IRS Destroyed 30 Million Paper Information Returns Due to Backlog
May 13 Update: In response to the recent audit report by the Treasury Inspector General for Tax Administration (TIGTA) addressing concerns about the destruction of 30 million paper-filed information returns in March 2021, the IRS issued a statement saying that the agency was forced to destroy the returns due to software limitations.
In the statement, the IRS said that the destroyed returns made up 1% of the 3.2 billion information returns processed in 2020 and that most were in the Form 1099 series. The IRS also said that in 2020, it placed a higher priority on processing tax returns to issue refunds amid the pandemic. As software constraints require the IRS to process paper information returns by the end of the calendar year in which they were received, the IRS said, returns received in 2020 could no longer be processed after the 2021 filing season began.
The IRS stated that it will process all paper information returns received in 2021 and 2022 but did not detail how it would make changes to assure the agency would not face the same constraints cited as the reason for its inability to process the 2020 returns. The statement also did not make clear how many taxpayers may have failed to properly include the reported tax items on the destroyed returns or if the IRS can identify those taxpayers and amounts.
May 9: According to a recently released report by the Treasury Inspector General for Tax Administration (TIGTA), the IRS destroyed an estimated 30 million paper-filed information returns in March 2021 due to its inability to process its paper backlog. Information returns are typically used by the IRS’s Automated Underreporter Program to help identify taxpayers who are not accurately reporting their income.
The backlog of paper returns accumulated at IRS facilities during the pandemic. In its report, the TIGTA stated that the backlog and the inability to ship paper tax returns and/or retrieve paper tax returns from Federal Records Centers due to the pandemic demonstrate the need for the IRS to develop a service-wide strategy to increase e-filing. The report said that although the IRS has developed some initiatives to increase e-filing, the agency should be doing more to encourage the e-filing of business returns.
TIGTA’s report recommended the IRS develop a service-wide strategy to prioritize and incorporate all forms for e-filing; develop procedures to identify and address potentially non-compliant corporate filers; and develop procedures to ensure that penalties are consistently assessed against business filers that are non-compliant with e-filing requirements. While they agreed with the first recommendation, IRS officials said they do not need to develop processes and procedures to identify non-compliant corporate filers because all requirements needed to assess penalties are not known at the time of filing.
The IRS said it will continue to pursue more ways to encourage the e-filing of business returns and that budget constraints have made it difficult to make greater progress in that area.