"The GAO's findings should be an embarrassment to the agency," Senate Finance ranking member Charles Grassley, R-Iowa, who requested the study, said in a statement.
IRS generates millions of paper or electronic files each year on tax returns, audits, investigations and other actions, often sending them to storage sites when closed. The Federal Records Act and other mandates require keeping the records ready for review.
But in a Sept. 28 report, GAO said an inability to find files often creates problems for the agency and taxpayers. The report says IRS' Wages and Income Division, in a recent review, could not provide 46 percent of 900 requested cases within 25 days to meet scheduled tax court dates. GAO cites several instances where the IRS filed liens for tax debts but lost the revenue when it could not locate original files for a hearing.
IRS' Centralized Case Processing Unit, which has 21 days to review closed cases, in a study last year found it received less than half the files it requested on time. GAO said the unit usually requests twice the number of files it needs to allow for those that are not located.
In two recent audits, IRS could not find 10 percent to 14 percent of requested files, while the Treasury Inspector General for Tax Administration, in a similar study, did not receive 19 percent of files it requested. GAO noted that IRS at times takes on added costs to recreate lost files and in some cases burdens taxpayers by requesting additional information during that process.
The report did not examine in detail why the agency struggles to locate files, but said IRS lacks a process for ensuring cases are found quickly. GAO recommended IRS ensure program managers are responsible for files and create a tracking system, suggesting as an example a bar code process used by the Veterans Affairs Department.
In a written response, IRS Acting Commissioner Linda Stiff announced the creation of an internal working group to review records management procedures. Stiff said the group would "take into account" the GAO report.