WASHINGTON — Some taxpayers will soon be able to have their tax refunds directly deposited into a low-cost bank account, under a new pilot program the Treasury Department announced Thursday.
The initiative is one of several attempts by Treasury to provide low-to-moderate income taxpayers with tools to avoid using high-interest payday and refund anticipation loans.
Treasury's Assistant Secretary for Financial Institutions, Michael Barr, said the effort will help low-to-moderate households obtain financial stability.
"Far too often, unbanked and underbanked Americans are forced to turn to high-cost alternative financial products — such as check-cashing and other services — that take a big bite out of the savings of those who can least afford it," Barr said, noting that tax refunds are the single largest income stream for many individuals.
The pilot accounts, created through the Federal Deposit Insurance Corp's "Model Safe Accounts Pilot" program, can be used year-round by taxpayers to pay bills, withdraw cash and make purchases. The accounts are essentially electronic because there will be no checks issued or linked to the accounts — only a debit card.
The pilot will launch during next year's tax return filing season. Treasury plans to evaluate the program for a period of time, after signing taxpayers up in the first quarter of 2011. The assessment will help determine the programs' future structure and feasibility.
"The idea of the pilot is to test what works and what doesn't work, whether the idea is a good idea, whether it helps people or doesn't help people; and then we'll make a decision about whether and how we should be broaden it to a national scale," Barr told Dow Jones. He later added if the project wasn't promising, Treasury wouldn't be investing much time and energy.
On outreach, Treasury plans to mail information in early 2011 to certain taxpayers. The department also said it will partner with the private sector to have informational brochures inserted into the paychecks and pay stubs of certain workers who do not currently use direct deposit to receive their tax return.
If successful, the program could potentially help steer millions of people away from high interest rate loans and into the mainstream banking system.
The Center for Economic Progress estimates as many as 26 million taxpayers could benefit from the proposed program. The center reached its projection by subtracting total refunds from the 2010 tax season — 96.3 million — from those who received direct deposit refunds that same season — 70.3 million.
An FDIC 2009 survey showed roughly nine million households were without bank accounts.
Along with the unbanked, 21 million more Americans are considered "underbanked" — people who have checking accounts but often turn to higher-cost services, such as payday loans and car-title loans, with annualized interest rates frequently exceeding 300%.
In trying to encourage more people to set up bank accounts, President Barack Obama — per Treasury's request — is seeking $50 million via his fiscal year 2011 budget from Congress to create a new program — "Bank On USA." The program, fitting into the administration's broader efforts, would help support state and local efforts toward getting more low-to-moderate income taxpayers into the mainstream banking system.
Even though Treasury hasn't released exact details pertaining to the program's launch and reach, Barr said Bank on USA will be a "national program designed to really change fundamentally the way financial services are offered."
Sudeep Reddy of The Wall Street Journal contributed to this article.