In a move set to redefine the refund process, the Internal Revenue Service (IRS), in collaboration with the U.S. Department of Treasury, has announced the gradual phasing out of paper tax refund checks starting September 30, 2025, as mandated by Executive Order 14247. This transition to electronic refunds marks a significant shift aimed at modernizing the system to enhance efficiency and security. However, it brings with it a complex set of challenges, especially for individuals who are unbanked or underbanked. Here, we explain what this means for taxpayers and explore the options available for those without access to traditional banking services.
The transition to electronic refunds is based on several compelling advantages. Compared to paper checks, electronic payments are over 16x less likely to be lost, stolen, or delayed, offering a more secure method for taxpayers to receive their refunds. Faster IRS processing times also mean that electronic refunds can be issued in less than 21 days if the returns are filed electronically. Additionally, there are no issues, unlike the several weeks it can take for non-electronic payments.
Additionally, the cost benefits are significant. Electronic payments reduce the costs associated with printing and mailing checks, thus allowing the Treasury to allocate resources more efficiently. During the 2025 tax season, a substantial 93% of federal tax refunds were already processed through direct deposit, indicating the acceptance of going paperless for the majority. This was accomplished because these taxpayers included their banking information on the tax returns they filed.
Challenges Facing Unbanked Taxpayers
Despite these benefits, the transition presents distinct challenges for the approximately 7% of recipients who still depend on paper checks. For many, especially those without access to current banking services, this shift necessitates urgent attention to viable alternatives, such as prepaid debit cards and digital wallets.
The American Bar Association (ABA) has voiced concerns regarding the rapid timeline of this transition, cautioning that un- and underbanked individuals may face unforeseen difficulties. The ABA has recommended that steps be taken to expand access to basic banking services and to educate the public on the potential risks associated with prepaid cards, which can sometimes incur higher fees and offer less consumer protection.
Moreover, the Tax Law Center has highlighted that prepaid cards, while a solution, might not be the most efficient option. This is due to the nature of annual tax refunds in contrast to monthly benefits traditionally paid via prepaid methods. They stressed the need for careful implementation to avoid costs potentially outweighing the benefits.
Proposed Solutions and Alternatives
To address these challenges, the IRS proposes several recommendations and initiatives that can help bridge the gap for those without a banking presence:
Prepaid Debit Cards: These cards offer an immediate solution that doesn't require a traditional bank account. However, taxpayers should be aware of any associated fees and the process for reissuing cards for annual tax refunds.
Digital Wallets: Services such as PayPal and mobile banking apps are viable options for receiving electronic payments. These platforms can be accessed with minimal initial setup, offering an alternative to bank accounts.
BankOn Initiative: This program aims to provide low- or no-cost banking services to underserved communities. Taxpayers are encouraged to explore accounts certified by the BankOn initiative, which feature low fees and no minimum balance requirements.
FDIC’s GetBanked Resources: Taxpayers can visit the FDIC's GetBanked website for guidance on opening a simple bank account. Many institutions offer accounts with nominal fees and requirements, which can be an excellent start for those new to banking.
International Considerations: For taxpayers abroad, the current policy restricts direct deposits into foreign bank accounts. While advocacy continues for changes to allow international ACH transfers, relying on existing accounts within the U.S. remains a suggested pathway.
The IRS's move to paperless refunds is both a forward-looking initiative and a logistical challenge, particularly for unbanked populations. The transition's success hinges on making sure all taxpayers are adequately informed and have access to alternative financial services. By exploring and promoting viable solutions, taxpayers can mitigate potential disruptions in their refund process and embrace the efficiency of electronic payments.
