IBA Compliance Connection

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A check-cashing company has been depositing out-of-state IRS tax refund checks in its account at our institution. One of the payees on the checks told us that he never cashed the check and that he will be filing a complaint with the IRS. What are the chargeback rights of the IRS and what is its look-back period?

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The general rule is that the IRS may reclaim the amount of a check payment from a guarantor of the check until the end of the one-year period beginning on the date that a check is processed for payment by a Federal Reserve Processing Center.

If the IRS determines that a guarantor of the check (the financial institution that presents the check for payment) has breached a presentment guarantee (that all endorsements are genuine), the guarantor may be liable to the IRS for the amount of the check payment if the IRS chooses to honor the claim of the correct payee (the taxpayer).

The bank, as well as the check cashing company, is the guarantor of the check for purposes of the IRS rule stated above, so the bank could be liable to the IRS in this situation. However, the bank would have recourse against the check cashing company, which warranted the endorsement of the check to the bank under the Uniform Commercial Code. Because the endorsement on the check was unauthorized, the check cashing company could be held liable for breaching the transfer warranty that “all signatures on the item are authentic and authorized.” As a result, we believe that you will be able to offset the check cashing company’s account for the amount of the check if the IRS makes a demand on the bank for the amount of the check.

For resources related to our guidance, please see below:

  • Treasury Rules — 31 CFR 240.8 (one-year reclamation period for paid checks)
  • Treasury Rules — 31 CFR 240.2(s) (“guarantor” is any financial institution that presents a check for payment)