The Internal Revenue Service, struggling to deal with a massive backlog of paper filings, decided to “destroy an estimated 30 million paper-filed information return documents in March 2021,” the agency’s watchdog reported last week.
The IRS said in a statement Thursday that taxpayers “have not been and will not be subject to penalties resulting from this action.” It said that it processed 3.2 billion information returns in 2020 and that the destroyed documents are not tax returns but documents submitted to the IRS by third-party payors.
It added that 99% of the information returns were already processed and 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 agency also said that “this situation reflects the significant issues posed by antiquated IRS technology.” The destruction of documents has sparked a backlash from tax preparers, with some reportedly concerned that the decision could hamper the agency’s ability to verify returns and trigger additional error notices.
“IRS management’s decision to destroy information return documents due to the processing backlog raised numerous questions regarding IRS’ decision making and risk assessment process,” Edward Karl, vice president of taxation at the American Institute of CPAs, said in a statement. “The IRS’ recent statement provided some of the answers, but American taxpayers deserve to know why this decision was made and how it might impact them.”
Rep. Bill Pascrell (D-NJ), chairman of the House Ways and Means Oversight Subcommittee, on Friday called for President Biden to replace IRS Commissioner Chuck Rettig, describing the document destruction as the latest black eye for the agency.
“The IRS is vital to public confidence in our nation and its Trump-appointed leader has failed,” Pascrell said in a statement. “The manner by which we are learning about the destruction of unprocessed paperwork is just the latest example of the lackadaisical attitude from Mr. Rettig.
This latest revelation adds to the public’s plummeting confidence in our unfair two-tier tax system. That confidence cannot recover if all the American people see at the IRS is incompetence and catastrophe.”
While the report doesn’t specify which information returns the agency chucked, the news has triggered angry responses from tax professionals, particularly after another difficult filing season.
“I was horrified when I read the report describing the destruction of paper-filed information returns,” said Phyllis Jo Kubey, a New York-based enrolled agent and president of the New York State Society of Enrolled Agents.
While the eventual consequences of the decision are unknown, tax professionals have long complained about the stream of automated IRS notices, with limited options to reach the agency.
“If they’re not putting those into the system, there’s going to be discrepancies, which means potential notices that are sent out,” said Dan Herron, a San Luis Obispo, California-based certified financial planner and CPA with Elemental Wealth Advisors.
“There were no negative taxpayer consequences as a result of this action,” the IRS said in a statement on Thursday. “Taxpayers or payers have not been and will not be subject to penalties resulting from this action.”
Brian Streig, a CPA with Calhoun, Thomson and Matza LLP in Austin, Texas, said the news was a “break of our trust,” pointing to the burden on the business community.
“Small businesses stress out every year in January trying to accurately prepare these informational returns and get them filed on time,” he said. “To see the IRS just destroy these is almost like the IRS admitting they don’t really care.”
- “Form 1120 (2015)” (PDF). Internal Revenue Service. Retrieved June 20, 2016.
- TAX BLANKS DELAYED.; But Corporations May Use Tentative Forms for Their Returns”. New York Times. March 8, 1919. Retrieved June 27, 2016.
- “3 NEW INCOME TAX FORMS”. New York Times. May 13, 1919. Retrieved June 27, 2016.
- “RETURN OF ANNUAL NET INCOME OF INDIVIDUALS” (PDF). Internal Revenue Service. October 3, 1913. Retrieved January 1, 2016.
- “1913 Internal Revenue Service 1040 Form”. Tax Foundation. January 2005. Retrieved January 1, 2016.
- Beyond the Headlines: What Do Corporations Pay in Income Tax?” (PDF). Tax Foundation. Retrieved June 27, 2016.
- The Rising Cost of Complying with the Federal Income Tax” (PDF). Tax Foundation. Retrieved June 27, 2016.
- What Tax Preparers Are Really Charging for 2014 Returns”. Wall Street Journal. Retrieved June 27, 2016.
- 1995 1040 instructions p. 5
- “The Rise of The 1099 Economy: More Americans Are Becoming Their Own Bosses”. Forbes.
- Topic 801 – Who Must File Electronically, Internal Revenue Service.
- Instructions for Form 1099-MISC (2012), Internal Revenue Service.
- Some Tax History: Whatever Happened to the W-1?
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