How Creditors Can Perfect a Security Interest in a Borrower’s IRS Tax Refund

By Gary M. Remer and Julie B. Teicher

As tax season draws to a close, millions of individuals and businesses across the country eagerly await the receipt of a federal tax refund. Taxpayers seeking to borrow funds may see their refund as a valuable asset they can pledge as collateral to secure a loan or additional funding. An existing secured lender may see the refund similarly as an asset that can further collateralize an active loan secured by all the borrower’s assets.

Insofar as an IRS tax refund is an asset of its recipient, it can be used as collateral and be subject to a security interest like any other tangible asset. However, the unique nature of a refund and the involvement of the IRS make perfecting that interest a more complicated task than it is for other types of security interests.

If you are a secured creditor seeking to perfect a security interest in a debtor’s tax refund this year, you should work with experienced tax counsel to ensure all necessary notices, forms, and steps are completed to protect your rights in such proceeds. That said, here are some basics creditors should know about the process.

Establishing the Security Interest

While perfecting a security interest in an IRS refund may be more complex, establishing that interest is largely comparable to doing so for any other type of intangible asset.  

Article 9 of the Uniform Commercial Code (UCC) governs security interests in most forms of personal property. As Article 9 neither expressly excludes nor expressly includes federal tax refunds, those proceeds are considered “general intangibles” under the UCC. 

As with other general intangibles, the foundation of a security interest in a tax refund is a security agreement and properly filed UCC-1 financing statement that describes the collateral in sufficient detail. While an agreement that lists “all general intangibles” is probably enough, including a reference to “any federal income tax refunds” removes any doubt about the creditor’s interest in the proceeds.

Perfecting the Interest: A UCC-1, Without More, Is Insufficient

While filing a UCC-1 is unquestionably a necessary step for perfecting a security interest in a federal tax refund, additional filings, many executed by the borrower, are required given the IRS’s involvement in the matter. Specifically, creditors need to ensure the following forms are submitted to the IRS and the Department of the Treasury (DOT) in order to protect their rights to receive those proceeds:

• Form 2848 – Power of Attorney executed by the borrower that identifies the name of an “authorized representative” who will receive the refund in lieu of the borrower. 
• Also to be executed by the borrower, DOT Form 235 – Resolution by Corporation Conferring Authority Upon an Officer To Execute a Power of Attorney for the Collection of Checks Drawn on the United States Treasury, and DOT Form 234 – General Power of Attorney for the Collection of Checks Drawn on the United States Treasury.
• For tax refunds of $1 million or more, the borrower must execute and submit Form 8302 – Electronic Deposit of Tax Refund of $1 Million or More, which authorizes the IRS to wire the proceeds of the federal income tax refund to an account maintained by the lender for the benefit of the borrower. 

Of course, the strength and value of a security interest in a federal tax refund is subject to any prioritized and perfected interests of other parties in the proceeds. And if the borrower owes an outstanding balance to the IRS, the agency retains the right to use all or part of a refund to satisfy that obligation.

If you have questions about or need assistance perfecting a security interest in a borrower’s federal income tax refund, please contact Gary Remer or Julie Teicher at Maddin Hauser.