TIGTA Report No. 2026-408-003, The IRS Has Made Limited Progress Achieving Paperless Processing
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TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
The IRS Has Made Limited Progress
Achieving Paperless Processing
February 6, 2026
Report Number: 2026-408-003
may be disclosed only to Department of the Treasury employees who have a need to know this information in connection with their official tax administration duties.
TIGTACommunications@tigta.treas.gov | www.tigta.gov
TIGTACommunications@tigta.treas.gov | www.tigta.gov 1
HIGHLIGHTS: The IRS Has Made Limited Progress Achieving Paperless Processing
Final Audit Report issued on February 6, 2026 Report Number 2026-408-003
Why TIGTA Did This Audit What TIGTA Found
This audit assessed IRS efforts to The IRS did not achieve its revised goal to digitally process all
digitize the processing of paper-filed Forms 940, 941, and 1040 by the 2025 Filing Season. As
paper-filed individual tax returns of May 2025, contractors had scanned nearly 517,000 (5 percent) of
and meet its goal to achieve the 9.8 million paper-filed Forms 940, 941, and 1040 received during
paperless processing for all tax the 2025 Filing Season.
returns by the 2025 Filing Season.
The IRS decided to develop an in-house paperless processing system
Impact on Tax Administration for the 2025 Filing Season. However, in April 2025, the IRS was
directed to stop work on its in-house system and begin a new Zero
The IRS conducted three pilots
Paper initiative (ZPI). The ZPI will use a phased approach to eliminate
during Fiscal Years 2023 through
paper submissions of tax returns, correspondence, and information
2025 to test paperless processing
returns.
for the following forms and
schedules: As part of ZPI, the IRS stated its goal is to digitally process 26 of the
highest volume paper-filed tax forms for the 2026 Filing Season. The
· Form 940, Employer's Annual
IRS also plans to expand the number of tax forms that can be filed
Federal Unemployment (FUTA)
electronically. However, the interim ZPI contractor had only scanned
Tax Return.
approximately 7 percent of the 5.7 million forms received from
· Form 941, Employer’s May 2025 through early August 2025.
Quarterly Federal Tax Return.
The IRS must overcome challenges to expand paperless processing
· Form 1040, U.S. Individual for the 2026 Filing Season.
Income Tax Return, plus
28 attachments. · The IRS experienced delays in implementing its solution for
the 2025 Filing Season and has already experienced similar
These tax forms and schedules delays with ZPI, mainly due to concerns about the process
account for 78 percent of all used to select the contractors.
paper-filed tax returns.
· Contractors had difficulty hiring sufficient staff because
While the pilots successfully proved workers cannot wait the estimated four to five weeks for the
the concept of paperless tax return
IRS to provide background clearances.
processing, the IRS has yet to
achieve the volume of returns Finally, the IRS continued to scan historical Forms 709 using both
necessary to meet goals set for the internal scanning and contracted services. From December 2023 to
2026 Filing Season. early July 2025, the IRS scanned 58.7 million pages (41 percent) of
the estimated 143 million pages of historical Forms 709. While
In addition, the IRS piloted
85 percent of the scanning was completed by a contractor, the IRS
scanning historical documents to
decided not to extend the contract, citing low volumes and quality of
save costs on physical storage and
scans. As a result, the volume of historical Forms 709 scanned has
comply with federal records
dropped significantly. We remain concerned that the IRS will be
management requirements. The
unable to meet the federal mandate to have all records in a digital
IRS estimated that it has 1 billion
format by December 2030 and will continue to incur millions in costs
pages of historical documents.
annually to store paper documents.
They began by scanning the
Form 709, United States Gift (and What TIGTA Recommended
Generation-Skipping Transfer) Tax We recommended that the IRS evaluate available options to
Return. The IRS prioritized scanning prioritize the scanning of historical documents to realize cost savings
Forms 709 because it is a and comply with a federal mandate to convert all paper documents
high-volume paper form that must
to digital format by December 2030.
be retained through the life of the
taxpayer (plus 40 years if The IRS agreed with the recommendation and will continue to
connected to an estate tax return). evaluate available options for scanning historical documents.
Treasury Inspector General for tax administration seal.
U.S. DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20024
TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
February 6, 2026
MEMORANDUM FOR: COMMISSIONER OF INTERNAL REVENUE
FROM: Diana M. Tengesdal
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – The IRS Has Made Limited Progress Achieving
Paperless Processing (Audit No.: 2024408028)
This report presents the results of our review to assess the Internal Revenue Service’s (IRS)
efforts to digitize the processing of paper-filed individual tax returns and meet its goals of
scanning and digitally extracting data from all individual tax returns by the 2025 Filing Season.
