Civista Bancshares Inc. says it will “step away from its income tax refund business for 2024” after Treasury inadvertently sent $5.6 billion in stimulus payments to the company during the COVID-19 pandemic, leading to an influx of consumer complaints.
Civista said in an October SEC filing that the decision was made in the third quarter of this year and that the company earned $2.4 million per year for the previous three years from the program “with very few direct costs associated with it.”
Civista worked with the Santa Barbara Tax Processing Group (TPG), a subsidiary of Green Dot Corp., a financial technology and bank holding company. TPG provides a refund transfer service for taxpayers, which allows them to pay tax preparation fees out of their tax refund.
TPG manages and pays out tax refunds “for clients of many tax preparation franchises, independent tax professionals, and online tax preparation services,” according to responses to complaints on the Better Business Bureau website. Civista provides banking services for TPG’s refund transfer service, they say.
“We have had a long and very beneficial relationship with the Santa Barbara Tax Processing Group (TPG) and our income tax refund processing program,” Civista CEO and President Dennis G. Shaffer said in a statement. “This was not an easy decision, but one that we felt made sense for Civista.”
Unexpected Business
Refund transfer products have become more popular in recent years, according to a 2019 report from the Government Accountability Office. Typically, a temporary bank account is set up to receive the tax refund, a service for which the taxpayer pays a fee. Additional fees are paid to other parties involved in the transaction. Civista is just one of the banks involved in tax refund transfers.
Taxpayers using tax refund bank products were frustrated and confused when the IRS unintentionally sent stimulus payments to temporary bank accounts that they were unfamiliar with, a situation that was documented in news reports across the country during the pandemic. The issue likely most affected lower-income taxpayers who rely on the products to pay their taxes.
TPG said in an April 23, 2020, statement on its website that if it was unable to “identify the payment as an economic impact payment, the deposit will be processed as a federal refund, with all associated fees withheld from the deposit amount.”
A spokeswoman for Green Dot said the company didn’t charge any customers to process stimulus payments. “We believed this was the right thing to do for consumers/customers who needed access to those funds,” she said in an email.
Civista didn’t respond to requests for comment by press time.
Tax refund bank products have drawn criticism from groups such as the Center for Taxpayer Rights, which said in comments to the Consumer Financial Protection Bureau that “taxpayers who use [tax refund bank products] become bank customers during the transaction, frequently without realizing it.”
Natalie Loebner of Loebner Consulting told Tax Notes that the IRS did a good job disbursing stimulus payments to those taxpayers that provided the IRS with their own routing and account numbers in the “refund” section of Form 1040. But for taxpayers that used a tax refund bank product or didn’t sign up for direct deposit, that might not have been the case.
The exact reason for the issue with the stimulus checks is unclear, according to Loebner, a former trial attorney in the Justice Department Tax Division.
“My assumption is that the customer was only allowing the bank to open that account for the purpose of receiving this one-time disbursement, so when [the bank] got the secondary stimulus money, they probably weren’t authorized to receive it,” Loebner said.
Loebner pointed out that banks setting up temporary accounts for refund transfers should have known the stimulus checks would be sent to these accounts. “I don’t really understand a lot of the confusion,” she said.
Regulation
Civista said in the SEC filing that while the number of complaints it received has dropped, “the amount of information required by our regulators to ‘close out’ each complaint has increased extensively.”
“While our business partner has been responsible for gathering most of the information related to these requests, it has become apparent that our regulators’ view of this program is changing. Management has made the decision to step away rather than risk that our participation in this program might inhibit” future mergers and acquisitions, the company said.
Civista’s primary regulator is the Federal Reserve Board, which issued final guidance in June that requires banks to manage risks associated with third-party relationships.
The IRS and Treasury didn’t respond to requests for comment by press time.