flatly: ''We don't have good methods for detecting and correcting errors.'' -- A telephone poll of 300 MONEY subscribers by the Gallup Organization in late February revealed that half of that generally higher-income group have received such notices -- one in four in the past two years (the poll's margin of error is plus or minus six percentage points). A stunning 45% of those who contested their notices report that the IRS claims were totally incorrect, and an additional 24% said that they were at least partially wrong. What's more, of those who challenged the IRS on their own, 53% wound up paying nothing and another 17% succeeded in getting the bill reduced.

The IRS declined to comment directly on MONEY's findings. Wilson Fadely, an agency spokesman, instead cited an internal study that showed a 9.1% error rate in notices sent out in February. When apprised of the IRS findings, however, Paul Posner, a GAO associate director of tax policy and administration, replied: ''Even if that figure is correct -- and it doesn't sound right -- the error rate is still not good. They've got to improve.'' But here's what really stings. Millions of taxpayers are paying up whether or not they should, even though 69% of MONEY subscribers polled, who put up a fight, report that their notices were at least partially inaccurate. Clearly, individuals are caving in to questionable demands for more money that would propel them to the phone in a second if the bill came from some bank or credit-card company. What they ought to be doing is fighting back against IRS inefficiency by firing off one of the four model letters that appear on this and the following pages. Why such abject submission? Reason No. 1 is simple, undifferentiated fear of fighting. The IRS is infamous for Star Chamber audits, summary confiscation of property and all-seeing, imperious independence. So when a taxpayer spots that ominous envelope, IRS seal and official business stamp, panic strikes. It's not surprising, then, that two-thirds of the IRS' $15.3 billion take in 1989 was from first notices alone. Says Mary Sprouse, a Los Angeles tax lawyer and ex-IRS auditor: ''If a client can't get me on the phone the very day the notice arrives, correct or not, out goes the check.'' A second reason for taxpayer timorousness is that the notices tend to be confusing, compounding the maddening complexity of tax law itself. ''These notices aren't intelligible except to the people who wrote them,'' admits Damon O. Holmes, taxpayer ombudsman and assistant to the IRS commissioner. And finally, tax professionals attest that all too many intimidated taxpayers fear that if they don't pay, they will suffer far worse. They begin to imagine that the IRS will come to audit them and perhaps end up questioning all sorts of deductions in the process. When they start thinking that way, it is easy for them to panic and rationalize that the IRS must be right. And that is where they are resoundingly, dramatically, stupefyingly wrong. Who ever stops to realize that the army of about 3,300 IRS tax examiners managing the annual flow of more than 120 million notices and follow-up letters are low paid (starting wage: $14,573 a year, with a General Schedule, GS, rating of 4 on a scale of 18) and poorly trained? (After a four-week course, novices are on their own.) They are not at all like the sharp lawyers and C.P.A.s you meet when you're called down to the local IRS office for an audit. Furthermore, about a third of the total 115,360 IRS work force are only temps hired for the crush of the filing season, typically trained for a week and thrown onto the barricades. A recent survey by the American Institute of Certified Public Accountants found a leading irritant among C.P.A.s to be the lack of technical knowledge at lower personnel levels. Who among taxpayers would guess that the agency's data network is really an antiquated system designed 28 years ago, a sagging patchwork of Sperry Univac, Honeywell and Control Data equipment and outdated magnetic tape that gets shipped around the country not electronically but in planes and trucks? ''The IRS computer system is badly out of date and headed for a train wreck in the early '90s,'' says Arkansas Senator David Pryor, Democratic chairman of the Senate Finance subcommittee that oversees the IRS. Former Commissioner Lawrence B. Gibbs agrees, predicting that between 1992 and 1994 the system will reach its maximum capacity. Worse still, Fred Goldberg, the present commissioner, in an exclusive interview with MONEY (see the box on page 96), worries that the agency's miles of technological ganglia may become completely overloaded by an increasing number of returns to process and documents to match, bringing the nation's proud tradition of voluntary tax compliance down with it. And who would think that a federal agency would have to operate under such squalid working conditions? At the IRS Service Center in Andover, Mass., for example, 3,400 employees labor in a dreary, largely windowless space the size of five football fields. Mail clerks, who begin the processing of returns, sit at paper-shuffling nightmares called Tingle tables (after the IRS employee who designed them in the mid-1960s). Each clerk confronts 18 bins, stacked three high, into which he or she is expected to sort 265 returns and related documents an hour. To combat this mind-numbing work, many clerks wear headsets tuned to their favorite rock stations. The roof leaks so strategically that during heavy rainfalls, employees have to position wastebaskets on top of their computers to prevent them from being drowned. Supplies are so limited that if you need a stapler, you may have to barter your calculator with another worker for it. The end result: according to a 1988 GAO study of four IRS processing centers, Andover had to undergo the highest rate of adjustments -- that is, work done over again -- because of errors. Andover is no isolated case. The 21-story Manhattan district office serves the fourth largest district out of 63 in the country and collects the most revenue -- $62 billion. Many of its 2,000 employees routinely show up late for $ work, partly because six of the 10 elevators have been regularly out of order for five years. And workers on the 13th floor kept a tote sheet on the number of mice they caught in a three-month stretch last year -- 35. One inevitable byproduct of such Dickensian working conditions: in 1988, according to an agency-wide IRS study, 2 million documents -- tax returns, 1099s and the like -- could not be located when IRS employees went looking for them in the files. Such chaos translates into low morale and an annual agency-wide turnover rate of 20%. Says Ann Dwyer, for 13 years a tax examiner at Andover, now an official of the National Treasury Employees Union, which represents 104,976 IRS employees: ''At Burger King you can make $6 an hour, which is what you can make here, but there you do it without the anxiety and job stress.'' Adds Morris F. Goldstein, a former IRS revenue agent and now a union official in Manhattan: ''As soon as we train people, they leave. You can get a better job at the post office.''

