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Ever been so far behind on paperwork or sorting mail that you were tempted to throw it all away and start fresh? That’s what the IRS did with 30 million business taxpayer documents received in 2020.

The agency admits an “inability to process backlogs of paper-filed tax returns contributed to management’s decision to destroy an estimated 30 million paper-filed information return documents in March 2021.” These information returns are used to conduct post-processing compliance matches to identify taxpayers who do not accurately report their income.

“During the pandemic, millions of paper tax returns and other documents accumulated at IRS facilities, and the agency has been working overtime to catch up on the backlog,” notes Accounting Today. “The problems led to the wholesale destruction of millions of information returns.”

The IRS blames its “antiquated technology,” stating that “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.” Those paper forms were mostly Form 1099s. “System constraints require IRS to process these paper forms by the end of the calendar year in which they were received. This meant that these returns could no longer be processed once filing season 2021 began. Not processing these information returns did not impact original return filing by taxpayers in any way as taxpayers received their own copy to use in filing an accurate return,” the IRS adds.

Thus far, the IRS has denied any taxpayers were harmed by the destruction. But the American Institute of CPAs® (AICPA) and Congress aren’t so sure. A letter from Senate Republicans suggests that certain taxpayers might have been penalized for failing to file information returns the IRS received but later destroyed. The group of Senators is insisting the IRS provide more answers.

The IRS, in the meantime, continues to receive large volumes of paper-filed tax and information returns, resulting in significant costs to process each year, a recent Treasury Inspector General report states. In Fiscal Year 2020 alone, the IRS expended more than $226 million to process paper-filed tax returns. About 63% of business tax returns are e-filed. That’s perhaps mainly because, as the report states, “the IRS does not have a service-wide strategy that identifies, prioritizes, and provides a timeline for the addition of tax forms for e-filing nor an accurate and comprehensive list of tax forms not available to e-file.”

The IRS claims to be working on ways to fix what’s broken. However, they’d prefer everyone just e-file, touting that e-filing “provides benefits to taxpayers, including upfront validations, greater tax return accuracy, and secure and confidential submission of highly personal tax return information.” Feel free to contact us with questions.

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