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Taxpayer Advocate: IRS Should Use Scanning Technology to Process Paper Returns

By:
Ruth Singleton
Published Date:
Mar 30, 2022

GettyImages-494777797 Erin Collins IRS Taxpayer Advocate KPMG

Taxpayer Advocate Erin Collins, in a blog post published Wednesday, urged the IRS to implement scanning technology to automate the processing of paper tax returns during the next filing season. She pointed to the agency’s “archaic data intake process,” involving manual transcription of paper returns, saying, “In the year 2022, this doesn’t just seem crazy. It is crazy.”

 “The reason paper returns are so challenging,” she wrote, “is that the IRS still has not implemented technology to machine read them, so each digit on every paper return must be manually keystroked into IRS systems by an employee.”

But, she argued, “It doesn’t have to be that way. During the past two decades, state tax agencies have been using scanning technology to automate the processing of paper tax returns. During that time, the IRS has considered, rejected, proposed, reconsidered, partially implemented, and deferred the question of whether to implement scanning technology.”

Collins reported that, on Tuesday, she “issued a Taxpayer Advocate Directive (TAD), directing the IRS to work with the tax software industry to implement 2-D barcoding for next filing season." She also directed the IRS "to implement optical character recognition (OCR) or similar technology for next filing season if possible or, if not, for the following filing season.”

In that TAD, Collins wrote, “The delays in processing paper tax returns result from the IRS’s archaic data intake process. When a paper tax return arrives, an IRS employee must transcribe the data, literally keystroking each number and letter from the return into IRS systems. During the past 20 years, the IRS has periodically explored instituting a modernized process, in line with common state tax agency practice, that involves using scanning technology to convert paper Form 1040-series returns into a digital format so the IRS can process them like e-filed returns. If the IRS had implemented scanning technology, it is unlikely the current processing backlog would exist.”

In her blog post, she wrote, “The IRS’s submission processing function today evokes images of what data transcription looked like in the 1960s – prior to the information age. Employees manually transcribe all paper tax returns. Transcription consists of keystroking each digit and each letter on the return. For a moderately complex return, several hundred digits may need to be transcribed. For longer returns with more forms and schedules, the number of digits may approach or exceed 1,000 digits. In the year 2022, this doesn’t just seem crazy. It is crazy.”
 

Her recommended solution is scanning technology, which, she said, “would speed return processing, substantially reduce or eliminate transcription errors, and enable the IRS to reassign employees from data entry jobs to other positions, ultimately saving tens of millions of dollars in labor costs.” 

Collins noted that there are currently two leading types of scanning technology: 2-D barcoding and optical character recognition (OCR). 

She reported that 2-D barcoding is well established, saying, “In 2002 – fully two decades ago – we reported that 17 states were using 2-D barcoding for returns prepared with tax return software but filed on paper, and we recommended the IRS consider doing so as well.”

But she said that, at the time, the IRS thought that doing so would dissuade taxpayers from transitioning to e-filing. There ensued several shifts in policy in the intervening years, she said, but the end result was no implementation of 2-D barcoding. 

“Thus, 20 years after more than one-third of states were already using 2-D barcoding, 18 years after the National Taxpayer Advocate initially recommended it for Forms 1040, 8 years after the Treasury Department requested that Congress provide the IRS with the authority to mandate 2-D barcoding, and 4 years after Congress sought to grant that authority and the IRS changed its position, the tax system finds itself in a crisis that might not exist, at least to this degree, if 2‑D barcoding or similar technology had been implemented,” she wrote. 

Collins wrote that if the IRS to were to implement 2-D barcoding “for paper returns filed beginning in January 2023,” that would "serve as an insurance policy against a continuing backlog next year by reducing the influx of new paper returns that require transcription. Even if the IRS does manage to work through its backlog this year, 2-D barcoding will reduce processing time and costs in future years, which will allow the IRS to reassign submission processing employees to perform other work.” 

Collins noted that “OCR is a newer technology with different advantages and disadvantages compared with 2-D barcoding. The main advantage is that it can be used to machine read all paper returns, including returns prepared by hand. The main disadvantage is that it is less accurate. For example, a ‘1’ and a ‘7’ may look similar, so OCR may read the digit incorrectly. However, OCR technology should still be more accurate than manual data transcription because an employee not only will have the same difficulty distinguishing between the ‘1’ and the ‘7’ but also will hit the wrong key by mistake from time to time. Last year, IRS employees made transcription errors on about 22 percent of paper returns.” 

In conclusion, Collins wrote, “If necessity can be the mother of invention, the unprecedented paper returns backlog resulting from the COVID-19 pandemic should spur the IRS to take immediate steps to automate the processing of paper tax returns – not in two years or three years but beginning with the upcoming filing season. The timely payment of tax refunds for millions of taxpayers is depending on it.” 

 

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