THE GAME'S FIVE GENERAL RULES Knowing what you now do about what's behind that high rate of errors in IRS notices, you can see that the agency's problems quickly become your tortures. So you are ready to move on to the next phase of your fight-back training. Rule 1: Never ignore an IRS notice. The agency may be wounded, but it can still bite. The computer that cranks out these letters is programmed to send you a series of five to nine, depending on the purported error. Each letter arrives some four to five weeks after the preceding one -- unless you send a response that stops them -- and each is more threatening in tone until you are finally facing a lien on your bank account, wages or other assets. For example, a typical math-correction notice starts calmly enough: AS A RESULT OF AN ERROR WE HAVE CORRECTED ON YOUR RETURN, YOU OWE THE IRS $1,990.20. IF YOU BELIEVE THIS AMOUNT IS NOT CORRECT, YOU MAY WANT TO CHECK YOUR FIGURES AGAINST OURS. IF YOU BELIEVE WE MADE A MISTAKE, PLEASE WRITE TO US AND INCLUDE THE BOTTOM PART OF THIS NOTICE. About five weeks later the first follow-up letter arrives, its tone noticeably darker: THE FEDERAL TAX SHOWN BELOW HAS NOT BEEN PAID. IT IS OVERDUE. PLEASE PAY IT TODAY. Four weeks after that, the third letter shows up, with OVERDUE TAX printed accusingly across the top. The fourth letter grows ominous: YOU DID NOT RESPOND TO OUR PREVIOUS NOTICES. AS A RESULT, YOUR ACCOUNT HAS BEEN ASSIGNED FOR ENFORCEMENT ACTION. The fifth letter plays hardball. In the upper left corner is the legend: PAST DUE FINAL NOTICE (NOTICE OF INTENTION TO LEVY). READ CAREFULLY. The body of the letter goes on to say: THIS IS YOUR FINAL NOTICE . . . IF FULL PAYMENT IS NOT RECEIVED WITHIN 10 DAYS FROM THE DATE OF THIS NOTICE, ADDITIONAL INTEREST AND PENALTIES WILL BE CHARGED. A NOTICE OF FEDERAL TAX LIEN MAY BE FILED . . . YOUR PROPERTY OR RIGHTS TO PROPERTY MAY BE SEIZED . . . If the taxpayer still fails to respond, the lien process begins, and 30 days later an IRS revenue officer calls on the taxpayer to collect. If he is unable to arrange payment, he then puts a lien on assets. Most likely target: your bank account. Rule 2: Respond quickly. When you get a notice, first check your records to determine who is in error. If it's you, send off your check within 10 days, and the matter will likely be ended. If the IRS is wrong, you can call in response -- a local IRS phone number and 800-424-1040, the agency's national switchboard for such matters, are listed on your notice. Most practitioners, however, tend to agree with C.P.A. John Beilsmith, a partner with the accounting firm of BDO Seidman in Atlanta: ''Never phone. Chances are you'll get a busy signal or someone who can't help you anyway. Besides, even if you get some help, you'll have no record of it. Then a month later you get another notice, and you have no proof you had been told the thing would be cleared up.'' Beilsmith and others strongly recommend that you write to the IRS and send your response by certified mail, with a return receipt requested, and have all documents photocopied for your records. That way, if the only answer you get to your rebuttal is yet another computer notice -- which is common -- you can reply again, this time enclosing copies of your previous correspondence and of your certified mail receipt. When you do win, you may not receive any IRS acknowledgment that your case has been settled. The notices will simply cease. Experts say that if the IRS stops sending threatening notices for 90 days after your reply, rest easy: no news is good news. Rule 3: Keep your response simple but sharp. ''A sixth-grade letter,'' one accountant calls it, so that the ill-trained, underpaid, overworked tax examiner will have no problems with it. Sentences must be like the ones in the sample letters that accompany this story -- short and clear, addressed solely to the issue of your notice. No outrages, overexplanations or justifications. Just the facts: You're wrong. I'm right. Here's the evidence. Rule 4: Follow up forcefully. However quick, accurate and complete your reply to the first notice may be, in most cases that will not be the end of the matter. Often a first response crosses in the mail with a second notice. (In fact, although that first notice says you have 30 days to reply, you may not receive it until a few days before the deadline.) If that happens to you, send the IRS a copy of everything you mailed the first time, citing the document locator number on the notice, usually in the upper right-hand corner, with a covering letter explaining that on such and such date, you answered the first notice, evidence of which is enclosed. If you receive a third notice, it is clear that your reasoned responses are not being appropriately acknowledged. At that point, it is time for you to phone the problem resolution officer (PRO) at your local district office or service center. ''When the regular channels don't work, we can fix things,'' says IRS ombudsman Holmes, who is in charge of the 300 PROs throughout the country. ''They can go to a computer terminal, pull out your case and, if they think it's warranted, stop any further action, including a lien that is about to be carried out.'' By most accounts, this is one part of the system that does work. Tax professionals report substantial success by phoning these officers, who handled 407,000 cases last year, taking an average of three weeks a case. PROs are not supposed to handle your problem unless you have received at least three letters or encountered rudeness or inefficiency on the part of IRS personnel over your case. Some will give you unofficial guidance earlier than that, however, such as finding the right person to whom you should write next. Rule 5: Get outside help if you need it. In most cases, the dispute revolves around facts that you can supply yourself, with the help of one of our sample letters. But if the issue turns on a technical point or an application of the law, call in a professional tax adviser. Not only will you get the argument properly and clearly presented to the IRS, but you will also gain the added respect you may need from the examiner reading your response. Remember that the examiner typically has only a high school education and fewer than three years on the job. He or she will tend to assume that a C.P.A.'s reading of a complex tax matter is more authoritative than the opinion of an amateur like yourself. Some good news: MONEY's tax poll found that 56% of subscribers who went to an adviser for help in resolving a notice problem wound up paying nothing for that extra service. Aside from the general rules, there are important points to know about each of the IRS' four common notices. These specifics will help you deal intelligently with the agency, as well as give you useful insight into its all-too-fallible ways:

