does the letter cite the code sections for the penalties.
you say the return was filed timely but what do the IRS records show?
if it was timely filed there should be no failure to file penalty [IRC 6651(a)(1)] but there should be the failure to pay penalty [(IRC 6651(a)(2)]. in addition, there possibly should have been an accuracy related penalty (IRC 6662), 20% of the underpayment attributable to any of the following: a) negligence or disregard of rules and regulations - failure to make a reasonable effort to comply with the tax laws, including failure to keep adequate records or to use ordinary and reasonable care in preparing the return b) substantial understatement of income tax - generally the greater of 10% of the correct tax or $5,000.
the IRS does make errors, but you don't want to end up in a worse position then present. If you decide to do anything, I suggest you use a tax pro to review the situation to determine what penalties apply.
