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An audit by the Treasury Inspector General for Tax Administration found that the IRS dumped data for millions of payers, sparking anger in the tax community.
The material, known as paper information statements in accounting parlance, is sent annually by employers and financial institutions and covers taxable activities, such as W-2 forms, with copies sent to taxpayers. and to the IRS.
“The continued inability to process backlogs of paper tax returns contributed to management’s decision to destroy approximately 30 million paper information return documents in March 2021,” the report said.
The IRS backlog, created by years of budget cuts, understaffing, pandemic-related office closures and additional duties, is expected to clear up by December, according to Commissioner Charles Rettig.
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Although the report did not specify what information the agency returned, the news sparked angry reactions from tax practitioners, especially after another difficult filing season.
“I was horrified when I read the report outlining the destruction of paper information returns,” said Phyllis Jo Kubey, a New York-based enrolled agent and president of the New York State Society of Enrolled Agents.
CNBC has contacted the IRS for comment.
Missing information returns can lead to a “mismatch” at the IRS, delaying refunds because the agency cannot verify the details of a taxpayer’s returns, she explained.
While the eventual consequences of the decision are unknown, tax practitioners have long complained about the IRS’ automated notice flow, with limited options for reaching the agency.
“If they don’t put them in the system, there will be discrepancies, which means potential notices will be sent out,” said Dan Herron, San Luis Obispo, Calif.-based certified financial planner and CPA at Elemental. Wealth Advisors.
Although the IRS shut down more than a dozen types of automated notices in February, Herron says the constant correspondence still creates headaches for taxpayers and advisers.
Brian Streig, CPA at Calhoun, Thomson and Matza LLP in Austin, Texas, said the news was a “break in our trust,” underscoring the burden on the business community.
“Small businesses stress out every January trying to accurately prepare those information returns and get them filed on time,” he said. “Seeing the IRS destroy them is almost like the IRS admitting they don’t really care.”
Larry Harris, CFP and director of tax services at Parsec Financial in Asheville, North Carolina, expressed similar concerns, questioning the agency’s ability to remain compliant.
“It only further damages the reputation of the IRS in the business community and in the public,” he added.