US Treasury to Issue Prepaid Debit Cards for Tax Refunds

As I mentioned in an earlier blog, the U.S. Treasury is getting in on the growing prepaid debit card trend. Last fall, they announced plans to test prepaid debit cards as a means of providing tax refunds to thousands of low and moderate income taxpayers for the 2010 tax year. Last month, they mailed some 600,000 letters to taxpayers making less than $35,000 a year offering them the option of receiving their refunds on a MyAccountCard Visa Prepaid Debit Card. In addition, the Treasury is also offering automatically deposited tax refunds to thousands of existing employees currently using debit cards for payroll check deposits.

The obvious benefit to the Treasury is the large savings of an estimated $40 million in mailing costs. (They claim it costs them roughly a dollar to mail a tax refund check vs. about 10 cents to deposit money onto a debit card.) Sounds great for the government … right? But what about the taxpayer?

Impact to Taxpayer of Debit Card Tax Refund

For those taxpayers electing to receive their refund via a prepaid debit card, the Treasury claims they will benefit from a refund method that is “faster and safer.” But there is a cost associated with these debit cards. Depending on which version of the debit card they select, taxpayers can incur fees such as monthly service fees ranging from free to $4.95 per month, fees for using out-of-network ATMs, as much as $4.95 to add money to the card, and $2.50 to withdraw cash from a bank teller. For low-income taxpayers who don’t have bank accounts and have trouble cashing checks, this may well be worth the costs. But, before you make a decision, carefully review the different card options being offered to see which is the best for your given financial situation and the way you spend and access your money. I am concerned that some taxpayers could end up losing a fair amount of the refund to fees.

In addition to the taxpayer cost concern, I have real concerns over the process used by the Treasury Department to launch this new tax refund initiative and who really stands to benefit. How did Utah-based Bonneville Bank and Green Dot Corp., the prepaid debit card provider and the largest player in the prepaid debit-card industry, get selected? I'm also concerned that these cards are just another way for banks and credit card companies to profit from excessive fees, especially fees impacting those who can least afford them - low income families and those with a lot of debt. Apparently I’m not alone. Congress, especially the Ways and Means committee, is asking similar questions.

Let me know what you think about this or your experience with prepaid debit cards.