Overwhelmed IRS Workers Shredded Millions of Tax Documents, Audit Shows

A recent Internal Revenue Service (IRS) audit found that staffers had destroyed 30 million taxpayer documents while they faced a huge backlog.

No taxpayers were negatively affected by the destruction, according to the tax collection agency.

The Treasury Inspector General for Tax Administration (TIGTA) made three recommendations to the IRS to promote more e-filing and improve its processing of paper tax returns.

“This audit was initiated because the IRS’s continued inability to process backlogs of paper-filled tax information documents contributed to management’s decision to destroy an estimated 30 million paper-filed information return documents in March 2021,” said the TIGTA report, which was signed by the deputy inspector general for audit, Michael E. McKenney.

“The IRS uses these documents to conduct post-processing compliance matches to identify taxpayers who do not accurately report their income.”

Following the inspector general’s report, the IRS issued a public statement.

“There were no negative taxpayer consequences as a result of this action. Taxpayers or payers have not been and will not be subject to penalties resulting from this action,” read the statement.

Tax documents included 1099 and W-2 forms, according to the inspector general. The IRS responded to the inspector general with incorrect responses, according to the report.

According to the report, of particular concern is that the Internal Revenue Service does not have a comprehensive and accurate list of business and individual tax forms that cannot be e-filed.

“For example, on September 16, 2020, the IRS provided us with a list identifying 365 tax forms that cannot be e-filed. Our review identified inaccuracies with this list. There were tax forms included on the list that could be e-filed and tax forms absent from the list that could not be e-filed.

“When we discussed the inaccuracies of this list with IRS management, they state they have not updated the list since calendar year 2018 due to other agency priorities and limited funding.”

IRS defends 2020 processing

The IRS defended its returns processing, saying, “We processed 3.2 billion information returns in 2020,” explaining further that tax returns and information returns are not the same.

Information returns are documents submitted by third parties, not taxpayers. “99% of the information returns we used were matched to corresponding tax returns and processed. The remaining 1% of those documents were destroyed due to a software limitation and to make room for new documents relevant to the pending 2021 filing season.”

The report from the inspector general called for the IRS to “develop a Service-wide strategy to prioritize and incorporate all forms for e-filing.” The IRS agreed to follow this recommendation.

The inspector general report also recommended that the Internal Revenue Service “develop processes and procedures to identify and address potentially non-compliant corporate filers.”

The IRS objected to this recommendation saying, “The IRS disagreed with this recommendation. IRS management stated that, for corporate filers to be subject to penalties for failure to e-file returns when required, they must have filed 250 or more returns and have assets of $10 million or more. Not all these criteria are known or available at the time of filing.”

TIGTA also recommended that the IRS “develop processes and procedures to ensure that penalties are consistently assessed against non-compliant business filers with e-filing requirements.”

The Internal Revenue Service also disagreed with this recommendation, as reflected in the report, “IRS management stated it has systemic processes in place for e-filed partnership returns and found them to be working as intended.”

“The IRS has yet to establish processes and procedures to identify and address corporate, employer, and Heavy Highway Vehicle Use Tax filers that do not comply with e-file mandates,” said the TIGTA report.

“Our analysis of tax return filings identified 15,108 filers that paper-filed 22,569 tax year 2018 returns that were required to be e-filed. TIGTA estimates that the processing of these returns cost the IRS $30,196 in comparison to the $3,405 to process the required e-filed tax returns.”

The TIGTA report says e-filing among businesses climbed from 41% to 63% since 2014.