First—do not panic! The good news is that in my experience at least half of them are wrong. Many times the IRS computer is kicking out a notice based on income reported to them on a 1099 that was reported on the original tax return correctly, but under a different name or by a different taxpayer (such as a related corporation). These are just two of the many reasons we have seen over the years where the notice proposing a change was successfully reversed.
If you do owe the amount but can’t pay it, the IRS has procedures in place to make payments. (This is another area where you should get your tax preparer or a CPA to help you.)
The second thing you should do is bring the letter to your tax preparer. We have much more experience dealing with these letters and can usually tell you if it is a serious matter or not right on the spot. If you did the return yourself, I would highly recommend getting professional help.
Third, don’t ignore the letter! The problem won’t go away. The IRS collection letter may be wrong, but the IRS is very good at collecting the amount they think you owe. Please don’t wait until you receive the dreaded “Intent to Levy” letter. Many times this is the first letter a client brings to us, and now it’s an emergency. But this is actually the third or fourth letter in the collection series. So please, answer the first one while you have time to properly research it and give the IRS time to fix their records. Trust me, the IRS won’t forget you owe them!
And finally—have patience! You are dealing with a large, inefficient bureaucracy that is very slow to remove amounts it thinks you owe. Many times it takes us two or three letters and/or calls to get the IRS to remove the erroneous additional tax amount.