May 26,2022
Washington,
D.C.–Senate
Finance Committee Republicans, led by Ranking Member Mike Crapo (R-Idaho),
wrote to Internal Revenue Service (IRS) Commissioner Chuck Rettig raising
concerns and questions about the IRS’s destruction of an estimated 30 million
paper-filed documents in March 2021 reportedly due to a backlog in processing
paper documents. A Treasury Inspector General for Tax Administration
(TIGTA) report brought the IRS’s destruction of the paperwork to light.
Despite
repeated requests from Congress for the IRS to exercise taxpayer penalty relief
due to pandemic-related problems, the agency never disclosed that among the
measures taken to reduce the backlog was the decision to destroy 30 million
information returns.
From
the letter:
“The
information disclosed in the May 4 TIGTA report has surprised many in Congress
and in the tax community. The destruction of documents ensuring taxpayers
did not underreport income or inflate a deduction is concerning. It also
raises questions about the IRS’s ability to administer the tax code and ensure
compliance.”
The
senators ask the IRS to clarify the potential damage to tax administration this
destruction will cause, as well as who made the decision, how the IRS will
address the consequences this decision will have for taxpayers and the
potential harm to tax revenues.
Read
the full letter, signed by all Senate
Finance Committee Republican members, below.
____________________________________
Dear Commissioner Rettig:
We are writing you regarding disturbing information that
came to light in a report issued by the Treasury Inspector General for Tax
Administration (TIGTA) and has been referenced in several news accounts.
TIGTA released the audit report, “A Service-Wide Strategy Is Needed to
Address Challenges Limiting Growth in Business Tax Return Electronic Filing” on
May 4, 2022. The audit states:
This audit was
initiated because the IRS’s 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 IRS uses these documents to conduct post-processing compliance
matches to identify taxpayers who do not accurately report their income.
This information is deeply concerning to many, especially in
the professional tax community.
On March 17, 2022, in an appearance before the House Ways
and Means Committee, Subcommittee on Oversight on the 2022 Filing Season, you
were quoted as expecting the backlog of unprocessed tax returns to clear before
the end of 2022. During that hearing you said, “As of today, barring any
unforeseen circumstances, if the world stays as it is today, we will be what we
call ‘healthy’ by the end of calendar year 2022, and enter the 2023 filing
season with normal inventories.” In written testimony submitted to the
U.S. Senate Committee on Finance in April of 2022, you wrote:
The IRS pursued
significant actions during the 2021 filing season to address the return and correspondence
inventory. But due to resource issues and numerous unique factors tied to
new legislation and the pandemic, we have entered the 2022 filing season with a
significant inventory of unprocessed returns and correspondence…”
Your statements in neither hearing suggest that the actions
taken to clear the backlog or the “significant actions” pursued benefitted from
the destruction of 30 million information returns.
A Tax Notes article noted that during the period IRS was
destroying 30 million information returns and while the COVID pandemic harmed
millions of Americans, “it [the IRS] was imposing penalties for failing to file
timely and accurate information returns, which, for all anyone knows, may have
been among the documents destroyed.” The document destruction also
happened during a time many called for the IRS to exercise penalty
relief. Since the summer of 2020, the American Institute of Certified
Public Accountants (AICPA) has released at least seven letters or statements
calling for some form of penalty relief from the IRS.
Senate Republicans also asked the IRS for taxpayer relief
due to the pandemic. In a letter dated February 10, 2022 (the February
letter), many Senate Republicans, including all Republican members of the
Senate Finance Committee, sent a letter to Treasury Secretary Yellen and you
that says,
While recognizing
the challenges the IRS currently operates under, we find the current situation
at the IRS alarming. Given the current circumstances, we respectfully
request the IRS consider exercising its existing authority to undertake
measures to bring immediate relief to taxpayers and reduce backlogs, during
this tax filing season….
Among other suggested solutions, the February letter asked
that the IRS “[c]ommunicate to the public, in a clear and timely manner, the
status of IRS operations, current processing times, levels of unopened mail,
number of error resolution cases, and dates to which mail, including paper and
amended returns, has been processed.” It is concerning that despite
repeated requests from the tax professional community and Congress, the IRS
never disclosed that among the measures taken to reduce the backlog was the
decision to destroy 30 million information returns.
The information disclosed in the May 4 TIGTA report has
surprised many in Congress and in the tax community. The destruction of
documents ensuring taxpayers did not underreport income or inflate a deduction
is concerning. It also raises questions about the IRS’s ability to
administer the tax code and ensure compliance. In order to understand how
the destruction of 30 million information returns was allowed to happen and the
ramifications for taxpayers, we respectfully ask that you respond to the
following by June 5, 2022:
- Please describe specifically what information return
documents (e.g., 1099?MISC) were destroyed, exactly how many were
destroyed, what tax periods the destroyed documents covered, how the
documents were destroyed and how you complied with document retention
requirements.
- Based on the most recent IRS
analysis of the tax gap (2011-2013), 56 percent, or $245 billion, of the
tax gap comes from underreporting by individuals. Also, according to
the IRS FY 2020 Budget and Performance plan, the Automated Underreporter
system where information return matching happens had a return on
investment of $25.80 for every $1 spent. What is the estimated tax
revenue lost because 30 million information returns were destroyed instead
of processed?
- Did the IRS assess penalties against information return
filers for failing to timely file or submit accurate information returns
(e.g., 26 U.S.C. §§ 6721 or 6722) when the paper information returns were
actually in the IRS’s possession and later destroyed? If penalty waivers
were provided for paper information returns, were they also waived for e?filed
information returns? If not, why was e-filing treated differently
than paper filing?
- Please describe in detail any other instances when the
IRS destroyed tax documents filed, as required by law, without processing
them.
- Please provide the legal basis
for this decision and describe how the conclusion was made to destroy the
documents, and provide a copy of the risk assessment completed by the
Small Business/Self-Employed Division that evaluates what the impact these
missing information reporting documents would have on the IRS’s
post-processing compliance activities. Please note and document what
specific IRS personnel were involved in the decision to destroy the
information returns, the date of the final decision to destroy the
returns, and the date at which the risk assessment began.
- Has the destruction of 30
million information returns negatively affected the ability of qualifying
taxpayers to receive the earned income tax credit or the ability to
accurately record withholding amounts credited on a destroyed Form 1099?
- The May 4 TIGTA report suggests that after the conclusion of a
tax year, the IRS is not able to process information returns for that year
“because the system used to process these information returns is taken offline
for programming…”Please confirm
whether or not that suggestion is accurate and if it applies to all late or
amended information returns filed after the conclusion of a tax year.
Thank you for your attention to
this important matter.
