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Common IRS Tax Refund Questions Answered

Amy Donaghue

By: Stephanie Mareski, AAP, APRP, Director, Member Support

Each year, we hear from our member financial institutions about the challenges they face with incoming tax refunds that force them to juggle compliance and customer/member service. Let’s look at some of the most common questions and the Rules-based answers you can rely on to protect your clients and institution.

What if the name on the Entry doesn’t match the name of the account holder?

According to the ACH Rules, Section 3.1.2, a financial institution is not required to match an account name with the transaction being posted to the account. The Green Book echoes this rule on page 1-8. If your financial institution is monitoring incoming Entries to match name and account number, you are going above and beyond what is required in the ACH Rules and the Green Book. This could lead to additional liability for your organization, depending on what steps you take next. Make sure your institution is consistent on how name mismatches are being handled and that the process is outlined in your policies and procedures.

The Green Book also clearly states that an RDFI is not liable for an ACH IRS tax refund sent to an erroneous or fraudulent account. The IRS encourages taxpayers who wish to have their tax refund sent by direct deposit to double-check their account number and routing number information to help prevent misdirected payments.

What do we do about this refund that came into a closed account?

The ACH Rules have specific requirements regarding availability of Credit Entries to Receivers (Subsection 3.3.1.1 and 3.3.1.2). Generally speaking, you cannot hold the credit until either the Receiver or the IRS ask for the monies. If an ACH Entry cannot be posted, it should be returned. In this case, it would be returned using the R02 Return Reason Code. Depending upon the Right of Offset laws in your state, an IRS tax refund might be eligible for offset if the account was closed with a negative balance. (To determine what the laws in your state say in this regard, contact your state’s Attorney General’s office).

Our account holder received a “HUGE” refund and only maintains a minimal balance with little activity in the account. What should we do?

According to the ACH Rules, Section 1.2.1, Effects of Illegality, if, as an RDFI, you have reason to believe the funds are illegal, you can “hold” the funds while you investigate the return. You should promptly investigate the suspicious transaction. Your investigation could include contacting the IRS to confirm the validity of the payment. They may instruct you to post the transaction or to return the transaction. If the IRS requests you to return the transaction, you should ask them how to return the Entry. In most cases, you would use the R06 Return Reason Code. You may not be able to get an indemnification letter, so you should document who you spoke to at the IRS.

My account holder is deceased. Is this federal government transaction subject to reclamation?

According to the Green Book, Section 5-3, tax refunds are not subject to reclamation.

The IRS has created an FAQ page on their website to help answer these and numerous other questions. And, of course, our Member Support team is also happy to answer your questions via our helpline (800.500.0100), email (memserve@epcor.org) or chat (epcor.org).

Have More Questions? Here Are Your Answers!

Tax Season is upon us, and this member-favorite webinar is back just in time! Register for our Tax Refund FAQ webinar recording to review your responsibilities and liabilities as an RDFI receiving tax payments and brush up on common tax refund dilemmas before your account holders start lining up with questions. During this 60-minute webinar, we will discuss topics such as handling rejected transactions, account titling, state versus federal refunds, multiple deposits to one account and more. Register now!