IRS Destroys 30M Paper Information Returns

In a report released last Monday by the Treasury Inspector General for Tax Administration, it was disclosed that 30M paper filed information returns were destroyed in March of 2021. The reason given was their inability to process the backlog.

“This audit (inquiry) 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,” said the report. “The IRS uses these documents to conduct post-processing compliance matches to identify taxpayers who do not accurately report their income.”

Before any of you freak out worrying that your paper-filed returns were not processed, please allow me to explain.

We do your income tax return, and you mail it in either requesting a refund or paying whatever tax is due. The Service logs it in and notes either the payment received or they process the refund.

At that point the paper income tax return goes into a pile for post-processing compliance. In other words, they match the numbers that we put on your return against the numbers they already have from forms like 1099’s, 1098’s, and W-2’s to determine who will be audited.

The documents help the IRS’s Automated Underreporter Program identify taxpayers who are not accurately reporting their income, but IRS officials said that once the tax year ends, the information returns, such as Forms 1099-MISC, can no longer be processed due to system limitations. That’s because the system used to process the information returns is taken offline for programming updates in preparation for the following filing season.

In other words, if you were smart enough to paper file your income tax return, they may not have anything to use to check if your return is accurate. As such, you probably won’t be chosen for an audit.

Let me leave you with this.

If you’re one of my clients, you know that I’m not a fan of e-filing. I have often said that electronically filing a return is the easiest way to get chosen for an audit. This report from the Treasury Inspector General proves this point.

The primary reason the IRS began allowing electronic filing was so that they didn’t have to pay someone to enter your return into their system so that it could be checked in the first place. If it isn’t checked, then they can’t choose you to be audited.

Yes, it’s true that there’s a rule saying that if you’re a paid preparer as I am who prepares more than 10 returns annually, that you must electronically file those returns. But as with everything in tax law there’s an exception to this rule.

If you sign a piece of paper saying that you don’t want to electronically file your return, then I’m allowed to paper-file it. In doing so, you probably cut the chances of being audited by a huge percentage.

I’ve always said that the easiest way to not get audited is to follow the tax laws to the letter and invest in a 53 cent stamp. As such, I haven’t had one of my returns audited at the federal level in twelve years.

Given the fact that most of my clients are perfect audit targets, that’s really saying something. Quality and how you file obviously counts.

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