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As a consequence of President Donald Trump’s Executive Order 14247, which directs federal agencies to phase out paper checks to the extent permitted by law, the IRS’s rapid transition to electronic refund delivery has increased the risk of erroneous refunds, necessitating heightened awareness and prompt action by taxpayers.
IRS Topic 161 provides guidance on how taxpayers can return erroneous refunds received by either paper check or direct deposit. As part of the IRS’s ongoing effort to modernize its refund delivery system, the IRS increasingly issues refunds via direct deposit rather than paper checks when taxpayer banking information is available.
Under Topic 161, when an erroneous refund is issued via direct deposit, taxpayers are advised to follow the steps to ensure the refund is properly returned to the IRS:
- Contact the Automated Clearing House (ACH) department of the bank or financial institution that received the direct deposit and request that the erroneous refund be returned to the IRS.
- Call the IRS toll-free number at 800-829-1040 (individual) or 800-829-4933 (business) to explain that the direct deposit is being returned.
- Initiate an ACH reversal as soon as possible, with the goal of reversing the transaction before the funds are fully settled by the bank or financial institution (ideally within 24 hours of identifying the error and no later than five banking days after the settlement date).
- Be aware that interest may accrue on the erroneous refund until it is fully returned to the IRS.
Grant Thornton insight:
Taxpayers should regularly monitor their bank accounts to identify any erroneous refunds that may be deposited. If a taxpayer misses the applicable ACH reversal window, the IRS may treat the refund as having been received and retained by the taxpayer.
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