Article Highlights:
The Internal Revenue Service (IRS), in partnership with the United States Department of Treasury, has stated that paper tax refund checks would be gradually phased away beginning September 30, 2025, as stipulated by Executive Order 14247. This transition to electronic refunds is a significant step toward upgrading the system in order to improve efficiency and security. However, it presents a complex set of issues, particularly for those who are unbanked or underbanked. Here, we will look at what this means for taxpayers and the options open to people who do not have access to regular banking services.
There are various strong reasons to switch to electronic refunds. Electronic payments are more than 16 times less likely to be lost, stolen, or delayed than paper checks, making them a more secure way for taxpayers to collect their refunds. Faster IRS processing times also mean that electronic refunds can be issued in fewer than 21 days if the taxes are filed electronically and there are no difficulties, as opposed to the many weeks that non-electronic payments may take.
Furthermore, the cost advantages are enormous. Electronic payments cut the expenses of printing and mailing checks, allowing the Treasury to spend resources more effectively. During the 2025 tax season, a significant 93% of federal tax refunds were processed by direct deposit, suggesting widespread acceptance and feasibility of going paperless for the majority. This was possible because the taxpayers included their banking details on the tax returns they submitted.
Despite these advantages, the changeover poses unique obstacles for the approximately 7% of recipients who continue to rely on paper checks. For many people, particularly those without current banking services, this transformation needs immediate attention to viable alternatives like prepaid debit cards and digital wallets.
The American Bar Association (ABA) has expressed alarm about the rapid pace of this change, warning that unbanked and underbanked individuals may confront unexpected issues. The American Bankers Association has advised that actions be taken to provide access to basic banking services and educate the public about the possible risks connected with prepaid cards, which can often carry higher costs and provide less consumer protection.
Furthermore, the Tax Law Center has stated that, while prepaid cards are a solution, they may not be the most efficient option due to the nature of annual tax returns, which differ from monthly benefits normally paid via prepaid ways. They underlined the importance of careful execution to avoid costs outweighing benefits.
To solve these problems, numerous proposals and efforts can help bridge the gap for those who do not have a financial presence.
1. Prepaid Debit Cards: These cards provide an immediate option that does not require a typical bank account. Taxpayers should be aware of any associated fees and how to reissue cards for annual tax refunds.
2. Digital Wallets: PayPal and mobile banking apps are good solutions for accepting electronic payments. These platforms can be accessible with less initial setup and provide an alternative to bank accounts.
3. BankOn Initiative: This program seeks to give low- or no-cost banking services to underprivileged populations. Taxpayers are invited to examine BankOn-certified accounts with low fees and no minimum balance requirements.
4. FDIC GetBanked Resources: For information on opening a simple bank account, taxpayers can go to the FDIC's GetBanked website. Many institutions provide accounts with low costs and requirements, which can be a good starting point for individuals new to banking.
5. International Considerations: The existing policy prohibits taxpayers from making direct transfers into overseas bank accounts. While there is ongoing agitation for improvements to allow foreign ACH transactions, depending on existing accounts in the United States remains a viable option.
The IRS's transition to paperless refunds is both a forward-thinking endeavor and a logistical difficulty, especially for unbanked individuals. The transition's success depends on ensuring that all taxpayers are well-informed and have access to alternative financial services. By investigating and supporting suitable options, taxpayers can reduce potential disruptions in the return process while also embracing the efficiency of electronic transactions.
This change will not affect taxpayers who already receive paperless refunds. Please contact this office if you have any questions.