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IRS Under Fire for Destroying Approximately 30 Million Paper Records

The IRS may need to hire a PR team to improve their image. As we reported in March, during a visit to the IRS campus in Philadelphia, IRS Commissioner Charles P. Rettig and Deputy Secretary of the Treasury Wally Adeyemo announced their plan to eliminate the IRS backlog in 2022. Last week, the Treasury Inspector General for Tax Administration (TIGTA) released a report that management at the IRS decided to “destroy an estimated 30 million paper-filed information return documents in March 2021.” Keep in mind that the documents that were reported to be destroyed were supporting paper documents, not actual tax returns such as Form 1040 or 1040 ES.

Why This Matters

The paper-filed information return documents1 are used by the IRS to conduct post-processing compliance matches to identify taxpayers who do not accurately report their income. By destroying the paper-filed information return documents, the IRS no longer has a way to validate the return. In addition, due to the coronavirus pandemic that began in 2020, the IRS has been unable to ship paper tax returns and/or retrieve paper tax returns from Federal Records Centers, which, in part, fueled the backlog of paper-filed tax returns into the millions. The other cause of backlog is the lack of workers and funding for the IRS.

IRS Calendar Year 2020 Tax Return Filing Volumes and Rates

The below chart provides details of the number of returns by e-file and paper file that were received by the IRS in 2020.

Type of ReturnTotal E-FiledTotal Paper-FiledTotal FiledE-File Rate
Individual Tax Returns149.5 million10.6 million160.1 million93.4%
Business Tax Returns38.4 million22.3 million60.6 million63.3%
Information Returns3.1 billion9.5 million3.1 billion99.7%

Source: Treasury Inspector General for Tax Administration report, page 5, dated May 4, 2022.

The Cost of Paper-Filed Returns

In Fiscal Year 2020, the IRS expended more than $226 million to process paper-filed tax returns. For taxpayers, the benefits of e-filing include upfront validations, greater tax return accuracy, and secure and confidential submission of highly personal tax return information.

Penalties for Corporate and Business Paper-Filers

The TIGTA recommended that the IRS develop processes and procedures to identify and address potentially noncompliant corporate filers as well as develop processes and procedures to ensure that penalties are consistently assessed against business filers that are noncompliant with e-filing requirements. In addition, the IRS agreed to the recommendation to develop a Service-wide strategy to prioritize and incorporate all forms for e-filing.

Response to Audit

Efforts to modernize paper tax return processing and increase electronic filing have been difficult. The IRS Digitalization Strategy established a vision for the IRS to be a digitally driven agency by 2025. While the IRS recognizes that some tax filers have barriers to their ability to file electronically, the IRS is striving to provide additional digital options by promoting the use of digital channels and online accounts as well as working to handle paper documents more efficiently.

The bottom line, in order to make the digitization of the IRS a reality, additional multi-year funding is necessary to achieve the desired outcome as funding, and the hiring of new employees, are key factors in implementing the modernization strategies.

Questions?

As always, should you have questions about this topic, or any other topics related to your personal or business situation, please contact us at any time.

1Information returns include Forms 1042–S, Foreign Person’s U.S. Source Income Subject to Withholding; Forms 1098 series (including mortgage interest, student loan interest, and tuition payments); Forms 1099 series (including interest and dividend distributions); Forms 5498 series (including individual retirement arrangement and medical savings account information); Forms W–2, Wage and Tax Statement; Forms W–2G, Certain Gambling Winnings; and Schedules K–1 (partnership, S corporation, and estate or trust distributions).  

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