An audit conducted by the Treasury Inspector General for Tax Administration revealed that the IRS discarded data for millions of taxpayers, infuriating the tax community.
The material, known in accounting parlance as paper-filed information returns, 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.
According to the report, “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 IRS Commissioner Charles Rettig, the backlog created by years of budget cuts, understaffing, pandemic-related office closures, and added duties is expected to be cleared by December.
While the report does not specify which information returns were discarded, the news has sparked outrage among tax professionals, especially 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, president of the New York State Society of Enrolled Agents and a New York-based enrolled agent.
CNBC has contacted the IRS for comment.
Missing information returns can cause a “mismatch” at the IRS, she explained, delaying refunds because the agency can’t verify details on a taxpayer’s returns.
While the decision’s long-term consequences are unknown, tax professionals have long complained about the flood of automated IRS notices, with few ways to contact the agency.
“If they’re not putting those into the system, there will be discrepancies, which means potential notices that are sent out,” said Dan Herron, a certified financial planner and CPA with Elemental Wealth Advisors in San Luis Obispo, California.
Although the IRS stopped sending out more than a dozen different types of automated notices in February, Herron claims that the constant correspondence is still causing problems for taxpayers and advisors.
Brian Streig, a CPA with Calhoun, Thomson, and Matza LLP in Austin, Texas, described the news as a “break in our trust,” emphasizing the burden on the business community.
“Every year in January, small businesses stress out trying to accurately prepare these informational returns and get them filed on time,” he said. “Seeing the IRS simply destroy these is almost like the IRS admitting they don’t care.”
Similar concerns were expressed by Larry Harris, a CFP and director of tax services at Parsec Financial in Asheville, North Carolina, who questioned the agency’s ability to remain compliant.
“It only serves to tarnish the IRS’s reputation in the business community and in the public eye,” he added.