Corona Cash and Refund Anticipation Checks

Vijay Raghavan, who will be joining the Brooklyn Law School faculty this summer and his colleague Tom James, shared a troubling observation about the payment of the recovery rebates ("Corona Cash" or "Mnuchin Mnoney") through direct deposit to taxpayers. It seems that the payments for around 15% of individual tax filings might be going to bank accounts that are closed or not controlled by the taxpayers. That 15% is surely a much larger percentage of households eligible for Corona Cash. I wouldn't be surprised if close to a quarter of eligible households are affected.

Raghavan and James write:

Recovery rebates (stimulus payments) under the CARES Act are supposed
to go out this week. A number of people have noted that the payments
will be delayed for unbanked consumers and the funds are at risk of
being swept by lenders or debt collectors. What has received less
attention is the fact that many banked or underbanked taxpayers may
not receive their rebates because they financed tax preparation with a
refund anticipation check (“RAC”). [AJL: this is different from a Refund Anticipation Loan, which advances the consumer part of the expected refund.]

RACs allow taxpayers to defer the cost of tax preparation and finance
preparation out of their refund. The refund is deposited in a
temporary bank account. The refund is then distributed to the taxpayer
minus preparation fees and ancillary fees via check, direct deposit,
or using some other payment instrument.

The conventional wisdom is RACs are primarily used by unbanked
consumers. But many banked or underbanked taxpayers may also use RACs.
Smaller tax prep chains and individual stores rely on RAC financing
for at least two reasons. First, the intermediaries these stores use
charge per transaction fees, which are easier to pay for out of a
taxpayer’s refund. Second, financing may make high preparation fees
less salient. As a result, it is not uncommon to find tax preparation
stores in low-income neighborhoods that refuse to accept upfront
payment and only process RAC-financed returns. In the 2018 tax year,
approximately 21 million returns were financed with RACs. [AJL: for context, consider that there were around 150 million individual returns filed in 2018.]

RACs present a few problems for stimulus distribution. If returns were
already filed and processed, the temporary banks accounts may be
closed, which will delay distribution of the rebate. If the temporary
account is still open, the rebate may sit in the account without being
distributed. There should be less problems if returns have not been
filed or are still pending. But if refunds are initially distributed
to the tax preparer as opposed to the taxpayer (which happens in some
cases), there is some risk tax preparer may take the additional money.

The good news is large chains like H&R Block and tax software
companies should have bank account information for the returns they
processed. They could turn this data over to the Treasury but the
CARES Act may limit the Treasury's ability to disburse payments. The
CARES Act seems to only allow electronic disbursement to accounts the
taxpayer has previously authorized. Taxpayers who regularly financed
tax prep with RACs likely have not authorized disbursement to their
own bank account. Treasury probably has to lean on preparers and
software companies to ensure that payments to RAC-financed returns are
disbursed to the taxpayer bank accounts.

The problems in doing a quick disbursal of Corona Cash highlight some deficiencies in the US payment and banking system. The House counterproposal to the CARES Act had in it a provision for the creation of FedAccounts--giving every consumer a bank account held at the Fed. It's kind of late in the game to try and set up such a system to deal with the corona virus crisis, but the crisis is exposing areas that need to be shored up going forward.