IRS Paperless Processing Initiative Shows Uneven Progress
The IRS paperless processing initiative, launched to convert paper tax records into digital format, has made slower progress than expected. A February 2026 audit by the Treasury Inspector General for Tax Administration found the Internal Revenue Service digitized only a small share of paper-filed tax returns during early pilot programs, raising concerns about processing times and modernization goals.
The Paperless Processing Initiative began in August 2023 as part of a modernization strategy to reduce reliance on paper returns and improve digital processing across the federal tax administration. Treasury Secretary Janet Yellen and IRS Commissioner Danny Werfel said the effort is central to the agency’s Strategic Operating Plan and broader technology upgrades.
The processing initiative aims to convert paper-filed tax returns, tax forms, information returns, and correspondence into digital format shortly after they arrive in the mailroom. The program was funded partly by the Inflation Reduction Act, which initially provided long-term funding for information technology upgrades and scanning capabilities within the Internal Revenue Service.
Officials say improved digital processing systems could help staff analyze data faster using pattern recognition and API technology. The modernization effort also supports a digital platform for Form K-1 and expanded electronic services such as Energy Credits Online.
A February 2026 audit by the Treasury Inspector General for Tax Administration concluded the agency has made limited progress toward scanning and digitally processing large volumes of paper returns.
Pilot programs during Filing Season 2024 and 2025 targeted major filings, including Form 1040, the Form 1040 series, Form 941 payroll tax filings, and Form 940 unemployment tax filings.
Between early 2023 and late 2024, contractors digitized about 3.8 million paper-filed tax returns through digital processing systems. That total represents 7 percent of the more than 53 million paper returns received during the same period.
The audit also highlighted the challenge of digitizing historical documents stored in federal warehouses. About 41 percent of roughly 143 million pages of historical gift tax returns filed on Form 709 had been scanned as of mid-2025.
Those records represent only a fraction of the agency’s overall archive, which includes nearly one billion pages of historical documents, tax transcripts, and other records.
Roughly 76 million paper tax returns and tax forms still arrive each year, along with more than 125 million pieces of correspondence. Managing this volume creates significant storage costs and administrative burdens for mailroom operations.
According to the audit, paper-filed tax returns cost about 43 times as much to process as electronically filed returns. During the 2025 filing season, paper returns accounted for only about 6 percent of filings but generated nearly three-quarters of processing expenses.
Longer processing times can affect taxpayers waiting for refunds or confirmation of key credits tied to Social Security records or other documentation. Many taxpayers monitor updates through the Where’s My Refund tool while paper returns move through the system.
Officials say expanding paperless processing could improve customer service by allowing staff to access taxpayer records through secure digital systems instead of physical files. Faster digital correspondence could also reduce delays in responding to notices and requests handled by Taxpayer Assistance Centers.
Advocates, including the National Taxpayer Advocate and the Taxpayer Advocate Service, say modernization may help resolve issues such as innocent spouse relief cases or delayed tax transcripts. Better digital processing helps enforcement teams detect identity theft, track tax evaders, and investigate compliance cases involving wealthy individuals or large corporations.
Professional organizations, including the American Institute of CPAs and several tax law firm groups, have supported the modernization push. They say improved scanning capabilities and a stronger information technology infrastructure could reduce processing backlogs and help the agency manage filings more efficiently.
By William Mc Lee, Editor-in-Chief & Tax Expert—Get Tax Relief Now