The IRS has issued many checks in the past few years between tax refunds and Economic Impact Payments as a result of the CARES Act and the American Rescue Plan. These were also commonly known as "stimulus payments" and many were likely processed by banks that cash third-party checks.
Tax refunds are commonly issued as checks. While most individuals eligible for a tax refund will opt for direct deposit, refunds owed for a prior year's return are always issued by check.
There are multiple reasons why an individual may need to endorse a check over to another payee to cash the check. The IRS and banks are committed to eliminating fraud related to check-cashing and tax refunds, which impacts how they are handled; this includes cashing third-party checks.
What Is a Third-Party Check?
A third-party check is any check that is written out to one person or entity, but signed over or endorsed to someone or an entity other than the named payee on the check. The process of signing over a check to another person or entity is called endorsing the check.
Many banks and financial institutions will honor and cash third-party checks, provided an individual can provide adequate proof that they are the rightful endorsee for the check (there are even some mobile banks that accept third-party checks). Guidelines for a third-party check endorsement, at minimum, typically require a signature and note on the backside of the check indicating the new payee.
It is important to know ahead of time whether a bank or financial institution will honor a third-party check. Banks that cash third-party checks will have specific rules and there is no guarantee that an endorsed check will be honored.
Often, the original payee must be physically present at the bank to endorse a check over to a new payee. With the popularity of mobile banking, it is extra important to be aware of the regulations and restrictions around mobile banks that accept third-party checks.
What About Stimulus Payments?
The Treasury's Bureau of the Fiscal Service released guidelines for financial institutions to verify and process Economic Impact Payments that urge financial institutions to only accept properly endorsed checks. Fraud and identity theft represent major concerns for the IRS.
CNBC reports in 2020 the IRS flagged 5.2 million tax returns as being potentially linked to fraud. This number represents a 50 percent increase over 2019. The ability to claim a Recovery Rebate Credit for both 2020 and 2021 is another area of concern for fraud.
The IRS issued three stimulus payments between 2020 and 2021. There are a number of reasons why a taxpayer might not have received a payment. There are no specific IRS stimulus check endorsement rules outside those enforced by the government and each financial institution.
The IRS has allowed eligible taxpayers to recover unreceived payments as a refundable tax credit known as the Recovery Rebate Credit. If a taxpayer takes the credit but has already received payments, the IRS can deduct the credit from a refund or request the funds back.
How to Avoid Tax Refund Fraud
Each year, hundreds of thousands of taxpayers find themselves victims of tax fraud in the way of identity theft, according to the credit reporting bureau Experian. There are seven major categories of identity theft, with tax identity theft ranking fifth in 2020.
While credit card fraud is more prevalent, tax identity theft is still quite shocking when it occurs. Victims of tax identity theft will have to reach out to the IRS and follow all recommended guidelines, which may include receiving an Identity Protection PIN.
It is important to take care and verify all information on a tax return, plus follow all guidelines when seeking to cash a third-party IRS check. The IRS and financial institutions all abide by strict rules for the sake of security in order to avoid identity theft, money laundering and other types of fraud.
Hashaw Elkins is a financial services and tax professional, as well as a project management consultant. She has led projects across multiple industries and sectors, ranging from the Fortune Global 500 to international nongovernmental organizations. Hashaw holds an MBA in Real Estate and an MSci in Project Management. She is further certified in organizational change management, diversity management, and cross-cultural mediation.