The Show So Far…
Back in early March, this blog asked, “Just What the Heck Is Going on With the IRS These Days?” We answered that question with some consolidated research on the huge backlog of unprocessed tax returns at IRS that started accumulating during the pandemic, continued to mount as the Service attempted to “work from home,” and then worsened as additional tax years rolled around — amid a declining IRS workforce. Federal civil service is not immune to the Great Resignation, either. “The Service” is often how we tax pros refer to the IRS, if you didn’t know.
The best outcome we learned and reported by the end of February this year was that the Service had stopped sending taxpayers automatically generated threatening letters based on their own incomplete accounting of what forms and payments they might have received but were lost in an ocean of backlogged filings. That backlog for early 2022 was estimated between 20 million and 30 million tax returns filed during 2020 and 2021, mostly Form 1040 — but nobody would or could say for sure what the real counts were.
And This Just In…
As of last week, mid-May 2022, the IRS is back in the TAX NEWS again — Big Time.
To deal with a portion of their massive backlog, the IRS destroyed approximately 30 million unprocessed information returns.
It might seem a bit too much of a coincidence that those numbers are in the same 30-million ballpark…
What a way to eliminate a backlog of 30 million tax returns by simply destroying 30 million paper-filed information returns!
But this is not what you might think it means.
The IRS did not destroy unprocessed tax returns. What they did destroy were paper-filed information returns. In accounting parlance, this refers to paper records mailed in every year by employers and financial institutions, as back-up proof of taxable activity, such as W-2 forms and 1099 forms, with originals also mailed at the same time to taxpayers.
The IRS said in their official statement that it processed 3.2 billion information returns in 2020 and that the 30 million destroyed information returns were also from 2020, and were submitted only by third-party payers as verification records. The report states that 99% of 2020 information returns were already processed and 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.” (This math checks out — 30 million is a little less than 1% of 3.2 billion.)
The report emphasized that “this situation reflects the significant issues posed by antiquated IRS technology.” And it is because of its “antiquated technology” that the Service was forced to dispose of the paper documents — and vowed to process all such information returns that it received for tax year 2021 and so far during 2022.
IRS also avows, “Taxpayers or payers have not been and will not be subject to penalties resulting from this action.”
The audit report was prepared and released on May 12, 2022 by the Treasury Inspector General for Tax Administration (fondly known by accounting professionals as TIGTA).
Ramifications and Repercussions
The news stories have sparked a flurry of noise and commotion on many fronts, and a measure of legitimate concern as well.
Many professional tax preparers (including us here at Baum CPA) are understandably concerned that disposal of even “only 1%” of information returns for a single tax year could hamper the Service’s ability to verify returns — which could also trigger more of those highly irritating or menacing automatic error notices. That 1% was in fact 30 million records — meaning that 30 million taxpayers could be affected.
Missing information returns can cause a “mismatch” in the IRS technology that presumably works as intended. The TIGTA report does not specify which information returns were disposed of — which implies that the automated system could easily flag a tax return as missing verification data that was actually destroyed in the eradicated records.
Such a mismatch flag could delay refunds because the agency can’t verify details on a taxpayer’s returns. And these would be 2020 returns, already severely delayed — and the IRS did not confirm whether they first checked to make sure that all 2020 tax returns had been processed and refunded before the last 1% of information returns were destroyed. The eventual consequences of the destruction are still unknown.
Records not entered into the IRS system will cause discrepancies, which means potential notices will get sent out, even though more than a dozen types of automated notices were discontinued in February.
One Possible Silver Lining
The TIGTA report did not make it clear how many taxpayers may have omitted tax items that could have been verified from the destroyed information returns, or if the IRS has any means or plans to identify those taxpayers and amounts.
The implication here is that if any taxpayer underreported income in 2020, which if reconciled against the destroyed records would have created a flagged discrepancy — then that taxpayer has a good chance of not getting busted for it!
But that chance is only around 1% — and only for 2020.
Other Fallout Great and Small
Because of this big reveal, there is A LOT of splashing and whooping and name-calling and “blamestorming” in the political arena, but at Baum CPA we prefer not to report on any of the politics nor comment publicly — unless or until there is some tangible, meaningful implication in the tax code. And even then, our interest is only in the proper management and execution of ALL tax code, and the reliable tax processing and advisory support that we serve to our clients.
On behalf of our clients at Baum CPA, we continue to protest to IRS about their stream of automated notices, with limited options to reach the agency, forever wait times on hold, frequent hang-ups after waiting forever on hold, and the headaches of correspondence that just adds to the logjam of unprocessed and unanswered documentation.
We join many of our colleagues and contemporaries around the U.S. in disparaging the Service’s decision to destroy documents, which we fervently agree is a break of trust among taxpayers and the taxpaying business community — especially small businesses that are burdened to accurately prepare informational returns every year, and file them on time. For the IRS to destroy these records is a slap in the face to the business owners’ earnest compliance — and to the professional tax preparers who support earnest, compliant U.S. taxpayers.
Sources of Further Information on the IRS Document Destruction Scandal:
This blog and its authors provide this content strictly for informational purposes. No content herein should be misconstrued as financial advice. Everyone’s specific circumstances vary — Always consult with a qualified, licensed financial advisor, legal counsel, and tax professional before venturing into any investment or business activities.