This review was part of our Fiscal Year 2025 Annual Audit Plan and addresses the major
management and performance challenges of Improving Operational Efficiencies and
Modernizing Information Technology.
Management’s complete response to the draft report is included as Appendix II. If you have any
questions, please contact me or Deann L. Baiza, Acting Assistant Inspector General for Audit
(Returns Processing and Account Services).
The IRS Has Made Limited Progress Achieving Paperless Processing
Table of Contents
Background........................................................................................... Page 1
Results of Review ................................................................................. Page 2
The IRS Must Overcome Challenges to Expand Paperless
Processing for the 2026 Filing Season .........................................................................Page 2
The IRS Is at Risk of Not Complying With Federal Records
Management Requirements ............................................................................................Page 5
Recommendation 1: ........................................................................... Page 6
Appendices
Appendix I – Detailed Objective, Scope, and Methodology................................Page 7
Appendix II – Management’s Response to the Draft Report...............................Page 8
Appendix III – Glossary of Terms....................................................................................Page 11
Appendix IV – Abbreviations ...........................................................................................Page 12
The IRS Has Made Limited Progress Achieving Paperless Processing
Background
While most tax returns are filed electronically, the Internal Revenue Service (IRS) continues to
receive and process an estimated 90 million documents annually, which includes tax returns,
correspondence, etc. According to IRS cost estimates, individual paper tax returns cost 43 times
more to process than an electronically filed individual tax return. For Filing Season 2025,
individual paper tax returns accounted for 72 percent of processing costs, yet they made up only
6 percent of all individual tax returns filed.
Digitizing paper tax
returns will improve
the accuracy and
timeliness of
processing and reduce
storage costs.
However, reductions in
funding over the years
and uncertainty of
future funding have
made it difficult for the
IRS to modernize
paper tax return
processing. In
August 2022, Congress
enacted the Inflation Reduction Act of 2022 which provided the IRS with long-term funding to
update technology capabilities and improve tax administration and services provided to
taxpayers.1 One of the initiatives the IRS undertook was to expand digital services for taxpayers.
Under this initiative, the IRS conducted three pilots during Fiscal Years 2023 through 2025 to
digitize paper-filed tax returns for electronic processing. These pilots included three tax forms:
· Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return.
· Form 941, Employer’s Quarterly Federal Tax Return.
· Form 1040, U.S. Individual Income Tax Return, plus 28 attachments.
According to the IRS, these tax forms and schedules account for 78 percent of all paper-filed tax
returns.
During the pilots, paper-filed tax returns were sent to contractor sites where they were scanned.
The contractors extracted the return data from the scanned images and transmitted the data to
the IRS for processing. These pilots successfully proved that paper tax returns can be digitized
and successfully processed. During the pilots, approximately 3.8 million (7 percent) of the
53.3 million paper-filed Forms 940, 941, and 1040 received from February 2023 through
December 2024 were digitized and processed electronically.
1
Pub. L. No. 117-169, 136 Stat. 1818.
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The IRS Has Made Limited Progress Achieving Paperless Processing
Based on the results of these pilots, the IRS committed to digitally process all paper-filed tax
returns by the 2025 Filing Season. The IRS later revised its goal to 78 percent of paper-filed tax
returns, which is the estimated volume of all paper-filed Forms 940, 941, and 1040. The revision
was due to delays obtaining approval to implement an in-house processing system and
subsequent contract issues.
The IRS also committed to digitizing up to 1 billion pages of historical documents in storage
such as processed tax returns and enforcement case files. This effort aligns with the June 2019
Office of Management and Budget and National Archives and Records Administration mandate
for agencies to convert all records to a digital format by December 2030 and will give taxpayers
and the IRS easier access to the data.2 The IRS estimated that digitizing historical documents
would save approximately $40 million, with $5.7 million in savings for facilities storage and
$34 million in savings for the reduction of staff for IRS Files employees.
The IRS conducted a pilot during Fiscal Years 2024 and 2025 to scan and convert historical
Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Return. This is just one of
the historical forms that the IRS must scan to comply with the federal requirement to transition
to electronic records. The IRS prioritized scanning the historical Forms 709 because one form
can consist of many pages and must be retained in storage through the life of the taxpayer. In
addition, Forms 709 that are connected to an estate tax return upon the taxpayer’s death must
be kept for an additional 40 years. Under the pilot, the IRS scanned 5.8 million pages of
historical Forms 709 from December 2023 through December 2024. The IRS received approval in
April 2025 to destroy the scanned Forms 709 which will help further reduce storage costs.
