Internal Revenue Service to Go Completely Paperless by 2025

So many of our clients have been frustrated by the length of time it can take to get a response from the IRS when submitting paper documentation. Last Wednesday, Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel announced the Paperless Processing Initiative to try and reduce the exorbitant load of paperwork that is plaguing the IRS.

Have you ever been waiting for a refund from the IRS, only to be told that the agency is behind in their processing of returns due to a backlog in handling paperwork? In an effort to reduce the load of paperwork received, the IRS has announced a new program, called the Paperless Processing Initiative.

This ambitious effort is being financed through the $80 billion infusion of cash that was granted to the IRS under the Inflation Reduction Act that was passed into law last August. According to Treasury Secretary Janet Yellen, the additional funding has given the IRS the ability to transform itself into a digital-first agency. Yellen believes that by next filing season, taxpayers will be able to digitally submit all correspondence, non-tax forms and notice responses to the IRS. She adds, “Of course, taxpayers will always have the choice to submit documents by paper.” Taxpayers use non-tax forms to request or submit information on a range of topics, including identity theft and proof that they are eligible for key credits and deductions that help low-income households.

Paper-based processes have long hampered the IRS and frustrated taxpayers. The challenges created by paper are two-fold: taxpayers are unable to digitally submit many forms and correspondence beyond their annual 1040 tax return, and the IRS is unable to digitally process paper tax returns it receives. For decades, taxpayers had to respond to notices through the mail, and IRS employees had to manually enter numbers from paper returns into computers one digit at a time, creating significant delays for taxpayers and challenges for IRS staff.

According to IRS data, approximately 213 million returns and other tax forms were filed electronically in fiscal year 2022, which represents 81% of all filings. The IRS also states that on an annual basis, the agency receives more than 200 million paper tax returns, forms and pieces of mail including non-tax forms.

The IRS has been dealing with decades of underfunding, as well as an overload of unprocessed documents due to the closing of IRS offices during the COVID pandemic. This has prevented the agency from processing tax forms on a timely basis. According to IRS leaders, this new initiative should allow the agency to expedite refunds by several weeks, which is welcome news to many taxpayers. In addition, the processing change is expected to reduce a portion of the $40 million per year that the agency spends storing more than 1 billion historical documents.

Under the initiative, the agency believes it will be able to process everything digitally, including all tax returns, by 2025. The IRS estimates more than 94% of individual taxpayers will no longer ever need to send mail to the IRS. Achieving this milestone will enable up to 125 million paper documents to be submitted digitally per year. As mentioned, taxpayers who want to submit paper returns and correspondence can continue to do so.

Funding for the IRS is vulnerable to cutbacks. As mentioned in our article about the debt limit, billions of dollars that were earmarked to go to the IRS, have been reprogrammed in the 2024 and 2025 fiscal years to be redistributed to nondefense discretionary programs. As money is reallocated away from the IRS, it will make it more difficult for the agency to realize its commitment to become fully digital. LMC will continue to monitor this large-scale effort by the IRS to go paperless, and, when appropriate, will take advantage of this newfound ability to correspond digitally with the IRS.