This week, the Internal Revenue Service and Treasury Department issued a Notice of Proposed Rulemaking in the Federal Register regarding misdirected direct deposit refunds. These proposed regulations reflect changes to the law made by the Taxpayer First Act (TFA), which was signed into law on July 1, 2019. The TFA added section 6402(n) to the Code, which directed the IRS to establish procedures to allow taxpayers to report when a refund is not deposited into the taxpayer’s account, as well as establishing procedures for identification and recovery of the misdirected direct deposit refund. The proposed regulations are intended to increase awareness and provide guidance to affected taxpayers who have made a claim for refund, requested the refund be issued as a direct deposit, but did not receive a refund in the account designated on the claim for refund.
The proposed regulations largely adopt the current procedures for the identification, recovery, and delivery of misapplied direct deposit refunds as outlined in the Internal Revenue Manual (IRM). A taxpayer or authorized representative may report that the taxpayer did not receive a direct deposit refund by calling an IRS customer service line, filing Form 3911, Taxpayer Statement Regarding Refund, or by initiating a Taxpayer Advocate Case. The IRS will first verify whether the refund was in fact, issued via direct deposit. Once the IRS confirms a refund was issued, the IRS will conduct a refund trace by working with the Bureau of Fiscal Services and the financial institution to locate the refund, verify the account and routing number and verify the identity of the account holder. If the account holder is not the taxpayer, then the IRS will attempt to recover the misdirected refund. When a misapplied direct deposit refund is discovered, the IRS will issue a replacement refund to the taxpayer in the amount of the refund that was misdirected. This replacement refund is issued regardless of whether the IRS is able to recover the misapplied direct deposit refund that the taxpayer did not receive. However, the replacement refund will generally be issued to the taxpayer as a paper check. This is due to the fact that the IRS is unable to change the account information for a direct deposit after the information has been input.
It is important to note that a misdirected direct deposit refund is defined in the proposed regulations and in the IRM as “a refund or a portion of a refund was made by direct deposit to an account that is not the account designated on the taxpayer’s claim for refund.” This only applies to situations when the IRS has caused the error, such as when the IRS mistakenly inputs an incorrect account number from the return or when the financial institution credits the payment to an account other than the account designated in the IRS’s direct deposit instruction. When a taxpayer or authorized representative designates an incorrect routing or account number on a claim for refund that will cause a refund to be disbursed to an account that is not an account of the taxpayer, then the refund is not considered to be a misdirected direct deposit refund, and is not covered by these proposed regulations. The same reporting and tracing procedures will apply in the situation, however, the IRS will not issue a replacement refund until IRS has recovered the original refund deposited in the incorrect account. The IRS will also only issue the amount it was able to recover.
The proposed regulations are published in their entirety in the Federal Register as REG–116163–19. Comments are requests for public hearing can be submitted until Feb. 1, 2020.