Each year, our member financial institutions share the challenges they encounter when managing incoming tax refunds, particularly in balancing compliance with delivering excellent client and member service. To assist, we’ve compiled some of the most frequently asked questions, along with ACH Rules-based guidance to help safeguard your clients and your organization.
What if the name on the Entry doesn’t match the name of the account holder?
Under ACH Rules Subsection 3.1.2, financial institutions are not obligated to verify an account name with the transaction being posted to the account. The Green Book further clarifies this on page 1-8.
If your organization chooses to perform additional name verification beyond these requirements, you are going above and beyond the ACH Rules and Green Book guidance. While this extra step might feel like added protection, it could increase your potential liability depending on subsequent actions. It’s critical to have a standardized procedure for handling name discrepancies and document this clearly in your policies.
What should we do if a refund is sent to a closed account?
The ACH Rules outline specific requirements on availability of credit Entries to Receivers (Subsection 3.3.1.1 and 3.3.1.2). Generally, funds cannot be withheld unless requested by either the Receiver or the IRS.
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 on state-specific Right of Offset laws, a tax refund may still be eligible for offset if the account was closed with a negative balance. For clarity on these laws, contact your state’s Attorney General’s office.
What if an account holder receives an unusually large refund but has minimal activity in their account?
According to the ACH Rules Section 1.2.1, Effect of Illegality, if there is a reason to suspect a payment is illegal, an RDFI may place a hold on funds while investigating. Prompt action is essential, and the investigation may include contacting the IRS to verify the payment's legitimacy.
Based on the IRS guidance, you may be instructed to either post or return the transaction, and in most cases, the R06 Return Reason Code would apply. Even if no indemnification letter is issued, document all communications with the IRS for your records.
My account holder is deceased. Is this federal government transaction subject to reclamation?
The Green Book (page 5-3) states that tax refunds are not subject to reclamation if the account holder is deceased.
Additionally, the Green Book clarifies that RDFIs are not liable for tax refunds sent to incorrect or fraudulent accounts. The IRS encourages taxpayers using direct deposit to double-check their account and routing numbers to help avoid misdirected payments.
Need more guidance?
The IRS provides a comprehensive FAQ page covering nearly every question related to tax refunds. And as always, our Member Support team is ready to assist via phone (800.500.0100), email (memserve@epcor.org) or website chat (epcor.org).
Also, check out our Did You Know video, Tax Refund Payment Handling, for practical tips on addressing common tax refund questions from account holders this tax season!
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