Households that claimed the €100 conservation grant but did not pay their water charges will not benefit at the expense of law-abiding people, Social Protection Minister Leo Varadkar has said.
Mr Varadkar has asked officials to come up with a way to link those who received the grant and payments made to Irish Water - even though the Government always maintained the two were separate.
The move is likely to significantly delay the payment of refunds, worth up to €325, but the minister said he feels "very strongly" that "those who did not pay should not gain financially over those who did".
Mr Varadkar's department administered the grant, which was introduced in 2015 in a bid to encourage households to register with Irish Water.
It is estimated that up to 190,000 people claimed the grant but never paid a bill.
The report of the Committee on the Future Funding of Domestic Water Services, which was passed by the Dail last week, states that in the interest of fairness and equity the grant must be taken into "consideration" when issuing refunds.
Sources have told the Herald it will require "a heavy workload" to match those who received grants with those who paid their bills. Asked yesterday whether it will be possible to find a politically viable solution, Mr Varadkar said: "I think it's very difficult so we have to look at what the options are.
"But the outcome has to be that those law-abiding citizens who paid their bills don't end up financially worse than people who didn't pay their bills but still claimed the grant."
Housing Minister Simon Coveney, who has responsibility for water, said he needs to talk to Mr Varadkar about the issue, as well as Finance Minister Michael Noonan and Public Expenditure Minister Paschal Donohoe.
He said he would not be "rushed" on the issue but would talk to his fellow ministers in order to "try to put as efficient a way of paying people their money back as we can".
Mr Coveney said it will take six weeks before the plan starts to come together but it is unclear whether repayments will be made as part of Budget 2018.
"Ultimately that will be a matter for Department of Expenditure and Reform or Finance to get it right, whether we do it through Revenue or whether we don't," he said.
Almost one million households will be entitled to refunds, worth a total of €162.5m.
However, this is likely to create a major administrative headache for Irish Water. Only 20pc of customers paid using direct debit, meaning a significant effort will be required to give households their money back.
Mr Coveney is working on legislation to introduce levies for excessive usage of water.