The Internal Revenue Service’s decision to destroy around 30 million unprocessed paper information returns to reduce its backlog during the pandemic probably had little effect on taxpayers, according to a new report.
The report, released Monday by the Treasury Inspector General for Tax Administration, examined a controversial decision that a previous TIGTA report disclosed last year (see story). The move provoked some outrage in Congress and the tax professional community, prompting calls for TIGTA to investigate it.
The new report traced the reasons why the IRS made the decision to destroy the millions of unprocessed returns that had been piling up in IRS facilities during the pandemic, when many IRS employees were working remotely.
“In October 2020, IRS management realized they could not process all Tax Year 2019 paper-filed information returns by the end of the year given their other priorities,” said teh report. “The IRS prioritized processing the 13.5 million backlogged tax returns to ensure that taxpayers received refunds and other outstanding tax-related benefits. Given the events of 2020, the IRS is moving to expand its paper-filed information return processing capacity to include prior year filings. By not completing processing of the paper-filed information returns, these returns would not have been searchable and storing them would have added no value to the IRS’s systemic matching compliance activities.”
The IRS checked with its Office of Chief Counsel and its Records Office before destroying the unprocessed information returns, relying on existing procedures for sensitive document destruction as classified waste. Considering the circumstances surrounding the COVID-19 pandemic, TIGTA found the decision to be reasonable.
“In addition, few taxpayers and information return filers were subjected to compliance treatment because of the destruction of unprocessed information returns,” said the report.
Even though 1.3 million payers may have had their information returns destroyed, only 484 of the 50,732 potential examination cases (or just about 1%) identified may have been selected because their information returns were destroyed. TIGTA also found that few, if any, payers were assessed a “failure to timely file” penalty for an information return that the IRS destroyed.
The IRS generally followed its already-established policy when destroying the information returns. The paper documents were transported to the IRS locations’ own shredding facilities in locked trucks and moved into access-controlled areas within each facility for shredding. However, not all of the bins used to collect classified waste at the Austin, Texas, tax processing center had locking lids, as required. TIGTA recommended the IRS coordinate with the shred contractor and implement the use of lockable bins for all classified waste at the Austin facility. IRS management, in coordination with the contractor, ordered and had delivered lockable bins for immediate use. In addition, IRS management has updated its procedures to make sure classified waste currently in unlocked bins stays in the secure extraction area until employees transfer the contents to a lockable container.
“The impact of the pandemic and its aftermath significantly affected our operations and illuminated many areas where improvements are needed,” wrote Kenneth Corbin, commissioner of the IRS’s Wage and Investment Division in response to the report. “We are committed to reducing our reliance on paper processes to the greatest extent possible, and improving the effectiveness and efficiency of tax administration for the benefit of all taxpayers.”
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