What do you do with tax refund credits that you suspect might be fraudulent? The NACHA/IRS Refund Return Opt-In Program was developed to make it easier for financial institutions to return these credits using return reason code R17, after signing an agreement to opt-in to this program.
According to the Rules, Return Reason Code R17 is defined as File Record Edit Criteria. This is used if the entry cannot be processed by the RDFI, the field(s) causing the processing error must be identified in the addenda record information field of the return. This return reason code can be used to return the entry to the ODFI by the opening of business on the 2nd banking day following settlement.
The Opt-In program is opening up participants to use return reason code R17 for a different reason- tax refunds with suspected errors or fraud. The specific reason is then indicated with the sub-codes in the addenda fields, and can be name mismatch, ID theft or questionable fraud. Questions or difficulties using the R17 sub-codes in the Addenda Information field may contact the IRS at Kristen.A.Landreth@irs.gov.
This program also increases the return time frame, allowing R17 return entries for up 60 days from the Settlement Date of the original PPD credit entry. If this deadline is missed, a Program Participant can contact the IRS’ External Leads Program to obtain permission for a late Program Return at efleads@irs.gov.
As the Treasury receives IRS payments returned R17, they are sending a follow up to the Financial Institution asking for the Account Owner. It is not required that you respond to these requests and they do not want to inconvenience the Financial Institutions. If you have the time to process the requests, they ask for a turnaround within 5 business days.
There is also a state opt-in program through NACHA. The Programs work the same exact way with the same language in the agreements, the only difference being that one is for the IRS and one is for State refunds. The agreements can be found at these links.
IRS Refund Return Opt-In Program: https://www.nacha.org/system/files/resources/IRS-Refund-Return-Opt-In-Program-Agreement-2017_0.pdf
State Tax Refund Opt-In Program: https://www.nacha.org/system/files/resources/State-Tax-Program-Agreement-RDFI-Mar-2017%20%28online%20submission%29.pdf
In conclusion, the main benefit for opting into these programs as a Financial Institution is that you have a return reason code you can use for potential tax refund fraud, you can use the R17 beyond 2 banking days and with permission even beyond 60 days. As a Participant of this Program, you will also help decrease fraud among income tax payments by preventing future fraudulent transactions.