The IRS insists that the destruction of taxpayer data will not affect payers

Filers will not be affected by the IRS decision to shred data for millions of taxpayers, the agency said in a statement Thursday.

As of March 2021, the IRS filed an estimated 30 million so-called paper-filed information returns, according to an audit by the Treasury Inspector General for Tax Administration.

The news has sparked anger in the tax community, many of whom are concerned about the agency’s ability to review tax returns, leading to more error reports, particularly with limited ability to reach the IRS.

“We processed 3.2 billion information returns in 2020. Information returns are not tax returns, and they are documents submitted to the IRS by third-party payers, not taxpayers,” the IRS said in its statement.

More from Personal Finance:
Tax experts ‘appalled’ at IRS destroying data on 30 million claimants
Inflation costs US households $311 a month
Retirement is changing as nearly 7 in 10 want to live to be 100

The agency said 99% of information returns have already been processed and the remaining 1% have been destroyed due to a “software limitation”, making room for the 2021 filing season.

“This measure had no negative consequences for the taxpayer. Taxpayers or payers have not been and will not be subject to any penalties resulting from this measure,” the agency said.

The agency said the situation reflected “significant issues raised by outdated IRS technology.” In 2020, the IRS prioritized backlogged returns to provide refunds and other Covid-19 relief over processing less than 1% of returns of paper information – mostly Form 1099.

Due to system limitations, the IRS must process paper forms by the end of the calendar year in which they are received, the agency said.

“Failing to process these returns of information did not impact taxpayers’ filing of their original returns in any way, as taxpayers received their own copy to use in filing an accurate return,” the IRS said.

“The IRS plans to process all paper information received in 2021 and 2022,” the agency added.

But Rep. Bill Pascrell Jr., DN.J., chairman of the House Ways and Means Committee oversight subcommittee, on Friday called for President Joe Biden to replace IRS Commissioner Charles Rettig over the incident.

“The IRS is critical to public confidence in our nation, and its Trump-appointed leader has failed,” Pascrell said, noting the public’s “collapsing confidence” in the tax system.

“The manner in which we learn of the destruction of unprocessed documents is just the latest example of Mr. Rettig’s lax attitude,” he added.

Edward Karl, vice president of taxes at the American Institute of CPAs, also expressed concerns on Friday.

“The IRS management’s decision to destroy information return documents due to the backlog raised numerous questions related to the IRS’s decision-making and risk assessment process,” he said.

“The recent IRS statement provided some of the answers, but American taxpayers deserve to know why this decision was made and how it might affect them,” Karl said. “The IRS should continue to be transparent about this matter.”

— CNBC’s Dan Mangan contributed to this report