We’re up to our eyeballs in it – tax season! While the April 17th IRS (Internal Revenue Service) filing deadline is still looming for some account holders, many others are already rejoicing in their refunds. I wanted to take the opportunity to share the five most common IRS tax refund questions received from our members.
Since this is a federal tax refund, do the name in the transaction and the name in the account need to match?
According to the ACH Rules, in 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 1-9. 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 this could even lead to additional liability for your organization, depending on what steps you take next.
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 tax payers 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, and 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).
How many federal tax refunds can come in to a single account?
The IRS implemented a rule in 2015 that only allows for three refunds to be sent to a single account before triggering a flag for that account number. The IRS states that any additional refunds directed to that account number will be sent via paper check to the address on the return. (There may be special circumstances when a person, such as a tax preparer, could register with the IRS to receive additional refunds to a single account) If your institution receives more than three refunds to a single account and are concerned about the validity of the credits, contact the IRS.
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 it, but in most cases, you would use the R06 Return Reason Code. You may not be able to get an indemnification letter, but should document who you talked to at the IRS.
My accountholder is deceased. Is this federal government transaction subject to reclamation?
According to the Green Book in Section 5-4, tax refunds are not subject to reclamation.
The IRS has a created a FAQ page on their website to help answer these and numerous other questions. For additional resources and questions, contact EPCOR member support at 800.500.0100 or at memserve@epcor.org.