The tax collection agency must bolster oversight of contractors who dispose of papers with personally identifiable information, the inspector general for tax administration at the U.S. Treasury said in the report released on Thursday.
"At every location we visited, we found documents containing PII (personally identifiable information) or other SBU (sensitive but unclassified) information in regular waste containers and/or dumpsters," it said.
"If security policies are not adequately communicated and adhered to, sensitive taxpayer information and employee data are at an increased risk of disclosure or other improper usage."
Americans have lost more than $45 billion to identify theft, according to the Federal Trade Commission.
The IRS, in response to the report, said it recently put in standards to oversee waste contracts, including background checks for employees. It agreed to all of the recommendations the inspector requested to improve oversight.
Investigators visited eight IRS offices in Arizona, Maryland, New York and Utah and interviewed managers across the country from September 2007 to May 2008. (Editing by John O'Callaghan)