NEW YORK -- Low-income taxpayers who don't have bank accounts will be able to get their tax refunds this year on prepaid debit cards supplied by the government, the Treasury Department said Thursday.
The department plans to send letters to 600,000 households next week, asking them to take part in a pilot program to put their tax refunds on the debit cards, which can be used to get money from ATM machines, pay bills or to buy goods and services from retailers.
The Internal Revenue Service is aiming to reduce the amount of paper it handles. To encourage taxpayers to file their returns electronically, for instance, the IRS is not mailing paper forms to taxpayers this year.
It will still be sending out refund checks but is seeking to reduce the number -- about 35 million were mailed in 2010 -- by encouraging direct deposit. For those without bank accounts, the debit cards will allow them to avoid check-cashing fees or costly refund anticipation loans and checks.
Direct deposit is also faster. It takes 10 days or fewer for the IRS to process a tax return and deposit a refund electronically. A mailed paper check may not reach a taxpayer for up to six weeks.
The new debit card, called MyAccountCard, is issued by Bonneville Bank, a community bank based in Provo, Utah. It will bear a Visa logo. Funds on the card are backed by Federal Deposit Insurance Corp. like regular bank accounts.
Treasury said it will test different fees as part of the pilot. Half the cards in the pilot will include no monthly fee, while the other half will carry a $4.95 monthly fee.
Cardholders won't have to pay service fees if they use the cards to withdraw money from ATMs in the MoneyPass network. All of the cards will carry a $2.50 fee for out-of-network ATM withdrawals, and a 50-cent fee for using out-of-network ATMs for balance inquiries.
There may also be a fee up to $4.95 for making in-person deposits on the cards, which can be done at retailers like Wal-Mart Stores, 7-Eleven, K-Mart and major drug store chains.
A second pilot started this week will notify tens of thousands of payroll card users that they can direct deposit their federal tax refund onto existing payroll cards.
Treasury said more than 1.7 million workers nationwide use payroll cards to receive and access their wages, often because they do not have bank accounts. The agency is working with payroll service provider ADP to notify payroll card users they can get tax refunds deposited onto those cards.
Using prepaid cards to receive tax refunds is not new: the nation's two largest tax preparers, H&R Block Inc. and Jackson Hewitt Tax Services Inc., have for several years offered their own versions of prepaid cards for their customers to receive their refunds. Individuals can also request that their refunds be deposited onto prepaid cards bought elsewhere, or onto payroll cards.
Still, the new Treasury-sponsored card is expected to appeal to taxpayers who have in the past used refund anticipation loans to get access to their tax refunds quickly.
These loans typically are offered by tax preparers to give their customers quick access to their refunds, but have been criticized for coming with exorbitant interest rates and additional fees. About 8 million taxpayers nevertheless used refund loans last year, mainly because they provide quick access to what is often the largest single infusion of funds during the year for low-income workers.
For the current tax season, refund anticipation loans -- often called "Rapid Refunds" -- will be even more expensive and harder to get than in the past. That's because the IRS has stopped using a code that told tax preparers whether individuals would receive their entire refund, or if some would be held back to cover back taxes, missed child support, student loan payments or other liens. Tax prep companies used the code, known as a debt indicator, as a sort of credit check for a population seen as high risk.
Since the IRS said in August that it would discontinue the code, much of the bank funding for refund loans has dried up. H&R Block and a large number of independent tax preparers have lost their funding. Jackson Hewitt and No. 3 tax preparer Liberty Tax Services Inc. will have loans available.
Some tax preparers who do not have refund loans are likely to promote refund anticipation "checks," which are actually temporary accounts opened to receive refunds. Consumer advocates say these also often have high fees attached.
Jean Ann Fox of the Consumer Federation of America, which has long discouraged taxpayers from using refund anticipation loans because of their high costs, was upbeat about Treasury's pilot program.
"This is a relatively low-fee card compared with others on the market," she said. "This is a better bet than paying about $30 for a refund anticipation check."
One factor that increases the appeal of refund loans and checks is going unaddressed in the Treasury program: Tax preparers typically allow customers who use those products to pay the cost of filling out their returns with their refunds.
The IRS has a program called Free File that allows taxpayers to file simple returns electronically, with software available at no cost to those who earn less than $58,000 a year, and makes electronic forms available for higher income earners. Taxpayers can also avoid preparation fees by taking advantage of volunteer tax-prep programs. Details about these programs are available on the IRS website, www.irs.gov.
Associated Press writer Stephen Ohlemacher in Washington contributed to this report.