IRS Issued Refunds Before Taxpayer Checks Cleared Bank

Cross References

TIGTA Report No. 2025-IE-R008, February 4, 2025 From January 1, 2023, through March 28, 2024, the IRS processed over 1.5 million dishonored checks that were submitted as subsequent payments totaling nearly $4.7 billion. Since the IRS does not have a computer program that delays refund issuance for a sufficient time to allow it to receive dishonored check information from financial institutions, the IRS is at risk of generating millions of dollars in erroneous refunds.

The Treasury Inspector General for Tax Administration (TIGTA) recently performed an evaluation and identified 7,765 individual taxpayers who may have received approximately $43.7 million in erroneous refunds based on dishonored checks that posted to their tax accounts from January 1, 2023, through March 28, 2024.

In June 2024, TIGTA issued an alert to IRS management that erroneous refunds were being issued based on dishonored checks. In July 2024, the IRS provided the results of its review of 20 taxpayer accounts of the 7,765 individual taxpayers. The IRS determined that taxpayers potentially benefited from these payments due to a timing issue of the IRS’ system generating the refund before the IRS received notification of the dishonored check, which is consistent with TIGTA’s analysis.

In September 2024, the IRS provided the results of a separate review of an additional 20 taxpayer accounts. The IRS reviewed the accounts to determine whether other internal control procedures were able to stop the refund payment before it was sent to the taxpayer. For these 20 accounts, the IRS found that it was able to stop some of the refund payments before they were sent to taxpayers or taxpayers returned the refund checks uncashed. TIGTA confirmed the results of the IRS’ review. According to IRS management, although some of the refunds were likely due to unintentional errors by taxpayers, the potential for fraud and erroneous refunds remains.

In response to TIGTA’s alert, IRS management agreed to a computer programming change to delay refund issuance for two posting cycles to provide the IRS time to receive dishonored check information. Accordingly, TIGTA analyzed the accounts of the 7,765 taxpayers to determine the amount of potential revenue that could have been protected based on the IRS’ proposed computer programming. If the computer programming had been in place, the IRS could have potentially protected approximately $22.4 million in erroneous refunds based on dishonored checks for about 56 percent of the 7,765 taxpayers. TIGTA recommended that the IRS should ensure that a computer programming change is completed to delay the issuance of refunds based on payments for two cycles to provide the IRS time to receive dishonored check information from financial institutions. IRS management agreed with the recommendation.