MATH-ERROR NOTICE This letter lands in your mailbox when the IRS thinks it has caught you in a simple arithmetic mistake or taking too many deductions for dependents or perhaps using the wrong tax table. Last year's 6 million math-error notices assessed penalties such as one-half of 1% of additional tax due for each month it is owed plus interest, currently at 11%. While there are no official figures on errors made or abatements -- IRS- speak for the elimination of penalties -- granted on these notices, tax professionals report that this is a major area of IRS goofs and cite two particularly weak links in the processing system. First, soon after your return arrives at a local service center, a data-entry transcriber -- typically a $7-an-hour GS3 with one week of training -- punches the essential information into a computer: your name, Social Security number, filing status, number of dependents, total wages, taxable interest, taxable income. That transcriber clerk, who might well be expected to process at least 460.4 returns an hour -- 7.7 a minute -- has only to strike a single wrong digit when entering, say, a deduction to make a math-error notice likely. This erroneous information passes electronically with all the other data from your return to the National Computing Center in Martinsburg, W.Va., where every single tax return in America is processed. In the millisecond that the computer there takes to review your return, it picks up the supposed mistake and confirms that a mistake notice should be sent to you. That information goes back to your local service center. Next, to double-check, one of the GS4 tax examiners compares the data in the notice with your actual return. But pressed to perform quickly, he all too often misses the mistake. Out goes the notice to you. Garbage in, tax notice out. If the IRS created the error, turn to the sample letter on page 86, fill in your particulars, and append any computation you have that will support your version. If the notice neglects to tell you exactly where the mistake . supposedly lies, which is sometimes the case, your first letter should demand specifics and include a statement that you have rechecked all of your computations and do not find any errors. When the IRS gets back to you with details, then proceed with your version of the model letter.

