Taxpayers Can Opt to Split 2007 Federal Income Tax Refunds

Tax professionals – your clients have a new refund option for their 2007 federal income tax refunds. In addition to direct depositing their refunds into one account or receiving paper checks, they now can opt to split their refunds with direct deposits into up to three different accounts with three different financial institutions.

This new option is available, regardless of whether your clients file on paper or electronically, on the following original filed returns:

Note: Clients filing Form 1040-EZ-T, Claim for Refund of Federal Telephone Excise Tax, or Form 8379, Injured Spouse Allocation, cannot opt to split their refunds.

You can continue to use the direct deposit line on Form 1040 to electronically send a client’s refund to one account, or use IRS’ new Form 8888, Direct Deposit of Refund, to split a client’s refund among two or three different accounts/financial institutions.

This change gives your clients more options for managing their refunds, teamed with the speed and safety of direct deposit. IRS estimates taxpayers will choose to split their refunds on approximately 3.8 million returns this year.

Two requirements for direct deposits

IRS will electronically deposit a client’s refund to any of his/her checking or savings account(s) with U.S. financial institutions, providing:

Taxpayers cannot direct their refunds into accounts of others. However, in the case of joint refunds, your clients can direct their refunds into joint accounts or accounts of either spouse. For example: IRS will deposit a joint refund into an individual retirement arrangement owned by one spouse.

These are the same guidelines IRS applies when a client directs his/her refund into one account. The only change is your clients now can divide their refunds among up to three accounts at the time they file.

Examples of savings accounts clients can choose to direct their refunds to include, but are not limited to:

Direct deposit acceptance varies among financial institutions and your clients are responsible for verifying that their financial institutions will accept direct deposits for the types of accounts designated. For example, a financial institution may accept direct deposits for regular savings accounts, but not for education savings accounts.

If a financial institution denies a direct deposit, IRS will issue that portion of the refund via a paper check.

Caution on Refund Direct Deposits to IRAs

Clients wanting to deposit all or part of their refunds to their IRA accounts should first ensure their financial institutions will accept direct deposits to IRA accounts.

As with all IRA deposits, the account owner is responsible for informing their IRA trustee of the year for which the deposit is intended and for ensuring their contributions do not exceed their annual contribution limitations. IRS direct deposits of federal income tax refunds will not indicate a contribution year for IRA accounts.

IRS instructions will stress that if a taxpayer fails to notify his/her IRA trustee of the intended year for the deposit, their trustee can assume the deposit is for 2007.

IRS is not responsible for the timeliness or contribution amounts related to IRA direct deposits. Since errors on returns or refund offsets could change the amount of refunds available for deposit, your clients who want to apply their refunds to 2007 IRA contributions should confirm the amount of the deposit and deposit date and make any necessary corrections to their 2007 contributions before their filing deadlines. If the deposit is not made into your client’s account by the due date of the return (without regard to extensions), the deposit is not a contribution for 2007. Your client must file an amended 2007 return and reduce any IRA deduction and any retirement savings contributions credit claimed.

Account and Routing Number Accuracy is Imperative

Whether your clients are directing their refunds to one or multiple accounts, encourage them to verify routing and account numbers with their financial institutions.

IRS assumes no responsibility for taxpayer or preparer error and your clients should ensure accurate account and routing information appears on their returns. Errors could result in different scenarios. For example:

Adjusting deposits for errors, offsets, etc.

Several factors could change the amount of a client’s refund. Math errors – one of the top mistakes on returns – can increase or decrease a refund and the amount available for deposit. Refund offsets for delinquent federal/state taxes, child support, student loans, etc., and freezes on the Earned Income Tax Credit (EITC) portion of a refund until IRS can verify a taxpayer’s eligibility can decrease the refund amount available for deposit.

Adjustments resulting in larger refunds

If a client splits his/her refund among multiple accounts and the mistake results in a larger refund than expected, IRS will add the difference to the last account designated.

Example of an adjustment for an increased refund: A taxpayer’s return shows a refund of $300 and the taxpayer asks IRS to split the refund among three accounts, depositing $100 to each account. Due to an error, the refund is increased by $150. IRS will adjust the direct deposits as follows:

Adjustments resulting in reduced refunds

If IRS must reduce the amount of a client’s refund due to a math error or an offset for delinquent federal taxes and your client has allocated his/her refund among two or three accounts, IRS will adjust the deposits using a bottom-up approach and deduct the difference from the amount designated for the last account. If the difference exceeds the amount designated for the last account, IRS will deduct the remainder from the amount designated to the next account, etc.

Example of a math error/delinquent federal tax offset adjustment resulting in a reduced refund: A taxpayer’s return shows a refund of $300 and the taxpayer asks IRS to split the refund among three accounts with $100 to each account. Due to a math error, the refund is decreased by $150. IRS will adjust the direct deposits as follows:

Your clients will receive letters from IRS explaining any adjustments to their returns, refund amounts, and direct deposits. Information about refund adjustments also will be available through Where’s My Refund? or by calling 1-800-829-1954.

IRS recommends filing your clients’ returns electronically to avoid math errors and other common problems that can result in adjustments to returns and change the expected amount of refunds.

Adjusting deposits for EITC freezes

If IRS withholds or freezes the EITC portion of a client’s refund pending additional information to verify eligibility, IRS will deposit the refund, less the amount withheld, according to the bottom-up approach discussed above.

If IRS later determines your client is eligible to receive the credit, the agency will deposit the amount withheld into the first account designated.

Offsets for delinquent state taxes, child support, etc., resulting in reduced refunds
 
If a client owes delinquent state income taxes, child support, or non-tax federal debts such as student loans, etc., the Department of Treasury's Financial Management Service (FMS), which disburses IRS refunds, may offset the refund for the delinquent amount.  

FMS will deduct the past-due amounts from the payment that appears first on the payment file received from IRS (the IRS payment file orders accounts from the lowest to the highest routing number).  If the debt exceeds the payment designated for the account that appears first on the payment file, FMS will reduce the payment designated for the account that appears next, etc.  
 
Your clients will receive letters from FMS explaining any offset amounts, the agencies receiving the payments, the address and telephone number of the agencies, and amounts of their refunds/direct deposits offset. Clients who dispute the debts should contact the agencies shown on the notice, not IRS, since IRS has no information about the validity of the debt. Information about refund offsets also will be available through Where’s My Refund?

Where’s My Refund? – Your clients’ best source for refund information

Whether your clients direct deposit their refunds into several accounts, into single accounts, or opt to receive paper checks, they can use IRS’ popular Where’s My Refund? service to track their refunds.

Where’s My Refund? will include a message confirming the refund was split and the expected deposit date. It will not specify the amount of the individual deposits or the accounts to which the deposits were made but, if IRS or FMS adjusted the refund amount for math errors, offsets, etc., it will inform clients about the amount of the adjustment. 

Your clients can access Where’s My Refund? or call 1-800-829-1954. 

Inviting your input

IRS invites input from the tax professional community about your experience assisting clients with 2007 split refunds — what worked and what can be improved. We will use this feedback to modify and improve the process for 2007 refunds. You can comment via e-mail to splitrefundcomments@irs.gov. Although we will read and consider every experience/suggestion, we do not have the capability to respond to individual e-mail messages.