Ach Debit rejected by Bank, Now what??

[ATSMAN]

I was just alerted to an unusual situation. My client had to pay in 7 states plus IRS because of various K-1 income. The state balance due amounts were all less than $100, except for MA. The Fed balance due was $4500. The debit date selected was 4/15/2019. The bank rejected all the ACH debit because it exceeded the # of transactions allowed for that type of activity from that account (it was a saving account if I recall)and called the customer to tell them that they had rejected. Taxpayer rushed to the bank and manager told them that they should contact the tax return preparer with another account # and have it fixed ant the IRS and various state DOR.

How do you fix this issue after the fact with IRS and state DORs (NY, MA, CT, RI, NC, GA, CA).

Any suggestions. I need to act on this on MONDAY!

[Lion]

IRS's Direct Pay and the state equivalents, such as CT's Taxpayer Service Center. And, tell your client to move his money to a different bank when this is resolved and to tell the bank why!

[dtlee]

I had an account like that and the interest rate was associated with a limit of 6 debits per month. How is it the bank's fault that the customer wants a better rate but does not want to abide by the terms of the accoun?

[TAXNJ]

IRS's Direct Pay and the state equivalents, such as CT's Taxpayer Service Center. And, tell your client to move his money to a different bank when this is resolved and to tell the bank why!

Good suggestion but need to make sure that the same bank account is not used with the IRS direct pay

[ATSMAN]

Worked a good part of Friday evening resolving this problem. Followed Lion's suggestion and did IRS Direct Pay and state DOR online payments. NY was a pain because they force you to create an account first before online payment is allowed. They have a Quickpay option but that requires a assessment # or bill# from them first.
Most other states allow direct payment WITHOUT creating an account first.

A different account was used and taxpayer confirmed with the bank that there is no ach debit restriction.

Dtlee is correct. Taxpayer had a savings account that limited the # of transactions because it pays interest and they exceeded the # allowed for the month. I guess they were not aware of it.

Now the next issue to deal with is any interest and penalty because the original Ach debit scheduled for 4/15 was rejected and payment was made on 4/19. Hopefully we can score a penalty waiver. I did warn them that they may have to pay some interest for the delayed payment.

[dtlee]

ATSMAN,

For the IRS, I think there will also penalty will be assessed under §6657:

If any instrument in payment, by any commercially acceptable means, of any amount receivable under this title is not duly paid, in addition to any other penalties provided by law, there shall be paid as a penalty by the person who tendered such instrument, upon notice and demand by the Secretary, in the same manner as tax, an amount equal to 2 percent of the amount of such instrument, except that if the amount of such instrument is less than $1,250, the penalty under this section shall be $25 or the amount of such instrument, whichever is the lesser. This section shall not apply if the person tendered such instrument in good faith and with reasonable cause to believe that it would be duly paid.

As such, you will need to establish "reasonable cause" since any simpler method will not apply. You will need to document the facts such that you show that it was tendered in good faith and there was reasonable cause to believe that it would be duly paid (perhaps you can state that the funds were available [with proof attached] and indicate that the taxpayer did not know when the "month" began and ended for the transaction limitation to apply [certainly true among the many things the taxpayer apparently did not know]),

Good luck.

[ATSMAN]

ATSMAN,

For the IRS, I think there will also penalty will be assessed under §6657:
As such, you will need to establish "reasonable cause" since any simpler method will not apply. You will need to document the facts such that you show that it was tendered in good faith and there was reasonable cause to believe that it would be duly paid (perhaps you can state that the funds were available [with proof attached] and indicate that the taxpayer did not know when the "month" began and ended for the transaction limitation to apply [certainly true among the many things the taxpayer apparently did not know]),

Good luck.

That is exactly what I intend to do. The e-file with the direct debit info was submitted in good faith and on 4/15 there was sufficient funds available in the account to pay the full balance due. The only fly in the ointment is that taxpayer forgot there is a limit on the # of transactions in that particular account. To prove good faith the day taxpayer was alerted by the bank, they contacted me and by end of day alternative bank account was used to directly pay the full balance. If this does not at least get a waiver of penalty, I don't know what will. I think taxpayer is ok with paying the interest charge from 4/15 to 4/19 or the actual day of debit.

[Lion]

You did a great job for your client Atsman!

[ATSMAN]

While I understand your frustration with the delayed payment issues, the simple fact is that the CLIENT should have already known of these restrictions (imposed not by the bank but by the Federal Reserve Board) and then should have informed you of such.

Live and learn!

I think the taxpayer realizes that they should have known of the restrictions in their saving account. Had they been aware of it I am sure they would have used their checking account. My frustration was that it happened in the evening of Good Friday and by the time they called me there was not much I could do except what I ended up doing. They and I will be happy if the penalties are waived and they end up paying some interest.

Lesson learned. Next tax season I am going to ask all my clients that they better make sure before they give me the account # it does not have any ach debit restrictions. In all my years doing ach debits on tax balance due returns, this is the first time I ran into this problem. This reminds me of a handful of older clients who still insist on paying balance due with a money order, or a bank check.

[TAXNJ]

….While I understand your frustration with the delayed payment issues, the simple fact is that the CLIENT should have already known of these restrictions (imposed not by the bank but by the Federal Reserve Board) and then should have informed you of such.
Live and learn!

FE

Best reply post. End of discussion.

[rtsietsema]

One more reason I have my client’s debits set to draw on April 12. It allows time for fixing a potential problem. I’m sure the interest earned in three days is not worth worrying about, considering the rate most banks are paying.

[Burke]

And frankly, 6 allowed debits per month is pretty generous by the bank. Most allow around 3 for those accounts. Having 7 states to file in is unusual for most taxpayers. (One reason I hate these limited partnerships!) Plus you don't get the K-1's until the last minute. I am still waiting on one.

[Gene V]

And frankly, 6 allowed debits per month is pretty generous by the bank. Most allow around 3 for those accounts. Having 7 states to file in is unusual for most taxpayers. (One reason I hate these limited partnerships!) Plus you don't get the K-1's until the last minute. I am still waiting on one.

I have a client with a S-Corp that has 30 states to file, two years ago they did a composite filing for 28 of the states, which left me with two states, I don't file those states, it would cost my client too much for me to file the two states, he would owe the other states about $15 to $20 in taxes, so he would rather take his chances with the other states auditing him. Also, they don't sent the K-1 until October of each year, they do give the client a estimate of what his portion of the income would be, so we file the tax on time with the estimate and then amend the return in October when he gets the K-1.

[ATSMAN]

Update: Client informed me today that MA DOR wants $30 bounce fee as well!

[Burke]

I would try to get it abated by showing sufficient funds to pay as of the draft date. Worth a shot.