The Internal Revenue Service has not developed sufficient processes to ensure that more than 61 million tax refunds were directly deposited last tax season to the correct bank account, according to a new report from the Treasury's inspector general.The Treasury Inspector General for Tax Administration said that the IRS places responsibility for compliance with federal direct deposit regulations on the taxpayer, and indicated that it is the taxpayer's responsibility to ensure that their tax refunds are directly deposited only into their accounts. TIGTA and representatives from the Treasury's Financial Management Service, however, believe that the IRS is responsible for enforcing the requirement.

The IRS has taken limited actions to ensure the accuracy of direct deposit information, noted TIGTA, but nonetheless, some tax refunds are being sent to accounts that are not in the taxpayer's name. The report found that last year, over 700,000 bank accounts received three or more tax refunds, totaling approximately $8.14 billion. In 2006, the IRS worked on an estimated 1,800 cases in which a taxpayer's refund was deposited into an account not in their name. The problems mainly resulted from a taxpayer or IRS transcription error, with most attributed to taxpayer error.

TIGTA recommended that the commissioner of the IRS's Wage and Investment Division should coordinate with responsible federal agencies and banking institutions to develop a process to ensure that direct deposit payments are made only to a deposit account in the name of the recipient. Meanwhile, the IRS should limit the number of direct deposits being sent to the same account. Also, an education campaign should be developed to alert stakeholders of the requirements. Finally, the IRS should also improve procedures for assisting taxpayers in recovering their erroneously deposited tax refunds.

The IRS disagreed that it should coordinate with responsible federal agencies and banking institutions because it is beyond the agency's jurisdiction. It also disagreed that it should limit the number of direct deposits to the same account, because it would not meet the requirements of the regulations and because of difficulties implementing a similar control in the past.

The IRS did not propose any significant corrective actions to address the first recommendation. IRS officials stated that they agreed with TIGTA's other two recommendations and plan to take corrective actions.

However, TIGTA is concerned with the lack of proposed corrective actions for its first recommendation. "Individuals have used direct deposit to commit refund fraud and there are instances in which thousands of refunds were sent to the same account in violation of federal regulations," said the report. "As the use of direct deposit grows, the risk of potential large-scale fraud will increase."

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