The AICPA and a member of Congress have sharply criticized IRS over its destruction of roughly 30 million paper information returns in response to with a backlog last year, Accounting Today reported.

On May 4, the Treasury Inspector General for Tax Administration (TIGTA) issued a report on the processing of business tax returns. The report mentioned that the IRS closed its Tax Processing Centers in March and April 2020 in response to the COVID-19 pandemic. It added, “Since reopening its Tax Processing Centers in June 2020, the IRS continues to have a significant backlog of paper-filed individual and business tax returns that remain unprocessed. 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.”  

The report further explained, “The IRS uses these documents to conduct post-processing compliance matches such as the IRS’s Automated Underreporter Program to identify taxpayers not accurately reporting their income. IRSmanagement advised us that once the tax year concludes, the information returns, e.g., Forms 1099-MISC, Miscellaneous Information, can no longer be processed due to system limitations. This is because the system used to process these information returns is taken offline for programming updates in preparation for the next filing season.” 

In a statement released on May 13, AICPA Vice President of Taxation Edward Karl said, “Considering the struggles the IRS has faced in keeping up with returns’ processing the last two years, the recent TIGTA report highlighting the revelation of the IRS’s destruction of 30 million documents last year has been concerning. IRS management’s decision to destroy information return documents due to the processing backlog raised numerous questions regarding IRS’s decision-making and risk assessment process. The IRS’s recent statement provided some of the answers, but American taxpayers deserve to know why this decision was made and how it might impact them. The IRS should continue to operate with transparency on this issue.”  

He added, “For months, the AICPA has urged the IRS to implement specific recommendations that would help them reduce their backlog more quickly and provide relief to taxpayers, several of which are related to pandemic penalty relief. We are encouraged that the IRS statement indicated that taxpayers and payors have and will not be subject to penalties. However, the AICPA believes that the IRS should be transparent with their remediation strategy to ensure that taxpayers who attempt to be in compliance, and payors who have been compliant with the information reporting requirements, do not have penalties imposed on them in the future.” 

Accounting Today reported that after IRS began to hire thousands more employees to help process backlogged returns, with authority from Congress, a reduction in the backlog may have appeased legislators who had been hearing complaints from. But the TIGTA report generated renewed concerns. 

On May 13, Rep. Bill Pascrell (D-N.J.), chairman of the House Ways and Means Oversight Subcommittee, called for IRS Commissioner Charles Rettig to be replaced by the Biden administration, even though his term is nearing an end in November. 

He said, “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. This latest revelation adds to the public’s plummeting confidence in our unfair two-tier tax system. That confidence cannot recover if all the American people see at the IRS is incompetence and catastrophe. Mr. Rettig has had plenty of time and plenty of cooperation to begin the crucial work of fixing the IRS. There needs to be real accountability. President Biden must replace Mr. Rettig immediately and also nominate a Chief Counsel for IRS.” 

The IRS issued a statement on May 13, emphasizing that “information returns are not tax returns, and they are documents submitted to the IRS by third-party payors, not taxpayers. Ninety-nine percent of the information returns we used were matched to corresponding tax returns and processed. The remaining 1% of those documents were destroyed due to a software limitation and to make room for new documents relevant to the pending 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 IRS noted that “we processed 3.2 billion information returns in 2020.”