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Millions of Destroyed Tax Forms Deal Reviled IRS Fresh Black Eye

May 13, 2022, 8:45 AM

The revelation that the IRS quietly disposed of around 30 million unprocessed tax documents is the latest blow to the reputation of an agency that has long struggled with its public perception.

The destruction of the unprocessed paper information returns was first disclosed by an agency watchdog in a September report, but drew the ire of tax professionals and others who follow the IRS closely after it was more prominently mentioned in a report released earlier this week.

Taxpayers won’t face any penalties resulting from destruction of the forms, which are used to help check to see whether taxpayers are reporting the correct amount of income, the IRS announced Thursday. Still, the IRS is facing criticism for not inform the public directly, the latest development as another in a long line of communication missteps.

“They owe the taxpayers of the United States this information,” former National Taxpayer Advocate Nina Olson, now executive director of the Center for Taxpayer Rights, said in an interview.

The IRS has never been universally adored by the public and has many opponents on Capitol Hill. The agency’s standing has been further eroded by challenges brought on by the Covid-19 pandemic, including a backlog of paper documents and a struggle to keep up with a flood of phone calls to agency help lines.

The failure to directly disclose the document destruction is both a sore point for tax professionals and another opportunity for opponents of the IRS to push back against the Biden administration’s proposal to super-charge the agency’s enforcement budget.

Read more: Fixing the IRS—Troubled Agency’s Needs Run Deeper Than Funding

Backlog, IT Limitations

The Treasury Inspector General for Tax Administration said Monday the IRS’s struggle with its pandemic-related backlog was a factor in its decision to get rid of an estimated 30 million paper-filed information returns in March 2021.

The backlog amassed early in the pandemic when the agency closed its processing centers due to public health restrictions. The agency has struggled to catch up—refunds for paper returns filed this year are still delayed—but IRS Commissioner Chuck Rettig has said the backlog should be cleared by the end of 2022.

The IRS explained the documents were destroyed because the agency’s “antiquated” information technology systems could no longer handle them. The IRS was unable to process the documents once the 2021 tax-filing season started, according to the agency.

“99% of the information returns we used were matched to corresponding tax returns and processed,” the IRS said in a statement provided Thursday to Bloomberg Tax. “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.”

Tax Pros Outraged

Tax professionals have been particularly upset about the report of destroyed information returns, saying it is upsetting to see the IRS destroy documents when they and their clients work hard to comply with tax obligations.

“The fact that they’re not playing by the rules, or have a different set of standards, causes a lot of frustration,” said Amie Kuntz, a CPA with RubinBrown LLP.

Adam Markowitz, vice president of Howard L. Markowitz PA CPA, said the destruction of the tax forms won’t end up on most taxpayers’ radars, but there could be some documents that were destroyed that were very important for certain taxpayers.

“The general public already hates the IRS,” he said. “This certainly isn’t going to help.”

Congressional Fallout

The issue is also drawing the attention of lawmakers on Capitol Hill, where the Biden administration has pushed for a substantial budget increase for the IRS.

House Ways and Means ranking member Kevin Brady (R-Texas) said Thursday he had requested a briefing from the IRS about the report that mentioned the 30 million destroyed documents. Brady said he wants to know what the impact will be for the IRS and the public, as well as whether the IRS has done anything similar in the past.

“We deserve to get real answers on this,” he said.

Republicans are still upset at the IRS for its scrutiny of conservative groups’ applications for tax-exempt status during the Obama administration. GOP tax writers also continue to question the progress of an investigation into how news outlet ProPublica obtained the confidential tax records of wealthy US taxpayers.

(ProPublica’s reporting has included the tax information of Bloomberg LP founder Michael Bloomberg. Bloomberg Tax is operated by entities controlled by Michael Bloomberg.)

Credibility Questioned

Grover Norquist, president of the conservative advocacy group Americans for Tax Reform, said a commonality between the destroyed forms and past IRS controversies is they came to light because they were discovered by outside entities.

“They’re killing their credibility,” he said. “‘Trust us’ doesn’t work when you have lied through omission.”

Failing to disclose the destruction of the tax forms is “not the way to ask for a raise,” Norquist added.

Criticism of the IRS isn’t limited to Republicans.

Rep. Bill Pascrell (D-N.J.), chair of the House Ways and Means subcommittee charged with oversight of the IRS, said he wanted Rettig gone.

“I’m not going to recognize him as the director because he’s not acting like one. What are you going to do? After the problem jump up and down and say, ‘We need $20 billion’?” Pascrell told Bloomberg Tax. “We already put money in there. I don’t know how they’re spending it.”

— With assistance from Kaustuv Basu and Colin Wilhelm.

To contact the reporter on this story: Naomi Jagoda at njagoda@bloombergindustry.com

To contact the editor responsible for this story: Patrick Ambrosio at PAmbrosio@bloombergindustry.com