The IRS has made limited progress in its efforts to digitize tax returns and may struggle to meet a federal mandate for all records to be in a digital format by 2030, according to an agency watchdog.
A February 6 report issued by the Treasury Inspector General for Tax Administration (TIGTA) reveals that the agency missed key goals for the 2025 filing season amid staffing and contractor challenges.
Paperless Processing Goalposts
Spurred by funding from the 2022 Inflation Reduction Act, the IRS set a goal to achieve paperless processing for all tax returns by the 2025 Filing Season. (Fact Sheet 2023-18) TIGTA notes that goal was subsequently revised, with the IRS aiming to digitally process all paper-filed Forms 940, 941, and 1040 by the 2025 filing season. These forms and schedules account for 78% of all paper-filed returns, according to the IRS.
The IRS initially relied on contractors to achieve this revised goal, while developing an in-house paperless processing system. However, according to TIGTA, contractors had only scanned about 5% of the 9.8 million forms received as of May 2025.
In April 2025, the IRS halted work on its in-house system. Instead, it began a new Zero Paper Initiative meant to modernize paper processing of tax returns, correspondence, and information returns.
TIGTA, however, found this Zero Paper Initiative is also behind schedule. An interim contractor scanned only 7% of the 5.7 million forms received between mid-May 2025 and early August 2025.
Contractor and Staffing Issues Create Delays
The TIGTA report points to significant hurdles in hiring and contractor management. Contractors faced hiring challenges due to the lengthy IRS background clearance process, which can exceed a month.
As of August 2025, the IRS Human Capital Office had approved only 50% of potential workers the interim contractor had submitted for clearance, said TIGTA. Of those approved, only 184 were for the processing pipeline – with the other workers in software engineering and other roles.
TIGTA noted that the IRS’ ability to provide timely clearances may be affected by its own staffing issues. That includes last year’s workforce reductions and a 43-day government shutdown that furloughed 84% of IRS Human Capital employees.
Scanning of Historical Records Also Falls Short
The IRS is also at risk of failing to comply with a federal mandate to convert all records to a digital format by December 2030. The agency has an estimated 1 billion pages of historical documents that must be digitized.
The IRS has initially focused on scanning historical Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Return. It had scanned 41% of historical Forms 709 by early June 2025. However, TIGTA notes these Forms 709 make up only about 6% of the total pages of historical documents that must be digitized to meet the 2030 deadline.
In addition, the volume of internal scanning dropped by 91% between April and July 2025. TIGTA attributes this to a 25% reduction in staff at the IRS function responsible for the digitization efforts. The watchdog notes, however, that external contractor scanning capacity has increased.
IRS to Focus on Current-Year Returns
TIGTA recommended that the IRS evaluate options for prioritizing scanning historical documents to realize cost savings and comply with the 2030 mandate.
IRS management agreed with the recommendation but stated its top priority is scanning current-year paper returns, where the cost savings are more significant.
According to the National Taxpayer Advocate’s 2025 report to Congress, about 11 million individuals file paper returns each year. In addition, the IRS receives about 11 million paper-filed employment tax returns annually. The IRS reports that the “average differential between electronic and paper return processing costs rang[es] from $3.17 to $9.91 per document.”
The agency does, however, plan to continue historical scanning as internal and contractor resources permit.
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