Returning Questionable IRS and State Tax Refund Credits

Posted September 19, 2017

NACHA, in conjunction with national Security Summit Financial Services Work Group, which includes members from the Internal Revenue Service (IRS) and state revenue agencies, would like to remind Financial Institutions of the availability of the IRS and State Tax Refund Opt-In Programs. Additionally, financial institutions should be reminded not to use certain Return Reason Codes when returning questionable or potentially suspicious ACH credit entries to these agencies.
 
Additional Information
 
In 2016, NACHA, with assistance from the Financial Services Work Group, has established a State Tax Refund Return Opt-In Program for RDFIs, in addition to the IRS Refund Return Opt-In Program, which has been in existence since 2013. These programs were developed to make it easier for financial institutions to return tax refund credits in cases of suspected error or fraud. Opt-in rules define how Return Reason Code R17 may be used by participating RDFIs to return questionable tax refund ACH credit entries originated by the participating states through their respective ODFIs.
 
The State Tax Refund Return Opt-In Program allows RDFIs to complete one participation agreement and be able to return questionable returns to any state, through its ODFI, that has also signed up to participate in this Opt-In Program.  A current list of participating states and associated ODFIs is maintained on the program page, along with the RDFI participation agreement.
 
Opt-In Program returns use the Return Reason Code R17, along with three specific “subcodes” within the Addenda Information Field of an R17 to further specify the nature of the return.  These additional reasons are:
 

  1. Name Mismatch between the name on the forward PPD credit entry and the name(s) associated with the Receiver’s account at the RDFI; 
  2. ID Theft, where the RDFI has been notified or believes, as a result of internal fraud investigation, that a PPD credit entry is related to a case where a taxpayer’s identity has been stolen; or 
  3. Questionable Refund, whereby account characteristics, account history, investigation and/or other key markers identified through filters or other means implemented by the RDFI indicate that a forward PPD credit entry deposited to an account(s) is questionable, invalid, erroneous, or obtained through fraudulent filings. 

Participating RDFIs are allowed to transmit these R17 return entries for up 60 days from the Settlement Date of the original PPD credit entry. Participating RDFIs are not required to check for name mismatch when posting.
 
Additionally, it should be noted that the Financial Services Work Group has created an optional file standard for state tax refund credits.  The below fields will be formatted as illustrated for the ease of RDFI recognition of these payments.  
 

  • Company Entry Description – list the IRS assigned four (4) digit MEF code and the phrase TAXRFD.     

    • State Example  -  NYSTTAXRFD  
    • City Example - NYCTTAXRFD  
  • Individual Name – Last Name, First Name, Middle Initial (if provided) and joint First Name, and Middle initial.  Display the first 22 characters of name.  

    • Example – Jones, Steven E & Deborah L = JONES, STEVEN E & DEBO 
  • Individual Identification Number  - List the full social security number or the last four (4) digits of the social security number without the dashes 

    • Full SSN Example – 123456789 
    • Last 4 SSN Example – XXXXX6789 

External Leads Programs

Federal and State External Leads Programs also exist, which  complement the R17 Opt-In Programs, allowing for agencies to receive external communications about the questionable tax refunds, including those sent by a third party provider. These leads may involve refund checks, direct deposits/ACH, refund anticipation loans or checks, and pre-paid debit cards.
 
A lead is traditionally defined as personally identifiable information related to suspicious refunds including taxpayer name or account. After researching the lead, the agency will work with the submitting financial institution to determine whether the associated funds should be returned. 
 
More information about the External Leads Programs are included on the associated Tax Refund Opt-In Program webpage.
 
Proper Return Reason Code Usage
 
Prior to the existence of the Tax Refund Return Opt-In Programs, some financial institutions would utilize other Return Reason Codes to return questionable or potentially suspicious ACH credits to tax agencies, such a R03-No Account/Unable to Locate Account.  When an R03 ACH return is received by a tax agency, the agency’s disbursement system will automatically issue a replacement check to the person/entity that filed the tax return.  In cases where there are questions about the validity of the tax return or associated ACH credit, utilizing an R03 ACH return means that the item is never flagged for review and funds ultimately disbursed, potentially to a fraudster.  Whenever possible, financial institutions should avoid returning a questionable or potentially suspicious ACH credit back to a tax agency using the R03 Return Reason Code.
 
Similarly, financial institutions should also remember that an ACH credit should only be returned as R06-Returned per ODFI’s Request at the explicit request of the ODFI (i.e., the U.S. Treasury or state tax agency’s ODFI).  ODFI’s requesting that an RDFI return an ACH credit related to a tax refund credit using the R06 Return Reason Code should also ensure that the tax agency (Originator) is aware.
 
When a financial institution has a questionable or potentially suspicious ACH credit from a tax agency, it should follow one of the above methods for alerting the appropriate agency.  See Resources below for simple instructions related to each program.

Resources
 
Additional information on the State Tax Refund Opt-In Program, including Participating States, can be found on the program webpage at:
https://www.nacha.org/programs/state-tax-refund-return-opt-program

Additional information on the IRS Tax Refund Opt-In Program can be found on the program webpage at:
https://www.nacha.org/programs/irs-refund-return-opt-program
 
 
RDFIs wishing to participate can access each RDFI agreement via the appropriate program page, along with instructions for submission to NACHA.
 
It is important to note that these are separate programs and participation in one program does not facilitate participation in the other.  

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