Results of Review
The IRS Must Overcome Challenges to Expand Paperless Processing for the
2026 Filing Season
The IRS did not achieve its revised goal to digitize all paper-filed Forms 940, 941, and 1040
received during the 2025 Filing Season. The IRS relied on contractors during the 2025 Filing
Season to continue scanning and transmitting these forms to the IRS for processing while it
developed an in-house
processing system. However,
these contractors were only
able to scan 517,000
(5 percent) of the 9.8 million
paper-filed Forms 940, 941,
and 1040 received as of
May 2025. We previously
reported similar concerns
with the IRS’s inability to
meet the Secretary of the
2
The original due date of this mandate was December 2022. The IRS received an extension until December 2030.
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The IRS Has Made Limited Progress Achieving Paperless Processing
Treasury’s expectation to scan millions of individual tax returns by the end of Calendar Year
2023.3
Implementation delays and the inability to increase the volume of scanned paper tax returns
prevented the IRS from achieving its paperless processing goal for the 2025 Filing Season. The
IRS must overcome similar challenges to expand paperless processing in the 2026 Filing Season.
Implementation delays limited progress toward achieving paperless tax return
processing
In July 2023, the IRS decided to develop an in-house paperless processing system for the
2025 Filing Season citing concerns with the cost of external scanning. However, the IRS did not
receive approval for the project until May 2024. In addition, concerns about the suitability of the
selected contractor were raised, which required the IRS to cancel the contract and select a new
vendor. The IRS did not award a new contract until November 2024, leaving only a few months
to implement a paperless processing system for the 2025 Filing Season.4 To mitigate the impact
of delays in implementing its in-house system, the IRS extended the pilot contracts to scan
Forms 940, 941, and 1040 through the 2025 Filing Season while it continued developing its
in-house system. Figure 1 provides an overview of the contract costs incurred for paperless tax
return processing for the 2025 Filing Season.
Figure 1: Overview of Paperless Processing Contract
Costs for the 2025 Filing Season
Contracts Awarded Total Paid/Obligated
In-house Scanning $68.5 million $60.6 million
Extended Pilot Contract $8.0 million5 $8.0 million
Total $76.5 million $68.7 million
Source: IRS Information Technology. Numbers may not add due
to rounding.
In April 2025, the IRS was directed to stop work on the development of its in-house paperless
processing system despite spending nearly $61 million. The IRS was preparing to test its
in-house system at the time it was suspended, and therefore, no returns were scanned. IRS
leadership then began a new Zero Paper Initiative (ZPI), which consolidates IRS efforts to
modernize paper processing of tax returns, correspondence, and information returns. As part of
this effort, the IRS has prioritized the scanning of 26 paper-filed tax forms for the 2026 Filing
Season. According to the IRS, these tax returns account for most of the paper tax return
submissions it receives. However, unanticipated delays could again prevent the IRS from
reaching its paperless processing goals for the 2026 Filing Season.
3
TIGTA, Report No. 2024-408-013, Progress Update on Tax Return Scanning Initiatives (December 2023).
4
The annual individual filing season typically begins in late January.
5
The $8 million is the amount awarded for the pilot contract extensions from May 2024 through August 2025 to
provide scanning services for the 2025 Filing Season.
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The IRS Has Made Limited Progress Achieving Paperless Processing
The IRS awarded two contracts for ZPI in April 2025. However, there were concerns it did not use
a competitive bidding process to award the contracts. The IRS then solicited competitive bids for
a permanent contractor in June 2025. It also revised the original contract to provide short-term
scanning capability until a permanent contractor could be selected. In September 2025, the IRS
selected four contractors to digitize paper tax returns, correspondence, and information returns
and transmit the data to the IRS. The contract awards totaled $2.3 billion through
Fiscal Year 2030.
Barring any unforeseen future delays or concerns, the ZPI contractors would have approximately
five months to prepare to digitize the 26 identified tax forms before the 2026 Filing Season.
During this time, contractors must program and test their software, recruit sufficient staff to
receive and open mail, and review return data for accuracy. The contractors must also ensure
that they have adequate space to store all scanned documents until destruction is authorized.
