First thing people need to note is that the first letter you will get will be from Karoo/KC and this letter does not need responding to it is just to inform you that they have passed your information onto ACS.
Wait until you get a letter from ACS then go to the site IAN mentioned and read through the info fully and DONT PANIC
When you do send the letter make sure it is sent by recorded delivery this way you have a record of the letter being sent. (do not ignore the letter) Do not admit to anything and do not add information that is not on the letter from them.
Remember they have to prove in a court that you shared this file/cd/film whatever, they cannot do this unless they sieze your computer and get the information directly from that.
Finally stand your ground this company have yet to take anybody to court because so many people panic and pay.
How to avoid the letters... Stop using peer to peer software (Torrents/file sharing programs etc) as IANP says the problem is not the downloading but the uploading(sharing) of the copyrighted file/s
Slightly off topic but if you need to download stuff look into newsgroups.