A TAX clampdown will cut the pension income of more than 115,000 retired people by up to €8,800 a year.
Some pensioner couples will have to endure the huge drop in income after two government agencies shared information on payments for the first time.
Officials discovered that a huge number of retired people had second pensions that the taxman knew nothing about.
The discrepancies came to light when the Revenue Commissioners and the Department of Social Protection began cross-checking data.
They found that large numbers of pensioners were earning more than had previously been thought. That meant their tax credits had been wrongly calculated for years.
Now, the pensioners have been told they have to pay more tax. This could be as high as €4,400 a year for an individual pensioner.
The clampdown means that those getting two pensions -- the one from their job and the state contributory pension -- will be taxed on the second one for the first time.
The Revenue Commissioners said 115,000 were found to be paying too little tax on their pensions. A spokeswoman said: "In cases where the pension is not on record at all and their other income already brings them into the 41pc tax bracket, the annual additional liability could reach €4,400 for a single person and €8,800 for a couple."
The tax officials said the higher tax would now apply if social welfare pensions had never been reported, had been under-reported or the taxpayer's circumstances had changed.
More than half-a-million letters have now been sent out to those who the Revenue suspects have second pensions that have not been properly assessed for tax.
Thousands who received the letters have been told that their occupational pension providers had been instructed to reduce the amount paid out every month or fortnight in order to reflect the tax changes.
The pensioners had not been aware that they had to pay tax on their state pensions.
One pensioner spoken to by the Irish Independent had his pension hit for €53 a week after the tax officials said they had failed to take account of his state contributory pension when calculating his tax credits.
A tax credit is the amount of money you are allowed to earn before paying any tax.
Tax bands have also being adjusted for thousands, meaning that many pensioners are now paying tax at the higher rate of 41pc.
Clare resident Patrick Houlihan (75) was taken aback to get a letter from Revenue telling him his ESB pension would now be reduced by €106 a fortnight.
"I am devastated by this. We just can't afford it," he said. Mr Houlihan will be down by €2,756 over the course of a year.
He and wife wife Noreen are now considering dropping their medical insurance because of the hit to their income.
Revenue officials have written to retired people to tell them that it has the updated details from the Department of Social Protection on people receiving state pensions.
It is understood that this is the first time there has been an exchange of data between the social welfare and Revenue IT systems.
This has led to tax officials concluding that the state pension payments have not been reflected in the tax credits given to the pensioners.
Because of the new information, "additional tax will be deducted by your pension provider", the letter states.
Tax expert John O'Connor, of Red Oak Tax Refunds, said he had been contacted by a string of distressed pensioners who have been shocked to receive the letters.
He explained that the Revenue now wanted to tax the social welfare pensions of retired people with private pensions.
Mr O'Connor said Revenue could have insisted on seeking the tax due from the affected pensioners over the past six years, but had instead decided to collect the tax due for this year only.
"I have been contacted by a lot of panicked people. People are scared. They are being told their tax certs are being adjusted for 2012, which effectively means they will pay more tax. Revenue is saying it incorrectly estimated their welfare income," the tax expert said.
A spokeswoman for Revenue said: "Revenue has been receiving a high level of queries from the general public, asking why their PAYE tax credits and rate bands for 2012 have been reduced which is resulting in higher tax deductions coming into effect from January 2012."
Revenue said those who only get a social welfare pension had nothing to worry about, as this is not taxable if it is a person's only source of income.
"However, if in addition to the DSP (Department of Social Protection) pension, an individual also has an additional source of income -- say an occupational pension from a former employer -- they may be liable to tax on the DSP pension."
Revenue said 20,000 taxpayers would not have to pay any extra tax, but 115,000 would end up paying more tax.
A spokeswoman said: "In cases where the pension is not on record at all and their other income already brings them into the 41pc tax bracket, the annual additional liability could reach €4,400 for a single person and €8,800 for a couple."