TIGTA: IRS should work to expand e-filing

By Paul Bonner

Ongoing processing backlogs of paper-filed returns point to the IRS's need for a systemwide strategy to increase electronic return filing, the Treasury Inspector General for Tax Administration (TIGTA) said in an audit report.

While e-filing of individual returns has swelled to 93.4%, leaving 10.6 million filed on paper in calendar 2020, e-filed business returns were only 63.3% of total business returns, leaving more than double the number of paper-filed ones, 22.3 million. Employment tax returns were e-filed less than half the time, 49%, representing one of the biggest unmet opportunities, according to TIGTA.

The report, A Service-Wide Strategy Is Needed to Address Challenges Limiting Growth in Business Tax Return Electronic Filing (Rep't No. 2022-40-036), dated May 4, highlighted the benefits in e-filing for both taxpayers and the government. For taxpayers, these include not having to mail forms and returns, getting confirmation that the IRS has received a return, greater accuracy of those returns, and secure and confidential submission of highly personal tax information. For the government, they include significant cost savings.

For example, individual returns in the Form 1040 series cost the Service only 36 cents per return to process in fiscal 2020, according to IRS estimates, while the average cost to process the same returns filed on paper was $15.21. For employment tax returns in the Form 94x series, the e-file cost per return was 26 cents, while on paper it was $3.34. The roughly 3.2 billion information returns filed in fiscal 2020 cost less than a penny each to process, while the 9.46 million of them on paper cost $4.30 each.

Thus, while the number of paper-filed returns in fiscal 2020 was only about 1/100th of e-filed returns (34.3 million paper returns versus 3.4 billion e-filed), the cost to process those paper returns in the aggregate was many times greater. In fiscal 2020, the IRS spent more than $226 million to process the most frequently paper-filed tax returns, TIGTA said. One driver of the higher cost is the manual keypunch input required, which also introduces errors, about 10 times as many as for e-filing, TIGTA reported.

TIGTA touched on one strategy to modernize paper filing, making paper returns readable with barcode scanning, as National Taxpayer Advocate Erin Collins recently directed the IRS to implement. As Collins also noted, TIGTA characterized the IRS's efforts in this regard as both long-standing and fruitless. With respect to its recommendations from 2009 that the IRS emulate state revenue agencies in implementing barcoding, TIGTA said: "These repeated attempts have been unsuccessful as the IRS has been unable to move beyond the conceptual stage for modernizing paper processing."

Similarly, regarding TIGTA's prior recommendations that the IRS take advantage of "the most significant opportunity for growth in business e-filing" by increasing e-filing of employment tax returns, major hurdles remain, most notably a lengthy and cumbersome electronic signature process.

While the IRS instituted a Form 94x personal identification number (PIN) option in 2016, the filer, using commercial software approved by the IRS, must first apply for the PIN. The IRS then may take up to 45 days to process the application. The PIN is then systemically generated along with Letter 3083, 94x On-Line Signature PIN Acceptance. The letter includes a statement of receipt, which the filer then returns to the IRS. Once the IRS receives and processes the statement of receipt, it activates the PIN within 14 days.

TIGTA contacted a sample of 12 practitioners who had filed a Form 94x on paper for tax year 2012 to ask why they had not e-filed it. "Our discussions found that delays in receiving a PIN ... is one of the reasons that these practitioners do not e-file employment tax returns," TIGTA reported.

While paper returns have been a major component and cause of the IRS's return processing backlog generally — critically so during the spring 2020 pandemic closure of processing centers — TIGTA described internal logistical hurdles of simply storing and retrieving all that paper. Generally, they are stored at a Federal Records Center, operated by the National Archives and Records Administration. But the IRS often needs them back, such as for post-filing examination of a taxpayer's return. The IRS then sends a request to a Federal Records Center. As of Dec. 31, 2021, there were more than 2,000 such outstanding requests. And the IRS as of the same date had 8.9 million returns awaiting shipment to a center.

"The chief operating officer of the National Archives and Records Administration stated that requests for tax records are one of the three largest types of backlogged requests being addressed by the National Archives and Records Administration. He estimated that it will take several years to fulfill the existing outstanding requests," TIGTA reported.

So much paper backed up, in fact, that in March 2021, the IRS decided to destroy 30 million paper-filed information return documents, such as Form 1099-MISC, Miscellaneous Information, despite the fact that they could be used to identify taxpayers who did not accurately report their income, TIGTA related. The IRS explained to TIGTA that it could not process the forms anyway because it had taken the system it uses offline to program updates in preparation for the following tax filing season.

In light of all these problems, the IRS needs a servicewide strategy to identify and prioritize which additional tax forms to make e-file-capable, TIGTA recommended. As of June 2021, the IRS had identified 92 individual and business returns and 235 supplemental reporting forms that cannot be e-filed, TIGTA noted. The strategy should prioritize and schedule their rollout. The IRS agreed with this recommendation.

TIGTA also found that the IRS has mostly not enforced penalties against corporations and partnerships for violating laws that mandate e-filing in some instances, such as for partnerships with more than 100 partners. In a sample of noncompliant paper filings, the IRS did not assess penalties against 93% of filers. The IRS should develop systemic processes to identify such business taxpayers and to ensure that penalties are consistently assessed. The IRS disagreed with these recommendations. In some cases, the IRS noted, it is unclear at the time of filing whether an e-filing mandate or exception to it applies, such as whether a corporation is filing 250 or more returns and has assets of $10 million or more that would generally require it to e-file.

The AICPA continues to advocate for better IRS services; visit the webpage describing AICPA advocacy efforts to learn more.

— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.

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