All Federal agencies are required to adopt electronic recordkeeping requirements by June 30, 2024. Due to delayed efforts to digitalize records, the IRS was not on track to meet the deadline, so it requested and was granted an extension until December 31, 2030. The IRS scans millions of pages of documents every filing season, including tax returns, checks, correspondence, and other original documents. However, scanning systems and capabilities vary widely across the organization. Current technology, such as optical character recognition and two-dimensional document bar coding, would enable the IRS to machine read paper tax returns, yet the IRS does not currently possess the capability to perform these functions on a large scale.

Digitalization is key to addressing challenges associated with large volumes of paper and achieving compliance with electronic recordkeeping mandates. While the IRS has developed high-level
strategies to help guide the transition to digitalized processes and electronic recordkeeping, these strategies have not been updated to reflect current priorities and the actions required to move forward. IRS efforts to digitalize records could be significantly enhanced by increasing the rate of electronically filed returns; however, the IRS has not developed a single Service-wide strategy to incorporate all forms for electronic filing. Paper-filed tax returns are more costly to process and are also more likely to contain errors and be subject to delays in processing, as seen during the Coronavirus Disease 2019 pandemic. As a result, the IRS must pay interest on any delayed refunds. In Fiscal Year 2022, the IRS paid $3.5 billion in total refund interest.

This is a 70 percent increase from the $2.06 billion paid in refund interest before the pandemic in Fiscal Year 2019. Delayed efforts to digitalize records have resulted in continued reliance on outside storage facilities. Access to IRS records stored in the Federal Records Centers has been problematic in the past and was significantly hampered by the Coronavirus Disease 2019 pandemic-related closures.

Read Full Report From Inspector General For Tax Administration