LATE-FILING NOTICE If you miss the tax-filing deadline this year -- your return must be postmarked by midnight on April 16 -- and fail to file a Form 4868 for an extension to Aug. 15, you will be liable for a penalty of as much as 5% of the tax owed for each month you are late, up to a maximum of 25%. Last year's 1.5 million late-filing notices generated revenue of $1.14 billion. Each notice says REQUEST FOR PAYMENT across the top and lists the tax already paid, plus the amount of the penalty and interest. Tardy taxpayers are supposed to be rooted out by another $7-an-hour GS3 clerk in the Receipt and Control section at the local service center. This employee, handling a peak load of as many as 283 documents an hour, stamps the date on your return if it is postmarked after the deadline, attaching your envelope. The stamp alerts the data-entry transcriber (again a GS3) down the line, who then pulls your return and codes the lateness information along with your other essential data into the computer. Then it all goes to computer central at Martinsburg. If ''delinquent'' is coded on your return, the master computer calculates your penalty and orders your local center to mail you a late-filing notice. One way the IRS sometimes errs in this process: your return arrives on time but languishes in the land of the Tingle tables. When a clerk finally picks it up, instead of checking its postmark, he stamps it with that day's date -- your late-filing notice is as good as in the mail. You might head off this headache entirely by including a letter with your return showing what the tax code calls ''reasonable cause'' for your lateness. Tax examiners in the collection department have the authority to accept your excuse on the spot. They simply consult their adjustment manual and run down a list of more than three pages of acceptable excuses. Some are allowed without documentation, such as the death or serious illness of the taxpayer, a family member, or the tax preparer, or destruction by fire of a taxpayer's residence and tax records. Others leave the decision up to the examiner -- for example, that you were unavoidably out of the country at filing time, or you were unable to obtain certain records to complete your return on time. One familiar and easily avoidable reason for lateness: the post office fouled up. Robert Parks, tax manager and head of the tax department of Mason & Co. in New York City, has a client who was hit for $25,028.10 in penalties for supposedly having filed five months late. The man insisted that he had mailed the return on April 14 and that it had been lost in the postal system. Parks sent the IRS a letter and affidavit exactly like the ones on page 87. The penalties were then dropped. On Parks' advice, his client never filed a return again by regular mail -- only by certified mail, return receipt requested, even when he was weeks early.

CP-2000 NOTICE This is the Big Brother notice, the one that results when the computer can't exactly match the entries on your return with data supplied by your employer, broker, bank -- any business or other source that pays you money. It is, as IRS Commissioner Goldberg asserts, no less than a massive audit of 40% of all taxpayers. Last year's 3.5 million CP-2000 (the CP stands for Compliance Program) notices carried penalties ranging up to 25% of the tax due. Interest is currently 11% of your shortfall. The master computer in Martinsburg does the matching and catching, again ordering your service center to mail out the notices. But before that happens, one of those low-paid tax examiners checks the Martinsburg findings against your return, looking for errors. Have you listed the income elsewhere on the return? Or called income ''interest'' when it was in fact dividends? Or listed the amount correctly as dividends but entered the name of the paying company incorrectly? If you simply drop the Inc. from a company's name, for example, and the 1099 form carries it, the computer can't make a match. Banks are frequent 1099 offenders, inflating with a faulty computer keystroke the amount of interest you actually received from them, or assigning income from a child's trust to the parent's Social Security number. Also, IRS data-entry transcribers often trigger an erroneous CP-2000 notice when transferring basic data from a return to the computer. This happens when they switch Social Security numbers of two taxpayers as they riffle through hundreds of documents an hour. When the source of a CP-2000 error is a third party -- your employer, bank or broker, say -- write immediately to the offender relating the facts of the matter and requesting a revised, corrected form. Don't even wait for a reply. Instead, send your explanation to the IRS immediately -- use the sample letter on page 88 as your guide -- along with a copy of the request for a correction you have just sent to the third party.

