A Dollars and Sense Rationale to Deliver Accounts at Tax Time

Each year the U.S. Treasury Department issues over one-hundred million refunds worth billions of dollars to individual tax filers.

Almost half of all refunds are issued via a paper check, with the majority of those checks being mailed to lower-income households. This presents a scaleable opportunity to provide these households with a low-cost transaction and savings account on the tax form.

IRS data show that of the 60 million federal tax refunds that were issued via a paper check in 2005, almost half were mailed to households earning $30,000 or less. These are the very households who typically lack access to reasonably-priced financial services and who are most likely to pay a disproportionate amount of their income to conduct routine financial transactions. They are also less likely to have adequate savings to cover emergency expenses like car repairs or unexpected medical bills, which often leads to payday lenders and other expensive sources of credit.

These households do, however, receive on average about $1,700 in federal tax refunds. And when examined in the aggregate, almost $50 billion is annually refunded to households with AGIs of $30,000 or less, via paper check.

The potential of those refunds as deposits creates a powerful case for financial institutions to make a low-cost transaction and savings product available to lower-income consumers.

And the millions of dollars in cost savings to the federal government in delivering these refunds electronically, combined with the policy objective of helping to "bank the underbanked," present a strong case for the federal government to provide tax filers with an option for such an account on the tax form.

Envisioned as a large-scale federal policy, the Assets and Transaction Account, or ATA, would be a prepaid account that would be delivered to tax filers who didn't direct deposit their refund into an existing account or elect to receive a paper check.

Financial institutions would issue the ATAs, which would be initially funded with tax refunds. Other deposits, including wages and salary and federal benefits, such as social security payments, could also be made into the accounts throughout the year. To facilitate savings, five percent of the tax filer's refund would be automatically deposited into a savings purse of the account. At a minimum, the ATA would be FDIC-insured, network-branded, and provide ATM access, POS capabilities, and web- and phone-based bill payment options, thus allowing the ATA-holder to use their account to conduct routine financial transactions and build some savings at a reasonable price.

By leveraging billions of dollars in annual tax refunds, there is enormous potential to deliver a financial product that benefits consumers, industry, and the government alike.