IRS insists destruction of 30 million files of taxpayer data won’t affect payers

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Filers won’t be affected by the IRS decision to destroy data for millions of taxpayers, the agency said in a statement Thursday.

The IRS tossed an estimated 30 million so-called paper-filed information returns in March 2021, according to an audit by the Treasury Inspector General for Tax Administration.

The news has sparked anger in the tax community, many of whom worry about the agency’s ability to verify returns, triggering more error notices, especially with limited ways to reach the IRS.

“We processed 3.2 billion information returns in 2020. Information returns are not tax returns, and they are documents submitted to the IRS by third-party payors, not taxpayers,” the IRS said in its statement.

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The agency said 99% of the information returns were already processed, and the remaining 1% were destroyed due to a “software limitation,” making room for the 2021 filing season.

“There were no negative taxpayer consequences as a result of this action. Taxpayers or payers have not been and will not be subject to penalties resulting from this action,” the agency said.

The agency said the situation reflects “significant issues posed by antiquated IRS technology.” In 2020, the IRS prioritized backlogged returns to deliver refunds and other Covid-19 relief over processing less than 1% of paper information returns — mostly Form 1099s.

System constraints require the IRS to process paper forms by the end of the calendar year in which they were received, the agency said.

“Not processing these information returns did not impact original return filing by taxpayers in any way as taxpayers received their own copy to use in filing an accurate return,” the IRS said.

“The IRS is planning to process all paper information returns received in 2021 and 2022,” the agency added.

However, Rep. Bill Pascrell Jr., D-N.J., chair of the oversight subcommittee of the House Ways and Means Committee, on Friday demanded that President Joe Biden replace IRS Commissioner Charles Rettig over the incident.

“The IRS is vital to public confidence in our nation and its Trump-appointed leader has failed,” Pascrell said, pointing to the public’s “plummeting confidence” in the tax system.

“The manner by which we are learning about the destruction of unprocessed paperwork is just the latest example of the lackadaisical attitude from Mr. Rettig,” he added.

Edward Karl, vice president of taxation at the American Institute of CPAs, also voiced concerns on Friday.

“IRS management’s decision to destroy information return documents due to the processing backlog raised numerous questions regarding IRS’ decision making and risk assessment process,” he 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,” Karl said. “The IRS should continue to operate with transparency on this issue.”

— CNBC’s Dan Mangan contributed to this report

Source: CNBC