ESTIMATED-TAX NOTICE If you pay estimated taxes and your quarterly payments don't add up to either 100% of the tax you paid the previous year or 90% of the present year's bill, you face an interest penalty, currently 11% of the tax you still owe. The Martinsburg computer tracks you, updating your file quarterly, by checking the amounts you pay each quarter as well as your filing dates. This is how the IRS can hit you at the end of the year for nonpayment in one quarter, even if you catch up and pay the full tax due by the end of the year. Once again, the computer at Martinsburg receives the basic data on your return from your service center, tracks your payments and determines whether to order the issuance of a notice for discrepancy in estimated tax. The 1.7 million such greetings that went out last year brought in $668 million. IRS officials and tax professionals agree that there is one widespread reason for errors in this notice: pervasive mishandling of credits from one year applied to the next. Says Mary Sprouse: ''They make so many mistakes that I won't let my clients apply refunds anymore.'' She insists they take the refund. If you get such a notice, pull out your files and be guided by our sample letter on page 89. If at first or even second try you don't succeed, you -- or better still, your tax pro -- may have to resort to what C.P.A. John Beilsmith calls his ''basic screamer.'' You take your first letter and strip it of polite language. Start your next letter like this: ''You have assessed an additional underpayment of estimated tax penalty. ''YOUR ASSESSMENT IS WRONG!'' Then go on to demand a resolution of the matter within three weeks of the date of your letter. Says Beilsmith: ''If that doesn't work, call the problem resolution officer and cry, 'Help!' One way or another, you'll win.''

BOX: Math error

The above sample letter, and those on the following pages, are basic models to use when replying to IRS notices. Just insert your facts in the patches highlighted in yellow. A simple mistake in arithmetic by you can trigger the math-error notice. Or IRS staffers can create the error by miscopying data from your return. If the IRS is in the wrong, once you send off your version of the above letter, chances are you will never hear of the matter again. See the ''Math-error notice'' section of the accompanying story for more details.

Late filing The post office is the likeliest late-filing culprit. If you wisely sent your return by certified mail, receipt requested, just write to the IRS stating when you mailed your return and enclose a copy of your receipt. Otherwise, send the IRS a letter and a notarized affidavit -- like the ones above -- plus copies of the check you sent with the return and the ones just before and after it to further verify the date. Consult the story for more guidance.

CP-2000 This is the IRS' name for a program that matches income reported on your tax return with the totals sent in by a third party such as your employer, bank or broker. If the IRS finds what seems to be a discrepancy, out goes a CP-2000 notice. Triple-check your records if you receive one: it's particularly error- prone. If you spot a reporting flub, ask the third party for a letter of correction and a new statement. But don't wait for a reply. Send a letter like the one above to the IRS, with a copy of your correction request.

Estimated tax If you receive this notice, the headline may offer some momentary relief: CORRECTION NOTICE -- REFUND DUE TAXPAYER. But as you wade through the molasses-like prose, you will discover that the IRS is accusing you of not keeping up with your promised estimated tax payments. When you sort out the problem, with the help of the accompanying article, send the IRS a letter based on the model above and enclose copies of your canceled checks as proof of payment.

BOX: IF YOU OVERPAID THE IRS, JUST FIRE OFF FORM 843

At some point when you were reading the accompanying article, did you suddenly realize that you were among the millions of U.S. taxpayers who have sent off checks to the IRS just as soon as one of those deficiency notices hit your mailbox? This despite the fact that you knew in your heart that you didn't owe a penny? It may not be too late to claim a refund -- plus interest currently running at 10% a year. If only two years have passed since you paid the extra money, or three years since you filed your return, you are in luck. Simply pick up a copy of IRS Form 843 from a local IRS office or phone 800-424-1040 and ask that one be mailed to you. On the form, write an explanation of your case in box 11. Check our sample response letters for tips on wording. If your story is too long to tell within box 11, attach a letter instead. In either case, also send the IRS copies of your questioned return and, if you have it, the canceled check with which you paid. If all goes well, you should get a check from the IRS in three months or so.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: AMERICANS and their MONEY The sums you would fight over Virtually all of the 300 MONEY subscribers polled recently by the Gallup Organization said they would fight an incorrect IRS de mand for additional taxes -- if the bill topped $250.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: What you have actually done Here's what the 50% of MONEY subscribers who received IRS bills for more taxes in fact did:

What happened to those who fought back: 46% did not have to pay additional taxes, and 15% paid less than the IRS originally demanded.