Tax Refunds via Direct Deposit

Direct deposit is fast and convenient, though mistakes can cost your refund.

Direct deposit check on desk
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Individuals have the option to have some or all of their federal tax refund directly deposited to their bank account.

With direct deposit, the IRS electronically transfers your tax refund to your bank account, which is often faster than receiving a check in the mail.

The IRS typically issues refunds in 21 days or less. "Even though the IRS issues most refunds in less than 21 days, it’s possible your tax return may require additional review and take longer," the IRS advises in Publication 2043.

How to Request Direct Deposit of a Tax Refund

If you prefer to have your entire refund directly deposited into one bank account, simply indicate your bank's routing transit number, your bank account number, and the type of account (checking or savings) on your tax form. On the 2015 version of Form 1040, direct deposit information is entered on Line 76.

If you prefer to have parts of your refund directly deposited into multiple bank accounts, you can use Form 8888 to split your refund among two or three different bank accounts.

Avoid Sending Your Tax Refund to Someone Else's Bank Account

Be aware that refunds should be deposited only into your own bank account. Your name must be listed as the account holder. Do not directly deposit your refund into someone else's bank account. 

"Do not request a deposit of your refund to an account that isn't in your name, such as your tax return preparer’s account.

Although you may owe your tax return preparer a fee for preparing your return, do not have any part of your refund deposited into the preparer's account to pay the fee," advises the IRS in their  Instructions for Form 1040.

Triple Check Your Bank Account Information Before Filing Your Tax Return

The IRS claims it is not responsible for any errors a person makes when indicating their bank account information.

"The IRS isn't responsible for a lost refund if you enter the wrong account information," the tax agency warns in its Instructions for Form 1040.

Further, "The IRS assumes no responsibility for tax preparer or taxpayer error" if a person has entered an incorrect routing or account number on the tax return (Refund Inquiries: What should I do if I’ve entered an incorrect routing or account number?,

More specifically, the IRS believes that refunds issued via direct deposit are not covered by the government's Check Forgery Insurance Fund, with the result that the agency believes it is not responsible for assisting taxpayers who entered incorrect direct deposit information on their tax return. To explain this situation, the National Taxpayer Advocate testified:

"When a paper refund is stolen, the Financial Management System (FMS) verifies that no person negotiated the check and issues a new one to the taxpayer. If FMS finds that the paper check has been negotiated, it conducts additional research, and if it determines the taxpayer was not involved in negotiation of the check, FMS issues a replacement to the taxpayer and charges the Check Forgery Insurance Fund (CFIF). The CFIF is a revolving fund established to settle claims of non-receipt and make sure innocent payees receive timely settlement checks where a third party fraudulently negotiated the original check....

"FMS guidelines state in part, 'If the taxpayer or the taxpayer’s agent gave incorrect account information, neither FMS nor IRS will assist the taxpayer with recovering the funds, and the taxpayer is free to pursue civil actions.' The IRS interprets this guideline as relief from further obligation as long as the account is the one listed on the return. The IRS’s interpretation of FMS guidelines leaves taxpayers with little recourse to recover their stolen direct deposit tax refunds." (Nina Olson, National Taxpayer Advocate, testimony before the House of Representatives, Subcommittee on Crime, Terrorism and Homeland Security, June 28, 1012, Hearing on Identity Theft and Income Tax Preparation Fraud, pages 12-13, pdf.)

Direct Deposit Information Cannot be Changed After the Tax Return is Filed – but Direct Deposits can be stopped if the IRS is notified immediately of the problem

Unlike other parts of the tax return which can be changed or corrected after a return is filed, the direct deposit information cannot be corrected after a tax return is filed.

However, a person can call the IRS to request that the direct deposit be stopped and to issue a paper refund check instead. The IRS states, "If the return has not already posted to our system, you can ask us to stop the direct deposit" (Refund Inquiries: What should I do if I’ve entered an incorrect routing or account number?, Taxpayers would need to call the IRS immediately, as electronically filed tax returns can post to the IRS system very quickly (usually in a few days).

If you discover a mistake in the direct deposit area you should call the IRS immediately at 1-800-829-1040 and ask that the IRS convert the refund to a paper check.

What to Do When Your Refund is Sent to the Wrong Bank Account

Verify the direct deposit information on your tax return versus the actual bank routing number and bank account number.

If the numbers you indicated on your tax return are correct, then call the IRS can ask them to initiate a refund trace to recover your refund.

If the numbers you indicated on your tax return are incorrect, then you'll need to deal directly with the bank in which your refund was deposited. You'll know which bank and bank account it is, since you have the bank numbers listed on your tax return.

  1. Find the bank by looking up which bank is associated with the routing number shown on your tax return.
  2. Talk to the ACH manager at that bank.
  3. Persuade the bank to send the refund back to the IRS.
  4. Call the IRS and explain that the bank will be sending back the refund.
  5. In the future, always get a check, unless you are 100% sure that your bank information is correct.

I developed this procedure after helping a client retrieve her refund that was incorrectly deposited into the wrong account. Fortunately, the bank was able to assist my client. However, that's not always going to be the case. Taxpayers may want to consult with an attorney to review options for taking legal action to recover a refund that was directly deposited into the wrong account.

What to Do If Your Tax Preparer Alters Your Direct Deposit Bank Information

In her 2012 Annual Report to Congress, National Taxpayer Advocate noted that some tax preparers are altering the direct deposit bank information to divert funds into the tax preparer's account. This is an example of preparer fraud. Tax refunds should be directly deposited only into the taxpayer's bank account and not anyone else's bank account. If you find this happens to you, contact an attorney to review your options for taking legal action to recover your refund.

Further Reading about Direct Deposit of Tax Refunds

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