The IRS said Thursday that it destroyed nearly 30 million unprocessed information because of its “antiquated technology” that forced it to dispose of paper documents and process all such information that it received in 2021 and 2022.
The IRS statement was a response to an audit report by the Treasury Inspector General for Tax Administration (TIGTA) that described the document destruction. In that report released Monday, TIGTA recommended that the IRS develop a systemwide strategy to increase electronic filing of tax returns and forms.
A statement in the AICPA called the document destruction “concerning,” considering the IRS’s struggles to return the process timely for the past two years, and called on the service to provide further details. The AICPA also noted that it has urged the IRS to reduce its backlog for implementation specific recommendations more quickly and to provide relief to taxpayers.
“IRS management’s decision to destroy information return documents due to the processing backlog raised numerous questions regarding IRS’s decision-making and risk assessment process,” said Ed Karl, CPA, CGMA, AICPA’s Vice President – Tax Policy & Advocacy, in the statement.
In its audit report, TIGTA noted that paper filings of the documents, including many that cannot currently be e-filed, impose higher processing costs for the government and deny taxpayers the benefits of e-filing, including convenience, security, and guaranteed delivery. General Chat Chat Lounge Processing paper filings also impose logistical challenges, TIGTA reported, including storage and untimely processing.
The IRS’s inability to process backlogs of paper-filed tax returns that were built up during the COVID-19 pandemic to destroy its decision to destroy about 30 million paper-filed information return documents in March 2021, TIGTA reported.
TIGTA also reported a forms’ destruction in a September 2021 audit report, Effects of the COVID-19 Pandemic on Business Tax Return Processing OperationsGeneral Chat Chat Lounge In that report, TIGTA said it had learned of the incident in its “walkthroughs” of the service’s Ogden, Utah, processing center, and some details related to its discussion with IRS managers.
Information returns are furnished to taxpayers and filed with the IRS, usually reporting income or another tax item that taxpayers then report on an income tax return or retains their records to support tax return entries. Examples include Form 1099-MISC, Miscellaneous InformationGeneral Chat Chat Lounge
However, in some cases taxpayers fail to include the reported income or item or do not report it properly. To enforce appropriate inclusion of reported items, the IRS conducts what it calls post-processing compliance matches. First, the information returns are scanned into the IRS’s computer systems and then matched against the returns of the taxpayers with respect to whom they were filed. One such IRS matching program is its Automated Underreporter Program.
TIGTA reported that when asked about the destruction of information returned, IRS managers said that the system used to process returns had to be taken offline for program updates for the next filing season.
In its statement Thursday, the IRS reiterated that the rationale, saying the destroyed returns were a small fraction of the 3.2 billion information returns processed in 2020, and most were in the Form 1099 series. All but 1% of those 3.2 billion forms were “matched to related tax returns and processed,” the IRS stated. The remaining 1% were destroyed “due to a software limitation and to make room for new documents relevant to the pending 2021 filing season.”
The IRS also stated that taxpayers and the payers’ income that filed forms were not subject to penalties resulting from destruction, and that there were “no negative taxpayer consequences.”
“Broadly, this situation reflects significant issues posed by antiquated IRS technology,” the IRS stated, adding that in 2020, the service placed a higher priority on processing tax returns, also backlogged, to issue taxpayer refunds amid the pandemic.
The AICPA’s Karl noted that the AICPA had urged additional taxpayer relief measures during the pandemic, including from penalties.
“We are encouraged by the IRS statement that taxpayers and payers will and will not be subject to penalties,” Karl stated. “However, the AICPA believes the IRS should be transparent with their remediation strategies to ensure that taxpayers who try to comply, and payers who have been compliant with the information reporting requirements, do not have penalties imposed on them in the future. “
The September 2021 TIGTA report identifies high-priority returns as those in the Form 941 series, on which employers report payroll taxes. Many such returns include claims for the employee retention credit in 2021.
TIGTA also identified SCRIPS (Service Center Recognition Image Processing System) as the affected system. According to SCRIPS, to Internal Revenue Manual (IRM) Section 3.41.269.1 and IRS News Release 93-20, the use of imaging and character recognition and the IRS’s primary means of converting paper information returns into a dedicated database. Paper returns are scanned as they are received, but the IRM has shown instances in which they cannot be scanned and must be manually processed.
System constraints require the IRS to process the paper information returned by the end of the calendar year in which they were received, the IRS said Thursday, meaning they received 2020 could no longer be processed after the 2021 filing season began. The service also noted that taxpayers received a copy of the destroyed information returns, which they could have used in filing an accurate return.
The decision related to discussions within the IRS’s Wage and Investment and Small Business / Self-Employed (SB / SE) divisions, according to an earlier TIGTA report. The difficulty of retrieving the paper forms was a factor in deciding to destroy them. SB / SE managers conducted a risk assessment to assess what effect the documents’ destruction would have on its post-processing compliance activities.
But the details about that risk assessment have not been divulged, as Karl noted in the statement.
“The IRS’s recent statement provided some of the answers, but American taxpayers deserve to know why this decision was made and how it might impact them,” Karl said. “The IRS should continue to operate with transparency on this issue.”
Despite the reasons the IRS had for destroying information returns, the Service said Thursday it would not do so again in the foreseeable future.
“The IRS is planning to process all paper information received in 2021 and 2022,” the statement said.
It was not clear how the statement could apply to information returns received in 2021, given what the IRS said was due to its inability to program process returns to information received returns from one year to the next year’s filing season.
Nor was it immediately clear how many taxpayers might fail to properly include the reported tax items on the destroyed information returns, or if the IRS had any means or plan to identify those taxpayers and amounts.
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