Weekly Column: Why Did The IRS Destroy 30 Million Paper Returns?

Americans spend millions of hours and billions of dollars filing their taxes.  At the very least the Internal Revenue Service (IRS) should open, read, process and protect what Americans send them.  Unfortunately, a recent report by the IRS watchdog, the Treasury Inspector General for Tax Administration (TIGTA), tells us the IRS destroyed an estimated 30 million paper-filed tax documents without processing them.  As the Ranking Republican Member of the Senate Finance Committee, I led a letter to IRS Commissioner Chuck Rettig highlighting TIGTA’s findings and asking questions about why the IRS would destroy 30 million tax documents without processing them first.

Here are the facts.  TIGTA reported in September 2021 and May 2022 that the IRS destroyed an estimated 30 million paper-filed information returns in March 2021, reportedly, in part, to relieve a backlog of paper documents.  The report gives little detail about the returns destroyed other than Form 1099‑MISC was an example of a destroyed document.  Information returns are important because they typically serve as a third-party check to ensure taxpayers are accurately reporting their income and deductions.  These information returns are so important, that a taxpayer who files an information return late or with inaccuracies is subject to penalties. 

The IRS responded the 30 million destroyed returns were only 1 percent of the total information returns filed, and they were destroyed due to a software limitation and to make room for 2021 tax filing season documents.  The IRS also claims “[t]here were no negative taxpayer consequences as a result of this action,” and taxpayers will not be subject to penalties resulting from the IRS’s actions.  Perhaps there were no negative consequences for those whose documents were destroyed, and maybe even some benefit if they underreported income.  However, as one CPA described it, it is a “slap in the face to taxpayers who properly filed their information returns electronically.”

Despite multiple public hearings discussing the IRS’s backlog problems, the IRS never mentioned its decision to destroy 30 million information returns.  This destruction has rightly sparked many questions: “How can the agency ask taxpayers to meet their filing obligations for information returns when it cavalierly destroys duly filed documents?” asked Nina Olson, former National Taxpayer Advocate. 

In the letter signed by all Senate Finance Committee Republicans, we wrote, “The information disclosed in the May 4 TIGTA report has surprised many in Congress and in the tax community.  The destruction of documents ensuring taxpayers did not underreport income or inflate a deduction is concerning.  It also raises questions about the IRS’s ability to administer the tax code and ensure compliance.”  We included an alarming point made in a Tax Notes article that noted during the period the IRS was destroying 30 million information returns and while the COVID pandemic harmed millions of Americans, “[the IRS] was imposing penalties for failing to file timely and accurate information returns, which, for all anyone knows may have been among the documents destroyed.”  Additionally, we asked the IRS to clarify the potential damage to tax administration this destruction will cause, as well as who made the decision, how the IRS will address the consequences this decision will have for taxpayers, and the potential harm to tax revenues.

The IRS seems to be saying that if it cannot get through its backlog, it can just destroy part of the paperwork causing the backlog.  And, somehow these tax documents are not that important (yet they are important enough to assess penalties if not accurately or timely filed).  I will continue to press for answers.

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