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Issue highlights another reason to file and make remittance payments electronically

The Internal Revenue Service admitted it destroyed roughly 30 million unprocessed informational returns from the 2020 tax year.

An audit by the Treasury Inspector General for Tax Administration (TIGTA) found the IRS intentionally destroyed these documents, most related to the 1099 series, in March 2021. The documents were part of a backlog of tax returns, which the IRS has struggled to process since the onset of the COVID-19 pandemic.

“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 report stated. “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.”

In a May 13 statement on their website, the IRS claimed 99 percent of information returns used were matched to corresponding tax returns and processed. The remaining 1 percent of those documents were destroyed due to what they deemed a software limitation, and to make room for new documents relevant to the pending 2021 filing season.

The IRS stated information returns are not tax returns; they are documents submitted to the IRS by third-party payors, not taxpayers. There were no negative taxpayer consequences as a result of this action and taxpayers or third-party payors were not and will not be subject to penalties resulting from this action.

According to a prepared statement released by American Institute of Certified Public Accountants (AICPA) Vice President of Taxation Edward Karl, CPA, CGMA, the destruction of the unprocessed documents is concerning.

“IRS management’s decision to destroy information return documents due to the processing backlog raised numerous questions regarding IRS’s decision making and risk assessment process,” Karl said. “The IRS’ recent statement provided some of the answers, but American taxpayers deserve to know why this decision was made and how it might impact them. The IRS should continue to operate with transparency on this issue.”

Earlier this year, the AICPA urged the IRS to implement specific recommendations to help them reduce their backlog more quickly and provide relief to taxpayers. At the time, one concern was the potential for penalties because the IRS was so far behind in processing tax returns.

“We are encouraged that the IRS statement indicated that taxpayers and payors have not and will not be subject to penalties,” said Karl. “However, the AICPA believes that the IRS should be transparent with their remediation strategy to ensure that taxpayers who attempt to be in compliance, and payors who have been compliant with the information reporting requirements do not have penalties imposed on them in the future.”

According to the Journal of Accountancy, information returns are furnished to taxpayers and filed with the IRS, usually reporting income or another tax item that taxpayers then report on an income tax return or retain in their records to support tax return entries. Examples include Form 1099-MISC, Miscellaneous Information.

However, as the Journal notes, in some cases taxpayers fail to include the reported income or item, or do not report it properly. To enforce the proper inclusion of reported items, the IRS conducts what it calls post-processing compliance matches. First, the information returns are scanned into the IRS's computer systems and then matched against the returns of taxpayers with respect to whom they were filed. One such IRS matching program is its Automated Underreporter Program.

In order to begin preparation for the 2021 tax season, the IRS claims it had to destroy the documents because the antiquated system used to process the returns had to be taken offline to program updates for the next filing season.

The actions taken by the IRS further highlight the need for taxpayers to file and make remittance payments electronically.

Brett W. Neate, CPA, M.Tax, and Zinner & Co. Partner, feels the destruction of 30 million tax forms is demonstrative of the staffing and technological challenges the IRS has faced for many years due to budget-constraints, which were exacerbated by the pandemic.

“In my opinion, while placing greater dependency on antiquated IRS technology by increasing the usage of both electronic filing and payment methods may seem counterintuitive, I feel the increased efficiency that comes with using these technologies would allow for IRS staff to more quickly address the current massive backlog of paper documents, allow for future increases in IRS productivity to minimize future backlogs, and reduce errors that lead to unnecessary tax notices,” he said. “Other benefits include digital confirmation of timely filing and payment in real time, which aids both taxpayers and the IRS to avoid timing-related communications that are more prevalent when relying on mail delivery services.”

The TIGTA report further highlights the need for taxpayers to ensure they use the most efficient means to submit all tax documents and payments. 

“Zinner and Co strongly recommends all taxpayers file electronically whenever it is possible, and to remit payments electronically, when possible, utilizing EFTPS or a similar state or municipality run payment portal,” Neate added.