It’s tax season, and along with the usual gripes, variations of this particular grievance are peppering consumer complaint sites, forums and blog comment sections (including on CreditCardForum.com):
I elected to have my tax refund direct deposited on a prepaid card. On the day I was supposed to get my refund, the card issuer asked me to send them my Social Security number, 1040 and all kinds of personal information before I can get my money. I sent that stuff a week ago, and my deposit is still in limbo. I call customer service, and they aren’t helping me. Where’s my money? What gives this company the right to hold onto it?
Granted, the posts are generally more strongly worded than that. It’s a frustrating situation. But why is it happening?
The crux of the issue is tax refund fraud. Thieves steal consumers’ personal information, use it to file tax returns in their victims’ names and collect their refunds before the victims have even begun filing. And it just so happens that prepaid cards are the method of choice among thieves to pull this scheme off, meaning these cards are under a lot of scrutiny when it comes to tax refunds.
“That’s exactly where thieves put the money, the bogus refund they’ve gotten,” says Mark Huffman, reporter for ConsumerAffairs.com.
Why prepaid cards? Direct deposits are the fastest way to get a tax refund. In fact, the IRS encourages consumers to take advantage of this method:
Federal law does require reloadable prepaid card issuers to collect certain identifying information on applicants (including address, Social Security number and date of birth) – but if someone’s already stolen your personal information so they can file a fake tax return, they’ve already got all that.
With that information, thieves can open a bunch of prepaid cards, fill in the routing number and account number on the fraudulent tax returns, hit the ATM as soon as the cards are loaded with the refunds, cancel the cards and make off with untraceable cash. Online tax preparation services (like TurboTax) also offer the option to have refunds loaded onto a prepaid card and mailed to the recipient, allowing fraudsters to have them mailed to co-conspirators or vacant apartments.
But why do I have to wait so long for my refund, just because there are thieves out there?
Tax refund theft is a costly problem. According to a Sept. 2013 report from the Treasury Inspector General for Tax Administration, fraudulent tax returns totaled about $3.6 billion in tax year 2011. Indictments for identity theft ballooned nearly four-fold between 2010 and 2012. It may come as no surprise then, that this burgeoning crime has left prepaid card issuers extra wary. While the IRS does not hold financial institutions liable for fraudulent tax refunds, federal law does require them to monitor for suspicious activity and report it. So if your return raises any red flags, you can expect the issuer to ask you for follow-up information before they release the funds to you. Policies vary by issuer, but here’s what the RushCard requires:
It’s this extra step that could be the root of a lot of tax-related prepaid card complaints.
“Based on the complaints I’ve looked at, the common complaint is that the bank says, ‘Well, you need to prove to us you are who you say you are,” Huffman says. “That suggests the return has been flagged as possibly problematic. It may not be. There could just be something about it that set off an alarm bell.”
After the consumer uploads (or faxes in) the necessary documents, the issuer will investigate. And that can trap the consumer in limbo for weeks. If customer service isn’t your issuer’s strong suit, the situation can become particularly torturous.
“It may be that some banks are better able to handle this than others,” Huffman says, adding that the growing problem of identity theft and the demands of tax season could catch some institutions off guard and ill prepared.
Customers getting the run-around while waiting for their money might find it hard to sympathize, though. Not only have they put away all their tax paperwork and started anticipating how they’ll spend their refunds, but they likely thought they were doing the smart thing by going the direct-deposit route.
“The IRS is saying, ‘Hey, we’d rather you do direct deposit. You’ll get your refund sooner,'” Huffman says. “And that’s another frustration for consumers because they’re doing direct deposit because they really want to get their refund, and now they’ve encountered this delay.”
So what can I do about all this?
Once your return is caught up in the suspected-fraud labyrinth, there’s not much you can do while the issuer and possibly the IRS sort out your identity.
Because prepaid cards may automatically raise suspicion, you might consider direct-depositing your refund into a checking or savings account. But, for those who don’t have bank accounts (or who want to keep their refund separate from the rest of their money for budgeting reasons), that’s not an option.
So the best route is to try to get prepaid card that has a good reputation. If you already have a relationship with a financial institution, consider asking about their prepaid card offerings. Otherwise, search online for complaints and reviews regarding the card you’re considering. If lots of recent customers have had tax return problems with that card, it’s a red flag that the issuer isn’t able to handle identity verification expediently.
“Being selective in what card you put it on might help,” Huffman says.