The IRS said Thursday that it destroyed nearly 30 million returns of unprocessed information because “outdated technology” forced it to get rid of paper documents and pledged to process all returns of information it received in 2021 and 2022.
The IRS statement came in response to an audit report prepared by the Inspector General of Treasury for the Tax Administration (TIGTA) that described the document’s destruction. In that report released Monday, TIGTA recommended that the IRS develop a system-wide strategy to increase electronic filing of tax returns and forms.
In a statement Friday, the AICPA described the document’s destruction as “related,” given the IRS’ struggle to process returns in a timely manner over the past two years, and called on the service to provide more details. The AICPA also noted that it urged the IRS to implement specific recommendations to reduce backlogs faster and to provide relief to taxpayers.
“The IRS management’s decision to destroy information return documents due to a processing backlog raised many questions regarding the IRS decision-making and risk assessment process,” Ed Karl, CPA, CGMA, AICPA Vice President – Tax Policy and Advocacy, said in the statement.
In its audit report, TIGTA noted that paper filings of documents, including many that cannot currently be submitted electronically, impose higher processing costs on the government and deprive taxpayers of the benefits of electronic filing, including convenience, security, and assured delivery. Handling paper files also poses logistical challenges, TIGTA reports, including untimely storage and processing.
The IRS’ inability to address the backlog of paper tax returns that has accumulated during the COVID-19 pandemic contributed to its decision to destroy nearly 30 million paper information return documents in March 2021, TIGTA reported.
TIGTA also reported the destruction of the forms in an audit report issued in September 2021, Effects of the COVID-19 pandemic on business tax return processing processes. In that report, TIGTA said it learned of the incident in the “details” of a processing center in Ogden, Utah, and linked some details about its discussion on the matter with IRS directors.
Information returns are filed with the taxpayer and filed with the IRS, usually income or another tax item that taxpayers then report on their income tax return or retained in their records to support tax return entries. Examples include Form 1099-MISC, General and miscellaneous information.
However, in some cases taxpayers fail to include the reported income or item or do not report it properly. To enforce proper inclusion of reported items, the IRS conducts what it calls post-processing compliance matches. First, returns of information are checked in the IRS computer systems and then matched against taxpayer returns regarding who they were submitted to. One of the IRS’s matching software is the automated Underreporter.
TIGTA reported that when IRS directors were asked about the destruction of returns information, they said the system used to process returns should be taken offline for software updates for the next recording season.
In its Thursday statement, the IRS reiterated this rationale, saying that the destroyed returns were a small portion of the 3.2 billion information returns processed in 2020, most of which were in the 1099 series. The IRS said that all of these forms 3.2 billion excluding 1% “matched with corresponding tax returns and processed”. The remaining 1% was destroyed “due to software limitations and to make way for new documents related to the 2021 filing season pending”.
The IRS also stated that taxpayers and income payers who submitted forms were not subject to the penalties for destruction, and that “there are no negative consequences for taxpayers.”
“Overall, this situation reflects important issues posed by legacy IRS technology,” the IRS said, adding that in 2020, the service has made processing tax returns, also backlogged, a higher priority for issuing refunds to taxpayers amid the pandemic.
The AICPA’s Karl noted that the AICPA has urged additional relief measures for taxpayers during the pandemic, including from sanctions.
“We are encouraged that the IRS statement indicated that taxpayers and payers have been and will not be subject to sanctions,” Karl said. “However, the AICPA believes that the IRS should be transparent with its remedial strategy to ensure that taxpayers who attempt to comply, and payers who have complied with information reporting requirements, are not penalized in the future.”
TIGTA’s September 2021 report specifically identified high priority returns such as those in the Form 941 series, which employers report for payroll taxes. Many of these returns in 2021 included claims for employee retention credit.
TIGTA also identified SCRIPS (Service Center Recognition Image Processing System) as the affected system. SCRIPS, according to Internal Revenue Manual (IRM) Section 3.41.269.1 and IRS News Release 93-20, uses imaging and character recognition and is the IRS’ primary means of converting returns of paper information into data in a dedicated database. Paper returns are scanned when they are received, but IRM describes cases where they cannot be scanned and must be processed manually.
System restrictions require the IRS to process returns of paper information by the end of the calendar year in which they were received, the IRS said Thursday, meaning that those received in 2020 can no longer be processed after the 2021 filing season begins. The service also noted That the taxpayer received a copy of the destroyed information returns, which they could use to file an accurate return.
The decision included discussions within the IRS’ wage, investment and small business/self-employed (SB/SE) division, according to a previous TIGTA report. One of the factors I decided to destroy was the difficulty of retrieving paper forms. SB/SE managers performed a risk assessment to assess the impact of document destruction on post-processing compliance activities.
But details of that risk assessment were not disclosed, Karl noted in the statement.
“The recent statement from the IRS provided some answers, but American taxpayers deserve to know why this decision was made and how it might affect them,” Karl said. “The IRS should continue to act transparently on this matter.”
Despite the IRS’s reasons to destroy it, the service said Thursday that it will not do so again for the foreseeable future.
“The IRS plans to process all paper information returns received in 2021 and 2022,” the statement said.
It was unclear how this statement would apply to incoming information returns in 2021, given what the IRS said was its inability due to programming limitations to process incoming information returns in one year after the start of next year’s filing season.
It also wasn’t immediately clear how many taxpayers may have failed to include correctly reported tax items in their destroy information returns, or if the IRS had any means or plan for determining taxpayers and amounts.
– To comment on this article or to suggest an idea for another article, contact Paul Bonner at [email protected].