The Internal Revenue Service plans to put in place new procedures starting next January to limit the number of refunds electronically deposited into a single financial account or pre-paid debit card to three, as part of an effort to combat fraud and identity theft, including fraud committed by unscrupulous tax preparers.

As part of the new procedures next tax season, the fourth and subsequent refunds automatically will convert to a paper refund check and be mailed to the taxpayer. The same is true to large refunds. No refund greater than $9,999 will be refunded via debit card. Any refund of $10k or larger will be paid via a paper check.

In addition, taxpayers will receive a notice informing them that their account has exceeded the direct deposit limits and that they will receive a paper refund check in approximately four weeks if there are no other issues with the return. Taxpayers will still be able to track their refunds through the IRS’s online Where’s My Refund? tool.

“The vast majority of taxpayers will not be affected by this limitation, and we would encourage taxpayers and tax preparers to continue to use direct deposit,” said the IRS. “It is the fastest, safest way for taxpayers to receive refunds.”

The direct deposit limit is intended to prevent criminals from easily obtaining multiple tax refunds. The limit applies to financial accounts, such as bank savings or checking accounts, and to prepaid, reloadable cards or debit cards.

However, the IRS cautioned that the limitation could affect some taxpayers, such as families in which the parent’s and children’s refunds are deposited into a family-held bank account. Taxpayers in this situation should make other deposit arrangements or expect to receive paper refund checks.
One reason cited by the IRS for the new procedures is to protect taxpayers from unscrupulous tax preparers. “The new limitation also will protect taxpayers from preparers who obtain payment for their tax preparation services by depositing part or all of their clients’ refunds into the preparers’ own bank accounts,” said the IRS. “The new direct deposit limits will help eliminate this type of abuse.”
Direct deposit must only be made to accounts bearing the taxpayer’s name, the IRS warned. Tax preparer fees cannot be recovered by using Form 8888 to split the refund or by preparers opening a joint bank account with taxpayers. The IRS warned that these actions by preparers are subject to penalty under the Internal Revenue Code and to discipline under Treasury Circular 230.

The problem now that the IRS was kind enough to disclose the change is the bad guys will simply adjust and open multiple accounts. Based upon firsthand experience with this type of fraud (as a victim) the problem is that the IRS will issue a direct deposit into an account with a name that doesn’t match the taxpayer’s name and then the banks do not have any sort of checks and balances that prevent the deposits even though the names don’t match. The IRS claims the banks should refuse the direct deposits with mismatched names and the banks say it is up to the IRS to police it. In the meantime, no one is minding the store and millions of dollars are stolen every year.

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