In April and March of 2020, the International Revenue Service temporarily closed its Tax Processing Centers in response to the COVID pandemic. Since reopening the centers in June of 2020, the IRS faced an unexpected hurdle, the inability to process the backlog of paper-filed tax returns from individual and business tax returns. A problem that remains to this day.
According to new reports released by the Treasury Inspector General for Tax Administration, the IRS claims to have destroyed an estimated 30 million paper-filed tax returns due to the inability to process. While the reports focused on how the IRS should be doing more to encourage the electronic filing of business tax returns and the reduction of paper filings, the reports of destruction have caused a stir in the financial sector.
The report was initiated because of the following:
“This audit was initiated because the IRS’s 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 destroyed papers in question included W-2 forms and 1099 forms among many others. The question of why the returns were destroyed still remains a mystery, but it is believed that the destruction of returns was enacted to relieve the current backlog of business tax returns.
Throughout the pandemic, the accumulation of millions of paper tax returns and other documents caused IRS facilities and agency workers to catch up on the backlog in overtime. Even with the additional overtime, the report noted that 16.4 million individual tax returns, transactions, and Accounts Management cases remained in inventory at the end of 2021. IRS Commissioner Chuck Rettig testified in a Senate oversight hearing in April of 2022, that this number has since been reduced to 1.8 million.
Transitioning Your Business to E-Filing
Since 2014, the percentage of businesses that completed their tax returns online has increased from 41% to 63%. The TIGTA has now recommended that the IRS develop a Service-wide strategy to prioritize and incorporate all forms of e-filing, and the IRS has agreed.
Electronics filing can provide significant benefits to both taxpayers and the IRS. E-filed tax returns go through a number of upfront validations that check for more than 1,000 possible errors before the IRS accepts your return. If your tax return does not pass one of these validations, the return is rejected and returned to the taxpayer for re-submissions. In comparison, the paper filed tax returns error rates are significantly higher due to IRS employee keypunch errors. Keypunch errors occur when information from a paper-filed tax return is not correctly entered into the IRS systems.
If you have been waiting for your personal or business tax return to process, you are not alone. Many documents have yet to be processed by the IRS. You can check the state of your return at https://www.irs.gov/. If a significant time has passed, you may want to consult with your CPA about resubmitting your tax return.