Bank Rejected Tax Refund: What Can You Do?

Article Summary:

Banks typically reject tax refunds due to a wrong account number or routing number on the recipient’s tax return. If your bank rejected your tax return, it’ll likely release the funds back to the IRS. The IRS will then issue a paper refund check. Avoid all of this by checking that you’ve entered the correct bank information on your tax return.

Getting a tax refund can make you feel on top of the world. That’s why getting your refund rejected is so irritating. Most U.S. taxpayers choose to receive their tax refunds via direct deposit into their bank account. It’s easy and quick, but there’s a chance your bank rejects the refund payment. Keep reading to learn why a bank might reject a tax refund and what you can do if it happens to you.

Tax refund definition

A tax refund indicates that you paid more taxes to the state or federal government than you needed to. For example, if you owe $15,000 in taxes, but you paid $17,000 in total throughout the previous tax year, you’ll get a $2,000 tax refund. You may also receive a tax refund if you qualify for a refundable tax credit, such as the Earned Income Tax Credit (EITC), premium tax credit (PTC), or Child Tax Credit (CTC).

Some argue that getting a tax refund is bad because it means you gave up money throughout the year that you could have used otherwise. Others argue that tax refunds are good and even look for ways to get a tax refund. It all comes down to your situation and perspective.

About 90% of people file their taxes electronically. Many use tax preparation services such as Liberty Tax Online or FreeTaxUSA. If you’re not sure which tool to use, you can compare tax preparation services using the comparison tool below.

How does the IRS issue tax refunds?

The Internal Revenue Service (IRS) issues refunds using two methods: direct deposits and paper checks. Let’s look deeper into these two tax refund methods.

Direct deposit

Most people opt for direct deposit for convenience and security reasons. When e-filing your taxes, the IRS instructs you to “select [direct deposit] as your refund method through your tax software and type in the account number and routing number. Or, tell your tax preparer you want direct deposit.” Once the IRS validates and approves your banking information, it will send your refund right into your bank account.

Pro Tip

Even if you’re part of the 10% of people who files taxes by paper, you can still elect to receive your refund via direct deposit. Just indicate direct deposit as your preferred method of refund and provide your account number and routing number.

Paper check and mail

The other, less popular refund method is paper checks. The IRS will issue a paper check and mail it to the most recent address on file. A paper refund check is subject to natural events and mail service issues, which may cause it to take longer to arrive at your home.

If you’re more comfortable doing it the old-fashioned way, select paper check as your refund method and make sure your address is up-to-date. Tax refund checks can take anywhere from six to eight weeks to get delivered.

Check your refund status

You’ve submitted your taxes, and now you’re waiting for your tax refund to show up. The IRS’s “Where’s My Refund” tool allows you to check on the status of your refund daily. Visit the IRS website, navigate to the “Where’s My Refund” tool, and enter the tax year, your Social Security number, your filing status, and the refund amount as shown on your tax return.

Special cases

Sometimes your refund status will indicate delays or rejections on behalf of the IRS. If your status mentions Tax Topic 152, it means your refund may be delayed. There’s nothing to worry about. Read this article from SuperMoney to learn more.

If you get notice of Tax Topic 151, it means that the Department of Treasury is withholding or reducing your tax refund. Learn more about what this means and what you can do about it in this article from SuperMoney.

Although rare, several other special cases might show up for you. The IRS website can usually help explain what they mean. Call a trusted tax professional for any specific questions.

Why did my bank reject my tax refund?

You’ve chosen to go with direct deposit for your tax refund and now your bank has rejected the refund. There’s likely a logical reason behind it. Let’s look at the normal process of a direct deposit tax refund to further understand why it might have been rejected.

Typical tax refund process

  1. You submit your tax return which indicates that you get a refund. You’ve selected direct deposit for your refund method and entered your bank account information.
  2. The IRS receives your return, approves the return and refund amount, and runs a validation check on your bank account information. This check doesn’t make sure the bank account information is correct, but instead validates that there are the correct amount of numbers. If there aren’t enough numbers, you fail the validation check, and the IRS sends your refund via paper check.
  3. If you pass the validation check, the IRS releases the funds to your bank account.
  4. Once your bank receives funds from the IRS, it can either accept or reject the deposit. If accepted, the money will get deposited into your account.

So, why would the bank reject your tax refund direct deposit?

