The IRS's decision in 2021 to destroy about 30 million unprocessed tax information returns is "deeply concerning," the U.S. Senate Finance Committee's Republican senators wrote in a letter Thursday to IRS Commissioner Charles Rettig.
The episode, in fact, "raises questions about the IRS's ability to administer the tax code and ensure compliance," the letter stated, and it asked seven specific questions concerning the decision, how it was arrived at, its potential effects, and whether the IRS has destroyed such documents before processing them at any other time.
The letter, signed by Sen. Mike Crapo, R-Idaho, the committee's ranking minority member, and its 13 other GOP members, also notes that news of the episode, following its brief description in a May 4 report by the Treasury Inspector General for Tax Administration (TIGTA), has "surprised many," not only in Congress but in the professional tax community.
The letter also comes after the AICPA also expressed its concern and similarly asked the IRS to disclose more details. The AICPA also noted that it has urged the IRS repeatedly to implement the AICPA's specific recommendations for reducing backlogs of unprocessed returns and correspondence. The TIGTA report described the IRS's decision to destroy the returns as prompted in part by such a backlog.
Yet it remains unclear exactly how destroying the returns might have benefited the IRS's efforts to clear the backlog, the letter states.
The Senate Republicans in their letter also noted that, since the summer of 2020, the AICPA has released at least seven letters or statements calling for some form of penalty relief from the IRS in light of the COVID-19 pandemic. Senators, too, have made calls for taxpayer relief due to the pandemic as recently as February this year, the letter notes.
And yet, although the IRS has denied any taxpayers were harmed by the destruction, it remains conceivable that payers might have been penalized for failing to file information returns the IRS received but later destroyed, the letter suggested.
The IRS has stated that "antiquated technology" for processing paper-filed information returns prompted the decision. The returns, which included Form 1099-MISC, Miscellaneous Information, reported amounts paid to taxpayers and would have been furnished directly to those taxpayers. The IRS also receives a copy, which it ordinarily uses to match against the recipient taxpayers' returns.
In the case of the destroyed returns, the IRS said in a statement that a software limitation led to the decision and that it also needed to make room for new documents relevant to the then-pending 2021 filing season. "System constraints" required the IRS to process the forms by the end of the year in which they were received, the IRS said.
The Service also stated there had not been and would not be any "negative taxpayer consequences," including any penalties, resulting from the destruction.
The senators specifically requested that the IRS by June 5:
- Describe the types and numbers of information returns destroyed, how they were destroyed, what tax periods they covered, and how the IRS complied with document retention requirements;
- Estimate the tax revenue lost as a result of the destruction, considering that an estimated 56% of the "tax gap" between the amount owed and the amount paid is thought to derive from individual taxpayers underreporting their income;
- Determine whether the IRS assessed any penalties against payers that filed the destroyed information returns, and, if any penalties were waived for them, why payers that e-filed information returns were not given equal treatment;
- Disclose whether the IRS had destroyed without processing any other tax documents filed as required by law;
- Provide the legal basis for the destruction and describe more fully how the decision was made, and provide a copy of a risk assessment concerning them that was mentioned in TIGTA's report, including the IRS personnel and dates involved;
- Report whether the destruction prevented any taxpayers from accurately recording withholding amounts or qualifying taxpayers from receiving an earned income tax credit; and
- Give additional details about the system used to process the information returns having to be taken offline at the end of each year for programming, as the TIGTA report related.
— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.