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It’s tax season, and while receiving tax refunds is great for account holders, sometimes unique circumstances pop up for financial institutions. 

As a Receiving Depository Financial Institution (RDFI), according to ACH Rules Subsection 3.1.2, you “may rely solely on the account number contained in an Entry when posting the Entry to a Receiver’s account, regardless if the name of the Receiver in the Entry matches the name associated with the account number in Entry”.  The Green Book mirrors this, as it suggests in Section 1-8 that “financial institutions’ responsibility is to post the Direct Deposit payment to the account indicated on the ACH record”. IRS Tax Refunds are also not subject to Reclamation according to Chapter 5. Yet, what creates difficulties for financial institutions during tax season? The taxpayers themselves.

Even when a financial institution posts to the correct account number as forwarded to them by the IRS, there can be issues with tax payments based on the following:

• Incorrect account information listed during filing.
• Use of IRS Form 8888 to pay an accountant or tax preparer.
• Separated married couple using the same account information as previous years.
• An individual using someone else’s account to retrieve their tax refund, which creates name mismatch. 

Each of these scenarios could create tension with your account holders, particularly as tax refunds are a dependable source of income early in the year for some.

If there was a typo in the account information given to a tax preparer or entered by the account holder themselves, this could cause one of two things:

1. The payment may post to an incorrect account.
2. The payment creates an exception, or non-posted item, for the RDFI to review. In this situation, RDFIs are protected from liability if they were to return the item back to the IRS.  However, it could take several weeks for the taxpayer to retrieve their refund from the IRS through other means.  Financial institutions can manually post the exception or non-post via their procedures, but they take the risk of posting to an incorrect account number and will be liable for any errors. Financial institutions need to weigh and balance customer service versus liability. Guidelines for handling these situations should be described in policies and procedures regarding exceptions or non-posted items.

Form 8888 by the IRS is intended to allow the taxpayer to submit up to three different accounts to split up their tax refunds (with only checking & savings as options). For example, an individual can send a portion of their refund to a checking account and a portion to a savings account. However, this form should not be used by tax preparers to pay their fees, as indicated on page two of Form 8888. When this form is misused to pay tax preparers, you’ll see multiple tax refund direct deposits in a tax preparer or accountant’s account. There’s a good chance that they didn’t know, so just advise them to change their practice and give them a grace period of two or more weeks to correct this on their end.

An all-too-common scenario that happens each year is separated married couples who have forgotten to change their account information and the full amount posts in a spouse’s account.  Then, the spouse who receives the funds often quickly withdraws the money using their own checks, debit card or other means to transfer payments.  Remember, the RDFI’s responsibility is to post based solely on the account number as Green Book Section 1-8 indicates. This matter would need to be handled between the soon-to-be-divorced couple outside of your financial institution.

Lastly, a common issue occurs when you have friends, family or significant others using someone else’s account to receive ACH deposits including tax refunds.  The IRS places the responsibility on the taxpayer that the “account must be in your name”.  As stated before, when the RDFI posts solely based on the account number, any issues with any tax refunds should be the taxpayer’s responsibility.  The United States Treasury and IRS can trace a taxpayer’s refund through legal requests made to financial institutions.  Through this process, the IRS can inquire with your financial institution to find out who received the funds. 

In summary, here are some tips to share with your account holders:

• Make sure your account information has been entered correctly on a tax e-filing.  Exceptions or non-posts could not only delay payments but could cause them to be returned.
• If you’re a separated married couple, try to talk things through about tax season and double-check that your refund is sent to the proper account.
• Form 8888 should not be used to pay an accountant or tax preparer’s fees.
• Tax refunds should be posted to accounts in the taxpayer’s name. If you allow friends and family to send their refunds to your account, it could become your liability and headache for any claims of unreceived tax refunds (or refunds these individuals claim they never received from you, but did). 

A little bit of information ahead of tax season, as well as tips to pass along, can help your financial institution weather the storm. The Green Book and the second page of Form 8888 are excellent resources to have on hand to show any account holders who may need answers for any of the issues described.