The main reason is that you entered incorrect banking information on your tax return. Incorrect banking information may look like any of the following mistakes:

  • Incorrect account holder name. If the name associated with your bank account doesn’t match that on your tax return, then your bank may reject it. The IRS states that “your refund should only be deposited directly into U.S. bank or U.S. bank affiliated accounts that are in your own name; your spouse’s name[;] or both if it’s a joint account.”
  • Incorrect numbers. The IRS may validate your account and routing numbers because they’re the correct amount of digits. However, if you slipped up and typed in even one wrong digit for your account number or routing number, your bank may reject the deposit.
  • Incorrect bank name. While this is a very uncommon mistake, if you write the wrong financial institution name down for your tax refund, it will get rejected.
Watch your refund count — The IRS only allows you to split a refund into a maximum of three different accounts or prepaid debit cards. If you exceed the limit, the IRS won’t release the money to your bank at all. They’ll send you a notice and a paper check for your refund.

What to do if your bank rejects your tax refund

First, don’t worry. If your bank rejects the tax refund, your money likely isn’t lost forever. Usually, the money will bounce back to the IRS. The IRS will then issue a paper check to the address on file. This is the most common scenario. However, there are a few alternative scenarios that may play out depending on your situation.

  • If you already submitted your tax return but realize you’ve messed up your banking information, act quickly. Check if the return has been posted to the “Where’s My Refund” system. If not, call the IRS at 800-829-1040 from 7 a.m. to 7 p.m. Monday through Friday. You won’t be able to change information on your tax return, but you can request a paper check instead. If your return is already posted to the IRS system, it is too late to stop the direct deposit. You can still contact the IRS with questions or concerns.
  • If you mistakenly entered someone else’s banking information and the associated financial institution accepts the deposit, it’s out of the IRS’s hands. You must work with the receiving institution and account holder to resolve the situation and recover your refund.
  • If you’ve had no luck contacting the bank to resolve a rejected refund issue, you can take further action. After two weeks, you can file Form 3911, Taxpayer Statement Regarding Refund. This will get the IRS involved in attempting to recover your refund. In rare cases, a bank may refuse to return funds.
Tip from the pros — It’s important to keep a paper trail of all communication and documentation throughout this process in case it becomes a civil matter.

How to avoid tax refund errors

How do you avoid this altogether? The answer is simple. Make sure your direct deposit information is correct. Double-check your names and numbers. Triple-check them if you have to just to be sure. You might even want to ask your spouse, a parent or sibling, or a trusted friend to review if you don’t feel confident. Taking the extra few minutes to verify your numbers before submitting your tax return can save you a whole lot of hassle down the line.

Key Takeaways

  • Banks usually reject tax refunds because of incorrect banking information. Check to make sure you entered the correct account number, routing number, bank name, and account holder name to avoid having this happen.
  • If you realize that you entered incorrect banking information, but you’ve already submitted your tax return, call the IRS immediately to try and resolve the problem.
  • Banks usually release rejected refunds back to the IRS. The IRS then sends a paper check within six to eight weeks.
  • Keep a thorough record of your tax return and refund process. If you run into issues getting your refund, it’s good to have documentation to back up a potential legal case.

Tax relief tips and a warning about debt collectors

Are you looking for ways to get tax relief? There are circumstances such as unemployment that can make you eligible for tax relief. Check out SuperMoney’s ultimate list of the best tax relief companies with a money-back guarantee.

Not seeking tax relief but worried about other debts? If you have outstanding debts, a debt collector could garnish your tax refunds. Learn more from SuperMoney in this article.

View Article Sources
  1. About Form 3911, Taxpayer Statement Regarding Refund — IRS
  2. Refund Inquiries 18 and 20 — IRS
  3. Refunds — How Long Should They Take? — IRS
  4. Useful background article from Chime and Turbo Tax, and from personal finance and tax preparation sites — Various
  5. What to Expect for Refunds This Year — IRS
  6. Best Tax Relief Companies with a Money-Back Guarantee — SuperMoney
  7. Can Debt Collectors Take Your Tax Refund? — SuperMoney
  8. Compare Tax Preparation Services — SuperMoney
  9. FreeTaxUSA Review — SuperMoney
  10. Getting A Tax Refund Is Bad: Here’s Why — SuperMoney
  11. How to Guarantee You Will Get a Tax Refund Next Year — SuperMoney
  12. Liberty Tax Online Review — SuperMoney
  13. Tax Topic 152 Refund Information: Is It Good Or Bad? — SuperMoney
  14. Unemployment Tax Relief and IRS 310 Tax Relief — SuperMoney
  15. What Does Tax Topic 151 Mean for Me? — SuperMoney