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MSP #11: PAYMENT CARDS

Payment Cards Are Viable Options for Refund Delivery to the Unbanked and Underbanked, But Security Concerns Need to Be Addressed

TAS Recommendations and IRS Responses

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1.

TAS RECOMMENDATION #11-1

Participate in a government-sponsored prepaid debit card program (such as Direct Express) offered at no cost to taxpayers.

IRS RESPONSE TO RECOMMENDATION: IRS does not agree that we should participate in a government sponsored pre-paid debit card program (such as Direct Express) for several reasons.  As noted, there have been previous pilot tests conducted offering a government-sponsored tax refund debit card.  In 2011, both the Department of Treasury and IRS’ SPEC organization conducted debit card pilot programs. Treasury ultimately made a decision to terminate the debit card pilot for refunds and has not offered it since that time.  The IRS, in evaluating its pilot program, determined that the uptake rate was so low that continuous use of the debit card program was not feasible.   Participating in a government-sponsored pre-paid debit card program would be in conflict with our collaborative efforts over the past several years with financial institutions and industry, where we have worked together in an effort to close the gap on identity theft and refund fraud. Financial institutions have provided IRS with information to assist us in the revenue protection processes, made changes to refund filters, and implemented processes and programming to identify refunds that have gone through our processes. This collaboration has allowed us to implement new initiatives, improve our processes, and implement strategies to address concerns with bank products identified over the past several years.  The IRS is unaware of any additional security features that Direct Express cards offer over any other bank account and routing number. Direct Express cards appear to contain the same constraints as other accounts, including the inability to identify the name of the account holder, account take overs, deposits that are not in the name of the taxpayer, and limited filtering on behalf of some banks to assist in the identification of refund fraud. Thus, we believe that any Direct Express or other initiative for pre-paid cards could ultimately result in the same concerns as existing financial institutions and may not result in lower fees for taxpayers. Financial institutions have initiated new products over the past two years to further expand customer bases, including early access products which offer no penalties and limited fees for taxpayers.

CORRECTIVE ACTION: N/A

TAS RESPONSE: We appreciate the recent efforts by the IRS to work collaboratively with the private financial sector to find ways to combat fraud. We hope that the IRS is correct in its optimistic view that financial institutions will broadly offer to taxpayers low- or no-cost products to receive tax refunds.  We do not find the IRS’s reasons to decline participating in the existing Treasury-sponsored debit card program to be persuasive. When the IRS characterizes a debit card as being a “one-time” use to deliver a tax refund, it is clear that it is taking an IRS-centric view. From the taxpayer’s perspective, the Direct Express debit card would not be discarded after it was loaded with a tax refund. Rather, taxpayers would be able to spend the refund amount in multiple transactions. Furthermore, if taxpayers were able to use the same Direct Express card already being used to receive other government benefits, then that would offer additional convenience. Even if the uptake rate would be low, what is the downside for the IRS opting to participate in the Direct Express program? We continue to believe that consumer interests are better served if taxpayers are given the opportunity to use Direct Express (or other government-sponsored pre-paid debit card). For the millions of taxpayers that are unbanked or underbanked, they can benefit from the increased bargaining power of Direct Express to negotiate lower fees or more features. The IRS needs to look at this in a holistic way when analyzing the costs and benefits of participating in the Direct Express program.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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2.

TAS RECOMMENDATION #11-2

Add “Direct Express” and “Other Payment Card” as additional refund type options in the Refund section of each of the Form 1040 series.

IRS RESPONSE TO RECOMMENDATION: The IRS does not believe that adding additional account types to the Form 1040 series would provide benefit in identifying fraudulent refund claims. Because the IRS cannot distinguish between a bank account and a prepaid debit card, we would not be able to detect if the filer checked the wrong box for an account type. Therefore, any potential filters that might indicate increased risk of fraud based on the account type would be largely ineffective.

CORRECTIVE ACTION: N/A

TAS RESPONSE: To accurately assess the scope of the refund fraud problem, it is important that the IRS learn how much of the fraudulent refunds are loaded onto prepaid debit cards. If the IRS currently has no way of distinguishing between taxpayers directing refunds to a bank account versus a prepaid debit card, we would like the IRS to have discussions with financial institutions and with legislators as well as regulators to change that. Prepaid cards are too exploitable to perpetuate refund fraud, when there is no effective way for the IRS to even identify when they are being used.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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3.

TAS RECOMMENDATION #11-3

Conduct a pilot comparing the refund fraud rate of refunds delivered to the Direct Express card versus non-government-sponsored prepaid debit cards.

IRS RESPONSE TO RECOMMENDATION: Because the IRS cannot distinguish between types of accounts, we would not have the necessary information to compare the refund fraud rate for government versus non-government-sponsored prepaid debit cards.

CORRECTIVE ACTION:  N/A

TAS RESPONSE: To accurately assess the scope of the refund fraud problem, it is important that the IRS learn how much of the fraudulent refunds are loaded onto prepaid debit cards. If the IRS currently has no way of distinguishing between taxpayers directing refunds to a bank account versus a prepaid debit card, we would like the IRS to have discussions with financial institutions and with legislators as well as regulators to change that. Prepaid cards are too exploitable to perpetuate refund fraud, when there is no effective way for the IRS to even identify when they are being used.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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4.

TAS RECOMMENDATION #11-4

Work with large employers and major providers of payroll services to conduct a pilot evaluating the efficacy of using payroll cards to deliver federal tax refunds.

IRS RESPONSE TO RECOMMENDATION: Based on the progress the Security Summit working groups have made with identification of identity theft returns and our extensive analysis from a security perspective, we do not agree that introducing payroll cards would be beneficial at this point. We believe that the same constraints exist as with any other account, including the inability to identify the name of the account holder, account take overs, deposits that are not in the name of the taxpayer, and limited filtering on behalf of some banks to assist in the identification of refund fraud. Additional challenges such as changing employers, current business email compromise of Forms W-2, secure access and other constraints exist.  We are currently working with payroll companies as part of our Form W-2 Acceleration efforts and as a result of the implementation of the PATH Act in 2017. We believe that these efforts, along with our current initiatives through the Financial Services Working Group and Payroll subgroup, will continue to assist us in the fight against identity theft.

CORRECTIVE ACTION: N/A

TAS RESPONSE: We understand the frustration the IRS must feel when it is required to deliver refunds to a payment card when it is unable to confirm the identity of the payment card holder. However, because the holder of a payroll card is an employee of a known company, the IRS will have reliable information about the recipient of the tax refund — much more reliable information than it would have for an ordinary prepaid debit card. For this reason, we believe the use of payroll cards to deliver refunds should be explored. The IRS may be right — the use of payroll cards may be of limited benefit — but we believe it is still worth exploring.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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