Proposed Rulemaking for Misdirected Refunds Notice Issued by IRS
The Internal Revenue Service and Treasury Department have 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.
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.