Surely, by now you have heard that the IRS has destroyed over 30 million paper tax documents. According to the Treasury Inspector General (TIGTA), the IRS made the decision to do this in March of 2021.
The IRS faced significant struggles over the last few years keeping up with return and tax correspondence processing after the backlog they returned to work to after the COVID-19 pandemic shutdowns. The TIGTA report states that it’s this backlog and the IRS’ inability to catch up that ultimately led to the decision to destroy documents. Another explanation provided was that “antiquated technology” forced the IRS to dispose of these paper documents due to a “software limitation”. One final reason provided – to make room for new documents relevant to the 2021 return filings.
Most of the documentation destroyed was information returns that was to be used to support tax return filings such as w-2s, 1099s, 1098s, etc. These are typically submitted by employers and financial institutions. This means that the IRS may be unable to perform post-processing compliance matches to ensure all reported income and items reconcile with the returns filed.
The IRS has shared that Taxpayers and Payors will not be subject to penalties as a result of this action. However, it is possible that the IRS may delay refunds when the IRS cannot verify information provided on a Taxpayer’s return. It may also create unnecessary issues of Taxpayers’ having to deal with IRS notices sent out due to discrepancies.
While paper filing does create higher processing costs for the IRS and also imposes logistical challenges to them such as storage, etc., many tax professionals, including the AICPA, are now questioning the IRS’ decision-making and risk assessment processes.
The overall consequences of this decision are still unknown.