Simply put, the road map to the second round of COVID stimulus payments has been incredibly complicated.
As you may have heard elsewhere, there is one major complication of the issuance of second COVID stimulus payments. A small subset of Refund Transfer clients are affected, with Boundless Tax as well as other providers.
What is a Refund Transfer?
A Refund Transfer is when a taxpayer pays their preparation fees to their tax professional (or software) using their refund. This service is offered as a convenience to taxpayers that may not have the funds available to pay for tax preparation.
The issue lies within how Refund Transfers work. A Refund Transfer uses an intermediary bank to make the entire process seamless for the taxpayer. A “dummy” bank account is created with an intermediary bank when a taxpayer elects a Refund Transfer. This bank then will receive the taxpayer’s Federal tax refund first.
When this intermediary bank receives the taxpayer’s tax refund from the IRS, it withdraws preparation fees due to the tax professional. Then, it forwards the fees to the tax professional, and the rest of the refund to the taxpayer. This usually happens with no additional processing time, so it is highly convenient.
Why Does This Affect Second Stimulus Payments?
To recap, it goes something like this:
IRS –> Intermediary Refund Transfer Bank –> Taxpayer’s Bank Account
The stimulus payment error occurs with these intermediary “dummy” bank accounts. Because this is where the IRS first deposited the Federal tax refund, this is the direct deposit account on record. Since these accounts are created only for the specific purpose of a Refund Transfer, they have now been marked closed. Meaning the IRS has millions of “closed” bank accounts on file that they have attempted to issue stimulus payments to.
During the first round of payments, money that went to these closed intermediary bank accounts was returned to the IRS. Then, it was up to the taxpayer to provide accurate direct deposit information via IRS.gov’s Get my Payment tool. If they did not provide accurate information, a check was mailed to the address on file instead.
The Recovery Rebate Credit & Initial IRS Guidance
With the second round of payments, the IRS has a very short window to issue payments. This window is much shorter than the first round, since tax filing season for the tax year 2020 has begun. Originally, IRS guidance told taxpayers and tax professionals alike that January 15th was the deadline to receive a payment. If a taxpayer did not receive their second payment by that date, they then claim the Recovery Rebate Credit. This credit is claimed when filing a 2020 tax return.
The Recovery Rebate Credit takes the $600 each taxpayer was supposed to receive for their second stimulus payment and credits it on the tax return instead. So any refund already received would be increased by $600 to make up for the missed stimulus payment.
That all sounds great, right?
Well, keep reading.
Latest IRS Guidance on Second Stimulus Payments
On January 11th, the IRS completely reversed course on their initial guidance. They now said they will be reissuing payments issued to these “closed” intermediary Refund Transfer bank accounts. And the deadline for this is now by February 1st.
Simply speaking, if you have not yet received your second stimulus payment, first check the IRS.gov’s Get my Payment portal. If it states no information available, you will likely receive your second stimulus payment by February 1st. If you have not received it by then, you will claim the Recovery Rebate Credit on your 2020 tax return.
For those that are missing their second stimulus payment, Boundless Tax is advising to wait until after February 1st to file 2020 tax returns. Although, there has been no official guidance issued by the IRS in this area. However, this allows time for your second stimulus payment to arrive. Taxpayers who wait will also know whether to claim the Recovery Rebate Credit or not.
If you file before February 1st and claim the Recovery Rebate Credit, taxpayers run the risk of receiving the stimulus funds twice. If this occurs, we fear that some taxpayers who are not informed about the special situations occurring will spend the funds, only to have the IRS request them back in the near future.
