Tax Watchdog Says IRS Botched Oversight of Taxpayer Records

What You Need to Know

A watchdog report alleges that many microfilm cartridges that contain key tax records and sensitive information have been mishandled by the IRS.
The worrying findings raise bigger questions about why the IRS continues to utilize microfilm technology in its recordkeeping process.
Although the IRS plans to eliminate its need to produce and store microfilm, it is likely the tech will remain in use for several more years.

While the IRS advises taxpayers to hold onto their income tax return records for three to seven years, depending on the situation, it actually holds onto taxpayers’ records for a lot longer — and is not doing a particularly good job of it, according to a critical new report published by the U.S. Treasury’s Inspector General for Tax Administration (TIGTA).

Per the Federal Records Act of 1950, the IRS is required to store individual tax records for 30 years and business records for 75 years. Despite the availability of newer storage technologies, some of that information is still stored on microfilm records which are housed at processing centers around the country.

According to the TIGTA report, required annual recordkeeping inventories have not been performed in the three tax processing centers that house these sensitive microfilm records of both individual taxpayers and businesses,

In addition to failures pertaining to the retention and ready accessibility of key records, the IRS has also failed to appropriately safeguard the sensitive information contained in its microfilm records, with the records in at least one center reportedly being stored in a warehouse setting that left them vulnerable to potential exploitation by fraudsters.

While the report notes that the IRS is slowly phasing out its use of such microfilm records, it is likely that their secure storage will remain an ongoing challenge for the IRS for years to come. As such, the report urges IRS officials to address these shortcomings with urgency and to ensure that microfilm records remain an asset for the agency and not a liability.

What the Inspectors Found

The worrying information and conclusions in the report are drawn from TIGTA’s recent review of the records management practices at the three tax processing centers that currently house microfilm backups. These facilities are in Austin, Texas; Kansas City, Missouri; and Ogden, Utah.

According to TIGTA’s report, this review identified “significant deficiencies” in the IRS’s safeguarding, accounting for and physical storage of its microfilm backup cartridges. Furthermore, the inspectors’ discussions with responsible officials at the processing centers identified that required annual inventories have not been performed.

Adding to the concern is the fact that management could not even provide a timeframe of when the last required annual inventory was conducted, and the lack of adequate inventory controls also includes no review and reconciliation of the microfilm backup cartridges that had been sent to these facilities from previously closed tax processing centers.

Perhaps most worrying, the TIGTA found that microfilm cartridges stored at the Ogden Tax Processing Center are not being adequately safeguarded to limit access to this information. Specifically, the microfilm cartridges are reportedly being stored on open shelving in the middle of the main files building, which is in essence a large warehouse.

As a result of its review, the TIGTA made 13 specific recommendations that range from conducting a detailed inventory of all microfilm cartridges on hand and properly maintaining request logs to better securing microfilm cartridges and setting a process for appropriately discarding outdated records.

Implications for Taxpayers

“As a result of the lack of adequate inventory controls, the IRS cannot account for thousands of microfilm cartridges containing millions of sensitive business and individual tax account records,” the report alleges. “The personal taxpayer and tax information included on these backup cartridges is key information that can be used to commit tax refund fraud identity theft.”

According to the TIGTA, a physical inspection found empty boxes labeled as including microfilm backup cartridges with no explanation as to the location of the missing cartridges. In addition, “the lack of adequate inventory controls also includes no reconciliation of the microfilm backup cartridges noted as being sent from closed tax processing centers to what was physically shipped and received.”

For example, the IRS was unable to locate any of the fiscal year 2010 microfilm cartridges that should have been sent from the closed Fresno Tax Processing Center to the Kansas City Tax Processing Center.

The report goes on to suggest that, in addition to these aforementioned issues, the IRS is not in compliance with records management requirements. Specifically, the TIGTA investigators identified individual microfilm cartridges stored at all three tax processing centers that exceed the 30-year storage requirement.

“Discussions with key personnel identified that no standard process has been established to timely dispose of microfilm backup cartridges,” the report states. “Managers must ensure that an annual reconciliation is completed to verify all microfilm cartridges created by the vendor and detailed in the vendor-provided listing of microfilm cartridges are physically in the IRS’s possession.”

IRS Recommendations

The TIGTA report goes on to offer more than a dozen recommendations for the IRS with respect to its ongoing management of microfilm records, beginning with a detailed inventory of all microfilm cartridges on hand and those which may be missing or which have been disposed of.

“This should include a full reconciliation matching vendor-provided microfilm logs to physical microfilm cartridges, as well as reconciling all microfilm cartridges received from closed tax processing centers,” the report states.

The report further recommends that the IRS take immediate action to properly maintain request logs, which should include all requests received for records stored on microfilm and include reasons for why any information is unavailable.

If the reason the information is unavailable is because the cartridge cannot be found, the report recommends appropriate actions should be taken to locate the cartridge or identify the impact of the lost taxpayer data.