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TIGTA: IRS’s Decision to Destroy 30 Million Paper Returns Was ‘Reasonable’

The agency's actions, which were reported by TIGTA in May 2022, drew scrutiny from lawmakers and tax professionals.

Considering the circumstances surrounding the coronavirus pandemic, the IRS’s decision to destroy approximately 30 million unprocessed tax year 2019 paper-filed information returns was “reasonable,” the Treasury Inspector General for Tax Administration (TIGTA) concluded in a report released last week.

The destruction of the paper returns was discovered by TIGTA in September 2021, and the IRS watchdog issued a separate report on its investigation in May 2022. Based on prior-year filing statistics, IRS management estimated the majority of the unprocessed information returns were paper-filed Forms 1099 submitted with a Form 1096. The IRS’s decision to destroy those documents drew scrutiny from lawmakers and tax professionals.

This most recent TIGTA audit assessed IRS actions taken to lessen the risk to the tax agency and taxpayers associated with the decision to not process the nearly 30 million paper information returns.

TIGTA determined that significant processing backlogs and pandemic-related staffing shortages limited the IRS’s ability to process those 2019 paper-filed information returns. The closing of IRS tax processing centers from March 20, 2020, through June 29, 2020, during the normal course of filing season, created significant inventory backlogs, TIGTA said.

The report states:

For example, in October 2020, the IRS had 10.3 million paper-filed individual and business income tax returns still to process or needing error correction, an increase of 405 percent over the 2 million returns in October 2019. Unprocessed paper-filed tax returns exceeded 11.5 million by December 2020, an increase of 2,629 percent from December 2019.

At the same time, the IRS was dealing with significant COVID-19-related staffing shortages in its tax processing centers, TIGTA noted, adding that it determined much of the work performed at the tax processing centers, including processing paper-filed tax returns, “was not conducive to a telework environment.”

The report states:

As such, the number of tax returns and other tax documents the IRS can process at these facilities before the end of a processing year is dependent on staffing levels. As of October 30, 2020, the number of employees working in the tax processing centers ranged from 68 percent to 96 percent of those employees working in the centers prior to the COVID-19-related closures.

Throughout CY 2020, in addition to concerns over the safety of their staff, IRS management’s primary focus was individual and business income tax returns processing to ensure that taxpayers received refunds and other outstanding tax-related benefits. In October 2020 IRS management realized that due to their priorities, they would be unable to process all paper-filed information returns submitted with a Form 1096 before the end of the processing year.

TIGTA noted that the IRS processes billions of information returns each year, and paper-filed information returns average just 1% of the total.

The report provides a timeline of how and when the decision was made to destroy the unprocessed paper returns:

In October 2020, IRS management realized that, given other priorities, they would not complete the processing of approximately 30 million TY 2019 paper-filed information returns by December 31, 2020.

IRS management assessed the potential impact of the unprocessed paper-filed information returns on taxpayers and its compliance programs. They determined the impact was low given the mitigations and processing workarounds that were implemented. IRS management also considered retaining the unprocessed paper information returns but determined that merely storing the unprocessed returns would add no value to the IRS’s systemic compliance matching processes. The returns would not have a Document Locator Number or other identifier needed to facilitate the filing of the forms and manual retrieval of documents for downstream processes.

In December 2020, IRS management in the Wage and Investment Division requested the expertise of the IRS Office of Chief Counsel and the IRS Records Office to determine whether the 30 million unprocessed TY 2019 information return documents could be treated as classified waste. IRS Wage and Investment Division management was advised that these returns could be destroyed under existing classified waste rules. In addition, the National Archives and Records Administration (NARA) completed an unauthorized disposition case in December 2022 regarding the IRS decision to destroy these information returns. Based on information provided by the IRS, NARA determined the records were destroyed in compliance with the applicable Records Control Schedule and not an unauthorized disposition.

The IRS destroyed the unprocessed information returns as classified waste during January through March 2021.

TIGTA said it agreed with IRS management’s assessment that the agency would not have completed the processing of the approximately 30 million TY 2019 information returns before Dec. 31, 2020, without delaying other priorities. In addition, TIGTA found the IRS’s decision to destroy the TY 2019 unprocessed information returns “reasonable in the context of the COVID-19 pandemic.”

TIGTA also concluded that “few taxpayers and information return filers were subjected to compliance treatment because of the destruction of unprocessed information returns.” Specifically, 1.3 million payers may have had their information returns destroyed. In addition, 484, or 1%, of the 50,732 potential examination cases identified may have been selected because their information returns were destroyed, according to the report. TIGTA also said 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 established policy when destroying information returns, the report stated. For example, the information returns that were destroyed were transported to the IRS locations’ respective shredding facilities in locked trucks and moved into access-controlled areas within each facility for shredding. However, not all bins used to collect classified waste at the tax processing center in Austin, TX, had locking lids as required, according to TIGTA.