The IRS has unveiled a new program that uses computer software to match information reported on K-1 forms with information on taxpayers' 1040 forms. Taxpayers receive K-1 forms from partnerships, S-corporations, and trusts of which they are partners, shareholders, and beneficiaries. Income and losses from these types of entities are passed through to taxpayers on the K-1 forms.

The IRS has never before had an efficient method of comparing the information reported on K-1 forms with the information on 1040s. Now, a computer program will advise the IRS of discrepancies. Once a discrepancy is found, the IRS manually examines the return to determine if there is an obvious reason for the discrepancy, such as a passive loss limitation.

The program has been initiated with a review of tax returns from the year 2000. More than 18 million K-1 forms were processed for that year representing $1.2 trillion in income. So far 65,000 notices have been mailed to taxpayers in an attempt to resolve discrepancies on tax returns from 2000. The IRS hopes that most discrepancies will be cleared up on the telephone or with a simple written response.

IRS Commissioner Charles O. Rossotti spoke of the significance of the new program. "One of the most powerful tools that we use to ensure compliance is matching information received from employers, financial institutions, and other businesses with information reported by taxpayers. Third parties report approximately 80 percent of the personal income received by taxpayers. An important compliance strategy is to use this data as effectively as possible."