Why you should set up direct deposit with the IRS this year — and correct errors, too

February 26, 2021 0 By boss



The IRS will give you an opportunity this tax season to establish direct deposit or fix errors. There’s a lot to know.

Sarah Tew/CNET

If you haven’t filed your 2020 tax return yet — either you’re waiting until closer to the April 15 deadline or thinking you’ll file a tax extension — you may want to consider setting up direct deposit with the IRS. This could not only help you get your tax refund much quicker but will also speed up any missing stimulus money. Even better, a third stimulus check could be directly tied to your taxes, and it’s on track to arrive by the end of March. Do note that when you file your taxes could determine your outcome for receiving the new payment.

Today, direct deposit is the most commonly used method of payment for tax refunds and stimulus checks. With the second stimulus check, the IRS sent out more than 100 million payments by direct deposit. Over 80% of people use direct deposit to receive their tax refunds, according to Benefits.gov. Plus, the US Treasury requires some groups, such as Social Security beneficiaries, to use direct deposit in order to receive their money.

While direct deposit is for the most part beneficial, there are two potential issues you could encounter (more about that below). But overall, the benefits of setting up direct deposit this year outweigh the negatives. Also, there are several benefits to filing your 2020 taxes earlier, too. Here’s why and how to set up direct deposit with the IRS.

You could get your tax refund back weeks sooner with direct deposit

When you file your taxes, you usually have the option to add a bank account so you can receive your refund through direct deposit. “The best and fastest way to get your tax refund is to have it electronically deposited for free into your financial account,” the IRS says. You can have your money deposited in up to three different accounts if you’d like to split up your tax refund.

Read moreNew child tax credit rules could give your family a check every month for a year

You can also expect a quicker refund if you combine direct deposit with electronic filing, rather than printing out and mailing in paper tax returns. In fact, the IRS expects nine out of 10 taxpayers will receive their refund within 21 days of when they file electronically with direct deposit, as long as there are no issues with their tax return.

You should also be aware that the IRS is asking taxpayers to avoid filing paper returns, if possible. Filing your return the old-school way could add to the processing delay the IRS is already experiencing as a result of a backlog of 6.9 million unprocessed paper returns from last year. Filing your tax return closer to the beginning of tax season rather than closer to the deadline will also set you up to get your tax return faster — and any unpaid stimulus check money, too.

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Stimulus check No. 3: What you need to know


You could get the next stimulus check faster, too

On the whole, people who had direct deposit set up with the IRS received their first and second stimulus checks much sooner than those who didn’t. Now that a proposed third stimulus check is on the table, you’ll want to get your direct deposit information set up as soon as possible. To do this, you’ll need to enter your banking information when you file your 2020 taxes this year.

Since it’s too soon to know if new direct deposit registrations would open up for a third stimulus check, your safest bet is to sign up now with the IRS if you’d like to receive a possible future $1,400 payment the fastest way possible. 

Also, because stimulus checks are expected to arrive while tax season is still ongoing, filing your taxes early could mean the next check is based on your 2020 filing rather than 2019, which may have certain advantages. Direct deposit would mean you’d potentially receive the new payment more rapidly.

Read more: Forget your tax refund. Stimulus checks are why you should file early this year


If a third stimulus check is approved, you could get it sooner with direct deposit.

Sarah Tew/CNET

Fun fact: It’s cheaper for the Treasury to send your refund via direct deposit, instead of by mail

Each paper refund check issued costs US taxpayers more than $1, but it only costs a dime for each direct deposit made, according to the IRS. In 2019, 125.3 million refunds were issued, with around 23 million sent by mail, according to Bankrate.

That means in 2019, it cost taxpayers about $23 million for paper check refunds to be sent out and about $12.5 million for direct deposit.

Read moreThis is how you’ll track your 2020 tax refund once the IRS starts processing returns

You’ll want to correct these errors now

The IRS never let recipients of the second stimulus check set up direct deposit or fix any bank account errors, resulting in this group needing to claim their missing money as a Recovery Rebate Credit on their 2020 taxes. But now, you’ll have an opportunity to make adjustments that could prevent a third stimulus check from going to the wrong account — like one you closed or if you entered your information incorrectly in a previous year.

Also, if you’d like to have your tax refund spread out across several accounts, now’s the time to do that. When setting up direct deposit on your taxes, you can add up to three different bank accounts, which can be beneficial if you’re using one as a savings account.

So, what are the downsides of direct deposit?

When it comes to stimulus check delivery, the second round of checks revealed two issues that affected millions of people (a relatively small percentage of all direct-deposit recipients).

Since the IRS didn’t open up direct deposit registration through the Get My Payment tracking tool, anyone who closed or changed bank accounts between the first and second checks was unable to make a correction. If their checks were returned to the IRS, this group will likely need to claim their payments using the Recovery Rebate Credit.

The second issue to know about is that the IRS sent direct deposit transfers to millions of temporary bank accounts used by tax preparation software like TurboTax and Jackson Hewitt (these accounts are a typical part of the third-party tax preparation process). As a result, there were delays with second stimulus check delivery to this group, as the IRS and the companies attempted to untangle the problem. While many people may need to claim the stimulus check credit in their taxes, the companies have promised to work with clients to ease the process.


Direct deposit is cheaper than receiving a check.

Sarah Tew/CNET

How to set up your direct deposit bank details when you file your tax return

When filing taxes, select Direct Deposit as your refund method through your tax software, then type in your bank account and routing numbers — you can still add your bank account information even if you’re not getting a refund. You can find your account and routing number on your bank’s website when you sign in, call your bank branch or locate the numbers on a check. You can also give your tax preparer this information if you don’t file your own taxes. 

If you’re a nonfiler, that is someone who is not usually required to file taxes, but you’re filing for the Recovery Rebate Credit to get a missing stimulus check, you’ll need to file Form 1040 or Form 1040-SR (PDF).

The IRS says your refund should only be deposited directly into a US bank or US bank-affiliated account, and that it needs to be in your name, your spouse’s name or both if it’s a joint account.

For more information, here’s what you need to know about stimulus checks and your 2020 taxes. Plus, how much money you could get with a third stimulus check and when and how to request an IRS payment trace.


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