A paragraph in a recently released Treasury Inspector General for Tax Administration Report[1] disclosed that the IRS destroyed an estimated 30 million paper-filed information returns in March 2021 due to the backlog in processing paper documents at the agency.

The audit was initiated to look at issues preventing broader use of electronic filing for business returns, but it began by noting that the decision to destroy these returns led to the audit:

This audit was initiated because the IRS’s continued 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.[2]

The report itself gives little information about the information returns involved, aside from listing Forms 1099-MISC as an example of the types of forms that were destroyed:

Since reopening its Tax Processing Centers in June 2020, the IRS continues to have a significant backlog of paper-filed individual and business tax returns that remain unprocessed. The continued 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. The IRS uses these documents to conduct post-processing compliance matches such as the IRS’s Automated Underreporter Program to identify taxpayers not accurately reporting their income. IRS management advised us that once the tax year concludes, the information returns, e.g., Forms 1099-MISC, Miscellaneous Information, can no longer be processed due to system limitations. This is because the system used to process these information returns is taken offline for programming updates in preparation for the next filing season.[3]

The news was met with a number of not very favorable responses from the tax community.  In an article by Jonathan Curry in Tax Notes Today Federal, CPA Joe Kristan’s reaction was described as follows:

Joe Kristan of Eide Bailly LLP shared a similar sentiment: “It’s shocking. . . . For the IRS to just throw all that work away is insulting.” He also described the news as a slap in the face to taxpayers who properly filed their information returns electronically, because their return information can be matched, while taxpayers who may have disregarded their paper information return obligations or underreported income won’t get caught.[4]

The article quotes former National Taxpayer Advocate Nina Olson as saying “How can the agency ask taxpayers to meet their filing obligations for information returns when it cavalierly destroys duly filed documents?”[5]

Certainly, it seems the IRS may have difficulty justifying imposing penalties related to 2020 electronically filed information returns when it appears that had the forms been filed on paper the issues never would have been brought to light due to IRS actions.

[1] A Service-Wide Strategy Is Needed to Address Challenges Limiting Growth in Business Tax Return Electronic Filing, TIGTA Report Number: 2022-40-036, May 4, 2022, https://www.taxnotes.com/research/federal/other-documents/treasury-reports/irs-should-prioritize-business-e-filing%2c-compliance%2c-tigta-says%c2%a0/7dgqn (retrieved May 11, 2022)

[2] A Service-Wide Strategy Is Needed to Address Challenges Limiting Growth in Business Tax Return Electronic Filing, TIGTA Report Number: 2022-40-036, May 4, 2022

[3] A Service-Wide Strategy Is Needed to Address Challenges Limiting Growth in Business Tax Return Electronic Filing, TIGTA Report Number: 2022-40-036, May 4, 2022

[4] Jonathan Curry, “Tax Pros Livid Over IRS Destroying Information Returns,” Tax Notes Today Federal, May 11, 2022, https://www.taxnotes.com/tax-notes-today-federal/tax-system-administration/tax-pros-livid-over-irs-destroying-information-returns/2022/05/11/7dgyq subscription required (retrieved May 11, 2022)

[5] Jonathan Curry, “Tax Pros Livid Over IRS Destroying Information Returns,” Tax Notes Today Federal, May 11, 2022