The IRS has yet to scan large volumes of paper-filed tax returns
Contractors were only able to scan 517,000 (5 percent) of the 9.8 million paper-filed Forms 940,
941, and 1040 received during the 2025 Filing Season as of May 2025. Similarly, the interim ZPI
contractor only scanned approximately 425,000 (7 percent) of the 5.7 million paper-filed
Forms 940, 941, and 1040 received from May 19, 2025, through August 9, 2025.
Two factors affect the volume of tax returns that contractors can digitize: 1) the contractor’s
ability to hire sufficient staff, and 2) the IRS’s ability to timely provide required clearances to
contract staff, once hired.
Both the IRS and the interim ZPI contractor expressed concerns about hiring sufficient
personnel to perform the work
Both the interim ZPI contractor and the IRS expressed concerns about hiring the personnel
needed to achieve higher scanning volumes. Often, workers need a job immediately and cannot
wait for the estimated four to five weeks it takes to be cleared to work on the contract. As of
August 2025, the IRS Human Capital Office had approved 250 (50 percent) of the 496 individuals
the interim ZPI contractor had submitted for background clearances. However, the interim ZPI
contractor indicated that only 184 of those already approved were personnel who work in the
processing pipeline preparing and scanning returns and quality reviewing scanned images. The
other approved personnel were for non-processing pipeline positions such as software
engineers. The interim contractor estimated that they would need approximately 600 individuals
in the processing pipeline to achieve the contracted volumes.
The IRS subsequently selected multiple contractors for the ZPI to address this issue. We have
initiated a separate review of the ZPI.
Workforce reductions have potentially affected the IRS’s ability to provide the required
clearances for contractor staff
All individuals who work under the ZPI contracts must pass an IRS background clearance. The
IRS Human Capital Office acknowledged the increased need for contractor employee clearances
for the ZPI and plans to prioritize these clearance requests when received. However, we
previously reported that this office lost 28 percent of its staffing as part of the federal
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The IRS Has Made Limited Progress Achieving Paperless Processing
government’s workforce reduction efforts.6 As a result, they may be unable to provide timely
clearances for the ZPI.
Additional factors may impact the IRS’s ability to scan more paper-filed tax returns
In August 2025, the Department of the Treasury announced the establishment of the Treasury
Common Services Center which will realign and centralize human resources processing and
other operational services across the Department of the Treasury into a unified service delivery
model. The impact of this effort on the IRS Human Capital Office is unknown.
Lastly, in October 2025, the IRS furloughed 84 percent of its Human Capital employees during
the 43-day government shutdown, increasing the risk that the IRS will be unable to provide
timely ZPI contractor clearances.
The IRS Is at Risk of Not Complying With Federal Records Management
Requirements
To comply with federal records management requirements and realize cost savings, the IRS
continued to digitize historical Forms 709. The IRS scanned 58.7 million pages (41 percent) of
the estimated 143 million pages of historical Forms 709 from December 2023 to early July 2025.
Although the IRS has scanned 41 percent of pages of historical Forms 709, this represents only
6 percent of the estimated 1 billion pages of all historical documents that must be digitized by
December 2030 to comply with federal records mandates.
The IRS used the following scanning initiatives to digitize its paper Forms 709.
· Internal Scanning. The IRS began scanning in October 2024 and scanned
8.9 million pages as of July 2025.
· External Pilots and Contracts. External contractors scanned 49.8 million pages as of
July 2025, which accounted for almost 85 percent of all pages scanned. These contracts
included efforts to pilot and prove technology.
In addition to the pilot, the IRS awarded a one-year historical scanning contract from June 2024
through July 2025 with the option to extend. The IRS did not extend this contract, citing reasons
such as the contractor’s inability to achieve the desired volumes and quality of scanning. The
contract required the contractor to scan 100 million pages per year. However, the contractor
cited difficulty in obtaining required security clearances from the IRS for contracted personnel.
The IRS had only cleared 245 (52 percent) of the 470 contract personnel as of April 2025.
Recent changes have significantly decreased the volume of historical documents that
are being scanned
Taxpayer Services management acknowledged that historical scanning volumes have declined
since ending the external contract and explained that they do not have enough staff to balance
the demands for ZPI, prepare for the 2026 Filing Season, and continue with historical scanning.
6
TIGTA, Report No. 2025-IE-R027, Snapshot Report: IRS Workforce Reductions as of May 2025, p. 5 (July 2025).
