How the IRS will treat misdirected tax refunds

The IRS is implementing procedures to identify and recover tax refunds issued by electronic funds transfer (direct deposit) that were not delivered to the account designated to receive the direct deposit refund on the federal tax return or other claim for refund. The regulations (T.D. 9940) finalize proposed regulations (REG-116163-19) with a change to the effective date in response to a comment.

Sec. 6402(n), which was added to the Code by Section 1407 of the Taxpayer First Act, P.L. 116-25, directs the IRS to issue procedures within six months of enactment for a taxpayer to report instances in which an IRS refund made by electronic funds transfer was not transferred to the taxpayer’s account, coordinate with financial institutions in identifying misdirected funds, and provide procedures for the misdirected funds to be delivered to the correct account.

The regulations define a misdirected direct deposit refund as any refund of an overpayment of tax that is disbursed as a direct deposit but is not deposited into the account designated on the claim for refund to receive the direct deposit refund. It does not include deposits made to accounts where the taxpayer transposed account numbers.

Under the regulations, a taxpayer or an authorized representative may report to the IRS that the taxpayer never received a direct deposit refund and request a replacement refund. The report must include the taxpayer’s name, taxpayer identification number, mailing address, the type of return the refund is related to, the account number and routing number that the taxpayer requested the refund be directly deposited into, and any other information necessary to locate the misdirected direct deposit refund.

Taxpayers may report misdirected refunds by calling the IRS, using a form prescribed by the Service, contacting the Taxpayer Advocate Service, or submitting the form in person at a Taxpayer Assistance Center.

The IRS will confirm that the overpayment was issued as a direct deposit and was not credited or offset for another liability. If the direct deposit is confirmed, the IRS will initiate a refund trace to request the assistance of Treasury’s Bureau of the Fiscal Service.

After the IRS has determined that a misdirected direct deposit has occurred, it will issue a replacement refund in the full amount of the refund that was misdirected, either as a direct deposit or as a paper check sent to the taxpayer’s last known address.

Only one comment was received in response to the proposed regulations. It expressed concern that these procedures would not apply to claims for refund from tax years before the applicability date of the final regulations. As a result, the final regulations clarify that the procedures apply to any report of a misdirected direct deposit refund for a current or prior year submitted after Dec. 22, 2020, the date the final regulations were published in the Federal Register.