A recent report from the Treasury Inspector General for Tax Administration has revealed that the Internal Revenue Service (IRS) is unable to locate numerous microfilm cartridges containing sensitive tax records for both businesses and individuals.

These records, if accessed by unauthorized parties, could potentially be exploited for tax refund fraud. The IRS is legally obligated to retain these microfilm backup cartridges for a specified period, yet the review exposed “significant deficiencies” in the agency’s methods of safeguarding, tracking, and storing these important records.

IRS’s microfilm backup cartridge management deficiencies exposed

The watchdog’s investigation discovered various lapses in the IRS’s management of microfilm backup cartridges. For instance, empty boxes labeled as containing microfilm backup cartridges were found during a physical inspection, without any explanation regarding the whereabouts of the missing cartridges.

During a site visit, the IRS was unable to locate the fiscal year 2010 microfilm cartridges, which should have been transferred to the Kansas City Tax Processing Center following the closure of the Fresno Tax Processing Center.

Additionally, as many as 168 cartridges sent for reformatting at the Ogden Tax Processing Center were unaccounted for, partly due to the abrupt closure of the prior microfilm contractor in 2018.

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The IRS has responded to these findings by working to conduct comprehensive inventories of its microfilm collection and by pursuing efforts to phase out the use of microfilm altogether.

In a response letter, Ken Corbin, the agency’s wage and investment commissioner, acknowledged the challenges faced by the IRS over the past decade due to reduced funding and staff attrition.

Corbin noted that budget cuts, which resulted in decreased staffing levels and audit rates, impacted the IRS’s ability to maintain up-to-date microfilm inventory records.

Although the IRS’s budget had experienced a decline of more than 15% leading up to 2022, it received a boost in funding following the passage of the Democrats’ Inflation Reduction Act.

This funding increase, however, has been met with Republican criticism and questions about its impact on audit rates for average taxpayers.

While the IRS has emphasized improvements in taxpayer services due to the new funding, concerns about the agency’s ability to manage and protect sensitive tax records underscore the need for enhanced safeguards and modernization efforts.