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The IRS Has Made Limited Progress Achieving Paperless Processing
As of July 2025, the function responsible for these efforts has lost 25 percent of its staffing. This
reduction has significantly impacted the IRS’s ability to scan historical documents. For example,
the number of pages the IRS scanned internally per week between April 5, 2025, and
July 5, 2025, dropped 91 percent from 901,179 to 81,553 pages. The week of July 5, 2025, was
the first week after the departure of the tax return processing employees who took the deferred
resignation program. In
contrast, the external
contractor had increased
its weekly scanned page
capacity by 212 percent
from 971,844 to
approximately 3 million
pages during this same
period.
The IRS had not planned
to have the ZPI
contractors scan historical
documents. However,
Taxpayer Services
management later
indicated that the IRS will
use the ZPI contractors to scan historical documents during times of low tax return volumes. In
December 2025, the ZPI contractors began scanning Forms 709. From the week ending
December 13, 2025, to January 24, 2026, ZPI contractors scanned 479,230 historical Forms 709.
We are concerned that without additional resources focused on historical scanning, whether
internal or contracted, the IRS may not meet the deadline to have all records in a digital format
by December 2030. Additionally, the IRS will continue to incur millions in storage costs until it
can increase the volume of historical documents scanned and destroy these paper records. The
IRS estimated that digitizing historical documents would save approximately $40 million in
annual storage costs.
Recommendation 1: The Commissioner, Internal Revenue Service, should evaluate available
options to prioritize the scanning of historical documents to realize cost savings and comply
with Office of Management and Budget and National Archives and Records Administration
mandates to convert all paper documents to digital format by December 2030.
Management’s Response: IRS management agreed with the recommendation and will
continue to evaluate available options for scanning historical documents. They indicated
that their top priority for document scanning will be shifting the current-year paper
return processing workstream to the scanning and digitalization process. With the
average differential between electronic and paper return processing costs ranging from
$3.17 to $9.91 per document, greater savings will be achieved by prioritizing current
filings for scanning and digitalization. Historical scanning will continue as IRS and
contractor resources permit. They will review the program’s progress at the conclusion of
Fiscal Year 2026 and determine if additional actions are required to meet the goal of
digitalizing archived Forms 709 by 2030.
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The IRS Has Made Limited Progress Achieving Paperless Processing
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this audit was to assess the IRS’s efforts to digitize the processing of
paper-filed individual tax returns and meet its goals of scanning and digitally extracting data
from all individual tax returns by the 2025 Filing Season. To accomplish our objective, we:
· Evaluated the IRS’s efforts to scan and digitally process paper-filed individual tax returns
at point of entry during the 2024 Filing Season.
· Evaluated the plans for meeting the goal of scanning and digitally extracting data from
all individual tax returns by the 2025 Filing Season.
· Tracked the progress of historical scanning for reduction of paper, including associated
storage costs.
Performance of This Review
This review was performed with information provided by the Taxpayer Services, Submission
Processing function offices in Austin, Texas; Cincinnati, Ohio; Kansas City, Missouri; and
Ogden, Utah as well as the IRS Enterprise Digitalization and Case Management Office and
Information Technology Organization located in Washington, D.C. during the period June 2024
through July 2025. We conducted this performance audit in accordance with generally accepted
government auditing standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objective. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit objective.
Data Validation Methodology
We presented data as reported from the IRS’s Office of Taxpayer Services. This information was
reported without additional analysis. We believe it is reliable for the purposes of this report.
Internal Controls Methodology
Internal controls relate to management’s plans, methods, and procedures used to meet their
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance. We determined that the
following internal controls were relevant to our audit objective: processes and procedures
followed when scanning paper-filed tax returns into an electronic format. We evaluated these
controls by reviewing the Internal Revenue Manual, meeting with IRS representatives and
management, and reviewing relevant documentation and data provided by the IRS.
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The IRS Has Made Limited Progress Achieving Paperless Processing
Appendix II
Management’s Response to the Draft Report
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Page 9
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Appendix III
Glossary of Terms
Term Definition
Digitalization The process of converting text, pictures, or sound into a digital form that
can be processed by a computer, easily shared, and accessed.
Digitization The process of scanning original source documentation in analog format
(e.g., paper) to create an electronic version of the record; often used
interchangeably with scanning, digital reformatting, digital imaging, and
document conversion.
Filing Season The period from January 1 through mid-April when most individual income
tax returns are filed.
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Appendix IV
Abbreviations
IRS Internal Revenue Service
TIGTA Treasury Inspector General for Tax Administration
ZPI Zero Paper Initiative
12
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