The Internal Revenue Service cannot locate thousands of microfilm cartridges storing millions of sensitive business and individual tax account records, a new watchdog report found.

The tax information could be used to commit tax refund fraud, according to the Treasury Inspector General for Tax Administration, the office that conducted the report.

Its review identified "significant deficiencies" in the way the IRS safeguards, accounts for and stores its microfilm backup cartridges -- which the agency is required by law to keep for a certain amount of time.

"For example, our physical inspection found empty boxes labeled as including microfilm backup cartridges with no explanation as to the location of the missing cartridges," the report said.

During a site visit, the IRS was unable to locate any of the fiscal year 2010 microfilm cartridges that should have been sent to the Kansas City Tax Processing Center in 2022 after the Fresno Tax Processing Center closed.

Separately, at the Ogden Tax Processing Center, IRS personnel were unaware of the current location of as many as 168 cartridges that had been sent out for reformatting, the report said. The location is unclear, in part, because the prior microfilm contractor went out of business abruptly in 2018, the report notes.

The IRS is taking action to complete inventories of the microfilm as well as working toward eliminating the use of microfilm, according to a response letter to the watchdog group from Ken Corbin, the agency's wage and investment commissioner.

He wrote that the report highlights the challenges the IRS has experienced over the last decade due to reduced funding and the attrition of experienced staff. As a result, the agency has had to shift workers to high-priority tasks and this affected its ability to update microfilm inventory records in a timely manner.

The IRS's budget fell by more than 15% in the decade leading up to 2022, leading to a decrease in both staffing levels and audit rates.

But the agency finally got the additional funding its officials had long been asking for when the Democrats' Inflation Reduction Act passed last August.

While that spending package included a provision to deliver $80 billion to the IRS over 10 years, Republicans have continued to criticize the new funding and have raised questions about whether the investment would lead to increased audits for average Americans.

Earlier this year, Republicans were able to reclaim $20 billion of the funding in the bipartisan deal to address the debt ceiling.

The White House argued that the cut won't fundamentally change what the IRS can do over the next few years. Biden officials have has also repeatedly said that taxpayers earning less than $400,000 a year won't face an increase in audits due to the new funding.

The IRS says the new funding has already helped it improve taxpayer services. It answered 3 million more calls and cut phone wait times to three minutes from 28 minutes this year compared to the year before. The IRS is also digitizing all paper-filed tax returns by 2025, which is expected to cut processing times in half and speed up refunds by four weeks, the agency said last week.