What's Happening?
The Internal Revenue Service (IRS) has encountered significant obstacles in its initiative to transition to paperless processing of tax returns. Despite efforts to digitize paper-filed tax returns, a recent report by the Treasury Inspector General for Tax
Administration reveals that the IRS has only managed to scan a small fraction of these returns. The report highlights that for the 2025 filing season, the IRS aimed to digitally process 78% of all paper-filed returns, but as of May 2025, only 5% of the planned goal was achieved. The IRS's paperless processing initiative, which began in 2023, included pilot tests for digitizing Forms 940, 941, and 1040. Although the pilot tests demonstrated the feasibility of digitizing paper returns, the IRS has struggled to meet its targets due to funding cuts and contractor issues.
Why It's Important?
The IRS's struggle to achieve paperless processing has significant implications for tax administration and efficiency. Paper tax returns are substantially more costly to process than electronic ones, and the inability to digitize them at scale results in higher processing costs and delays. This inefficiency affects taxpayers who rely on timely processing for refunds and other tax-related matters. Additionally, the IRS's challenges highlight broader issues of funding and modernization within the agency, which could impact its ability to effectively serve the public and manage tax compliance. The situation underscores the need for sustained investment in technology and infrastructure to enhance the IRS's operational capabilities.
What's Next?
The IRS plans to continue its efforts to digitize tax processing through the Zero Paper Initiative (ZPI), which aims to eliminate paper submissions of tax returns and correspondence. The agency intends to digitally process 26 high-volume paper-filed tax forms by the 2026 filing season. However, the IRS faces ongoing challenges, including contractor selection issues and the need to develop an in-house paperless processing system. The agency must also address concerns about meeting federal mandates to digitize all records by 2030. Continued evaluation and adaptation of strategies will be crucial for the IRS to achieve its paperless processing goals.
