IRS falls far short on paperless processing goal

The Internal Revenue Service has made only limited progress so far on its goal of achieving “paperless processing,” scanning only a tiny fraction of paper-filed returns last tax season, according to a new report.

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The report, released Tuesday by the Treasury Inspector General for Tax Administration, found that for filing season 2025, the IRS originally planned to digitally process all paper‑filed Forms 940, 941 and 1040, estimated to be 78% of all paper-filed returns. But as of May 2025, contractors had scanned 517,000 paper filed forms, or only 5% of their planned goal.

According to the IRS, individual paper tax returns cost 43 times more to process than electronically filed individual tax returns. “For filing season 2025, individual paper tax returns accounted for 72% of processing costs, yet they made up only 6% of all individual tax returns filed,”  said the report. “Digitizing paper tax returns will improve the accuracy and timeliness of processing and reduce storage costs. However, reductions in funding over the years and uncertainty of future funding have made it difficult for the IRS to modernize paper tax return processing.”

The IRS spends millions of dollars each year to store paper documents, the report noted. In August 2022, Congress enacted the Inflation Reduction Act, which provided the agency with long-term funding to update its technology capabilities and improve tax administration and services provided to taxpayers. However, the nearly $80 billion in funding over 10 years has since been cut by more than half by Congress to $37.6 billion.

The IRS embarked on a paperless processing initiative in 2023. Under the initiative, the agency did three pilot tests during fiscal years 2023 through 2025 to digitize paper-filed tax returns for electronic processing. The pilot tests included three tax forms: Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return;” Form 941, “Employer’s Quarterly Federal Tax Return;” and Form 1040, “U.S. Individual Income Tax Return,” plus 28 attachments. 

During the pilot tests, paper-filed tax returns were sent to contractor sites where they were scanned. The contractors extracted the return data from the scanned images and transmitted the data to the IRS for processing. The pilot tests proved that paper tax returns can be digitized and successfully processed. During the pilots, approximately 3.8 million (7%) of the 53.3 million paper-filed Forms 940, 941 and 1040 received from February 2023 through December 2024 were digitized and processed electronically. 

After the successful pilot program, the IRS decided to develop its own in-house paperless processing system for the 2025 filing season as a less expensive alternative to outsourcing. However, final approval was delayed, and then concerns were raised about the suitability of the selected contractor, requiring the IRS to award a new contract. To mitigate the impact of this delay, the IRS extended the contracts used during the pilot program while it continued developing its in-house system. 

In April 2025, the agency was directed to stop work on its in-house paperless processing system and begin a new Zero Paper Initiative. The ZPI consolidates IRS efforts to modernize paper processing of tax returns, correspondence and information returns. 

The ZPI will use a phased approach to eliminate paper submissions of tax returns, correspondence and information returns. 

“While the pilots successfully proved the concept of paperless tax return processing, the IRS has yet to achieve the volume of returns necessary to meet goals set for the 2026 filing season,” said the report. 

The IRS piloted the scanning of historical tax documents to save costs on physical storage and comply with federal records management requirements. The agency estimated that it has 1 billion pages of historical documents. It began by scanning the  Form 709, “United States Gift (and Generation-Skipping Transfer) Tax Return,” prioritized it because it is a high-volume paper form that must be retained at least through the life of the taxpayer. 

As part of the ZPI project, the IRS said its goal is to digitally process 26 of the highest-volume paper-filed tax forms for the 2026 filing season. The agency also plans to expand the number of tax forms that can be filed electronically. However, the interim ZPI contractor had only scanned approximately 7% of the 5.7 million forms received from May 2025 through early August 2025. 

The IRS experienced delays in implementing its solution for the 2025 filing season and has already experienced similar delays with ZPI, mainly due to concerns about the process used to select the contractors. 

Contractors had a hard time hiring enough staffers because workers can’t wait the estimated four to five weeks for the IRS to provide background clearances. The agency continued to scan historical Forms 709 using both internal scanning and contracted services. From December 2023 to early July 2025, it scanned 58.7 million pages (41%) of the estimated 143 million pages of historical Forms 709. While 85% of the scanning was completed by a contractor, the IRS decided not to extend the contract, citing low volumes and quality of scans. As a result, the volume of historical Forms 709 scanned has dropped significantly. 

TIGTA said it remains concerned that the IRS will be unable to meet the federal mandate to have all records in a digital format by December 2030, and will continue to incur millions of dollars in costs annually to store paper documents. TIGTA recommended the IRS evaluate the available options to prioritize the scanning of historical documents to realize cost savings and convert all paper documents to digital format by 2030. The IRS agreed with TIGTA’s recommendation and said it will continue to evaluate available options for scanning historical documents.

“The IRS is undergoing a significant transformation and modernization of business processes, including the conversion of paper tax returns and other tax documents to a digital format,” wrote Kenneth Corbin, chief of the Taxpayer Services Division, in response to the report. “The digitalization of tax documents benefits taxpayers and the IRS by permitting electronic routing, processing and storage costs, and improvement in our ability to respond to taxpayer and other stakeholder needs.”