TaxAlmanac:Featured article/November 6, 2006

From TaxAlmanac

IRS Expands Taxpayers’ Options for Direct Deposit of Refunds

General

Hoping to encourage higher savings and more banking, the Internal Revenue Service announced that it will create a new program to allow taxpayers who use direct deposit to divide their refunds in up to three financial accounts.

New Form

The IRS will create a new form, Form 8888, which will give taxpayers greater control over their refunds. Form 8888 will give taxpayers a choice of selecting one, two or three accounts such as checking, savings and retirement account. Taxpayers who want all their refund deposited directly into one account can still use the appropriate line on the Form 1040 series.

"Direct deposit is growing rapidly and is now used by over half of all refund filers,” said IRS Commissioner Mark W. Everson. “This program will give taxpayers the option of depositing a refund into more than one account. Split refunds should encourage saving, and we hope it will dampen demand for refund anticipation loans.”

The program will take effect in January 2007.

Background

More than three-quarters of the nation’s taxpayers receive refunds each year. Last year, the average refund was $2,171. The IRS repeatedly has encouraged taxpayers to adjust their payroll withholding to ensure they pay only the taxes required, but some people appear to view payroll withholding as a way to save money.

Direct deposit of refunds was first offered in 1987. Last year, the IRS issued 100 million refunds (from 133 million tax returns) amounting to $217.6 billion. Of those figures, 52.7 million refunds amounting to $134.2 billion were deposited directly into bank accounts.