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An audit by the Treasury Inspector General for Tax Administration revealed the IRS has tossed data for millions of payers, sparking anger from the tax community.
The material, known as paper-filed information returns in accounting parlance, is sent yearly by employers and financial institutions, and covers taxable activity, such as W-2 forms, with copies sent to taxpayers and the IRS.
“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,” according to the report.
The IRS backlog, created by years of budget cuts, understaffing, pandemic-related office closures and added duties, is expected to clear by December, according to Commissioner Charles Rettig.
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While the report doesn’t specify which information returns the agency chucked, the news has triggered angry responses from tax professionals, particularly after another difficult filing season.
“I was horrified when I read the report describing the destruction of paper-filed information returns,” said Phyllis Jo Kubey, a New York-based enrolled agent and president of the New York State Society of Enrolled Agents.
Missing information returns can cause a “mismatch” at the IRS, delaying refunds because the agency can’t verify details on a taxpayer’s returns, she explained.
While the eventual consequences of the decision are unknown, tax professionals have long complained about the stream of automated IRS notices, with limited options to reach the agency.
“If they’re not putting those into the system, there’s going to be discrepancies, which means potential notices that are sent out,” said Dan Herron, a San Luis Obispo, California-based certified financial planner and CPA with Elemental Wealth Advisors.
Although the IRS halted more than a dozen types of automated notices in February, Herron says the constant correspondence is still creating headaches for taxpayers and advisors.
“There were no negative taxpayer consequences as a result of this action,” the IRS said in a statement on Thursday. “Taxpayers or payers have not been and will not be subject to penalties resulting from this action.”
Brian Streig, a CPA with Calhoun, Thomson and Matza LLP in Austin, Texas, said the news was a “break of our trust,” pointing to the burden on the business community.
“Small businesses stress out every year in January trying to accurately prepare these informational returns and get them filed on time,” he said. “To see the IRS just destroy these is almost like the IRS admitting they don’t really care.”
Larry Harris, a CFP and director of tax services at Parsec Financial in Asheville, North Carolina, voiced similar concerns, questioning the agency’s ability to stay compliant.
“It just further damages the IRS’ reputation in the business community and in the public,” he added.