An ACH tax refund payment posted to an account, and the name on the payment does not match the name on the account. This was discovered when a bookkeeper was looking at other items in the account. The item was pending yesterday, but the customer has already removed $3,000.00 in cash from the account. There isn't enough money to return the item without overdrawing the account. What is required according to the Green Book? I see where it says that if an RDFI becomes aware of such a transaction, it should promptly notify the agency. How is the agency notified... phone call or returning the item? Are we required to return the item even though it will overdraw the account, or does that matter?

NACHA rules only require that you post the transaction to the account number listed. There is no requirement saying that you have to verify the names on the transactions. We don't look at payee names unless something hits the unpost report. However, the Green Book says "Also, if an RDFI becomes aware that an agency has originated an ACH credit entry to an account that is not owned by the payee whose name appears in the ACH payment information, the RDFI shall promptly notify the agency as required by Code 31 CFR Part 210." (page 2-5)

Code 31 CFR Part 210 can be found here (pdf)...
http://www.treasurydirect.gov/forms/savpart210.pdf

Thank you tdogz. How do you notify the agency? Is there a preferred method?

That I don't know. We've never returned or even contacted the Treasury about this issue, so I would be interested in hearing from those who have.
Also: What return code would you use to return it? If I'm reading your question right, then today would be the last day you could return it as an R03. About the only option left after today would be an R06, right?

...also, maybe tell your bookkeeper to be less nosy next time and it won't be an issue

This is from the section titled "Notice of Misdirected Payment" on page 4-3 of the green book...
"In accordance with Code 31 CFR Part 210. If an RDFI becomes aware that an agency has originated an ACH credit entry to an account that is not owned by the payee whose name appears in the ACH payment information, the RDFI shall promptly notify the agency. An RDFI that originates a Notification of Change (NOC) entry with the correct account and/or Routing and Transit Number information, or returns the original ACH credit entry to the agency with the appropriate return reason code, shall be deemed to have satisfied this requirement."

What if the entire deposit is no longer available? The customer removed a portion of the deposit while it was pending. Returning the item would overdraw the customer.

Assuming this is someone on staff at Anonymous' bank, they are doing their job of monitoring accounts. If you and/or your bank are not properly monitoring accounts (i.e. "being nosy") I suspect we will soon see Retread posting a link in the BSA/AML/OFAC forum about actions taken against your bank like others who don't monitoring their customers' accounts...you dang well better be monitoring those accounts and investigating anything suspicious! Props to the bank employee who thought this suspicious, as it well is!

Unfortunately, I didn't see any exception to the rule. It's like reclamations: you have to send them, regardless of the account balance. I would call the customer & explain that you are required to send it back. Tell them they will need to redeposit $xx or they will be overdrawn and incur fees. Maybe they can get the deposit in before it costs them anything.

That was meant as a joke of course (thus the smiley). The way the OP was worded, I inferred that they were looking into a completely unrelated issue and just happened to see this. Thus the small joke about being nosy. Thanks for your concern though!