Direct deposit triple play

The third time's a charm. At least that's what the IRS hopes. This year it's giving filers three ways to directly deposit refunds.

New for 2006 returns, you can split your IRS cash back three ways and have it sent to three different accounts. Send some of your refund straight to your checking account. Tell the IRS to put another chunk directly into your savings. And direct a third amount to your IRA.

All it takes is filling out the new, half-page Form 8888.

But be careful. If you enter a wrong numeral for any of those accounts, you could end up losing your refund.

Smack in the middle of Form 8888 is this warning: "The IRS is not responsible for a lost refund if you enter the wrong account information. You should check with your financial institution to get the correct routing and account numbers and make sure your deposit will be accepted."

Kind of scary. But a disappearing direct deposit is not a new problem.

William Perez at About: Tax Planning has the sad tale of how misentered numerals meant $5,000 forever lost. And there are "thousands of cases a year" like that one, according to a spokesman with the Taxpayer Advocate Service in Washington, D.C.

Part of the problem is that there is no cross-checking mechanism. The IRS just has to take the taxpayer's word that the account number is correct. Then, for better or worse, the direct deposit amount is out of the IRS' hands.

For the last two years in her annual reports to Congress, Taxpayer Advocate Nina Olson has called for changes in the system that would allow banks and the IRS to more easily share information and work together in cases where unintentional errors meant filers lost their refunds.

In her 2005 report, Olson devoted more than a dozen pages to the problem. Since she covered it so thoroughly then, there wasn't much left to say in the 2006 report. But she did take the opportunity this year in her legislative recommendations section to urge that "if a taxpayer inadvertently designates the wrong account number to receive a refund, the IRS should have the proper authorization to resolve the issue."

A cost of protecting your privacy: Part of the problem comes from privacy regulations. Both financial institutions and the IRS are pledged to protecting confidential customer information.

But in this case, the customer -- the taxpaying bank account holder -- is implicitly authorizing the two entities to work together. Olson is correct in advocating that more explicit protocols be instituted so that the financial sector and Uncle Sam can more easily work together, especially when it means someone is going to miss out on a tax refund because of a transposed number.

When it comes to dealing with an old-fashioned paper refund check that is lost, the IRS has a system in place to reissue the check. It's only fair that since the agency is pushing us all to go paperless and use electronic methods when it comes to our taxes, it be able to reissue any tax refunds that were lost in cyberspace between the IRS and our banks.

You can read more about the triple deposit option -- its advantages, disadvantages, the process and other things to think about if you decide to spread your refund wealth around -- in this story.

Film at 11 (10 Central): If your local TV station is a client of NewsProNet, you might just see me on air in your town talking about this new deposit option. A cameraman from Austin's CBS affiliate Channel 42 dropped by the house today to interview me for the syndication service. 

I think it went well. I reviewed the topic before he arrived. I didn't stutter or have a coughing spasm. I even put on mascara for the event.

Even better, the construction crew working on a new house across the street was taking a break during the taping, the garbage men didn't come by until after tape stopped rolling and the hubby, listening surreptitiously from his office next door, stifled his laughter until after the news guy left!

Comments

[Guy]

Typical the-buck-stops-nowhere bureaucratic attitude. I wonder if my payment to the IRS was lost they would be out of luck?

[William]

Thousands of people a year lose their tax refunds? This is horrible? Can you point me to the relevant pages in Ms. Olson's '05 report?