An audit by the Treasury Inspector General for Tax Administration revealed that the IRS released data for millions of taxpayers, sparking the anger of the tax community.
The material, known as paper disclosure statements in accounting parlance, is posted annually by employers and financial institutions and covers taxable assets, such as W-2 forms, with copies sent to taxpayers and the IRS.
Continued inability to process backlog of paper tax returns contributed to management’s decision to destroy approximately 30 million paper tax return documents in March 2021, “according to the report.
The IRS backlog, created by years of budget cuts, staff shortages, pandemic-related office closures and additional duties, is expected to be cleared by December, according to Commissioner Charles Rettig.
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While the report does not specify what information the agency returns, the news sparked angry responses from tax professionals after another particularly difficult presentation season.
“I was horrified when I read the report describing the destruction of archived information statements in paper form,” said Phyllis Jo Kubey, a certified financial planner based in New York and president of the New York State Society of Enrolled Agents.
CNBC contacted the IRS for comment.
Missing information statements can cause a “mismatch” to the IRS, delaying refunds because the agency can’t verify details on a taxpayer’s statement, he explained.
Although the possible consequences of the decision are unknown, tax professionals have long complained about the flow of automated IRS alerts, with limited options for reaching the agency.
“If they don’t put them in the system, there will be discrepancies, which means potential alerts being sent,” said Dan Herron, CFP and CPA based in San Luis Obispo, Calif., With Elemental Wealth Advisors.
Although the IRS held more than a dozen types of automated alerts in February, Herron says the constant correspondence is still creating headaches for taxpayers and consultants.
Brian Streig, a CPA with Calhoun, Thomson and Matza, LLP in Austin, Texas, said the news was a “break in our confidence,” indicating the burden on the business community.
“Small businesses get stressed out every January trying to carefully prepare these disclosure statements and have them filed on time,” he said. “Seeing the IRS destroy them is almost like the IRS admitting they don’t really care.”
Larry Harris, a 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 further damages the reputation of the IRS in business and the public,” he added.