Tax Administration
Possible Implications of Expanding Refund Offset Provisions Gao ID: GAO-09-571R May 7, 2009Millions of federal taxpayers receive billions of dollars in income tax refunds every year. Many of these refunds are paid to taxpayers who owe money to the federal government or to their state or local government. The law allows certain types of debts to be collected through offsets of federal income tax refunds before payments are issued to taxpayers--in calendar year 2008, over $5 billion was deducted from income tax refunds and used instead to pay other federal agency nontax debt, state income tax debt, and overdue child support payments. Due in part to the current economic downturn and the financial problems of state and local governments, interest has grown in potential expansion of the refund offset program Congressional request, this letter's objectives are to describe (1) recent proposals to expand the refund offset program, and (2) challenges and design issues that would need to be addressed by policymakers and program administrators in the event of program expansion, including the implications of eliminating the current requirement that tax refund offsets for state income tax debts are allowed only when the affected taxpayer lives in the state seeking the offset.
Legislation to expand the types of debts or the types of entities eligible to participate in federal income tax refund offsets have been introduced to Congress in recent years. Congress has also considered but not enacted changes to the requirements with regard to existing offsets. The proposals for adding additional types of debts to the offset program include proposals to add state judicial debt. These are past-due, legally enforceable debts resulting from a state criminal or traffic court's judgment or sentence, including court costs, fees, fines, assessments, and restitution to victims of crime. There have also been proposals to add local government tax debt to the list of allowable offsets. Proposals to expand the offset program to include new types of debts submitted by local governments differed in the proposed methods for submitting the debt to Financial Management Service (FMS).
GAO-09-571R, Tax Administration: Posible Implications of Expanding Refund Offset Provisions
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GAO-09-571R:
United States Government Accountability Office:
Washington, DC 20548:
May 7, 2009:
The Honorable John Lewis:
Chairman:
The Honorable Charles W. Boustany, Jr.
Ranking Member:
Subcommittee on Oversight:
Committee on Ways and Means:
House of Representatives:
Subject: Tax Administration: Possible Implications of Expanding Refund
Offset Provisions:
Millions of federal taxpayers receive billions of dollars in income tax
refunds every year. Many of these refunds are paid to taxpayers who owe
money to the federal government or to their state or local government.
The law allows certain types of debts to be collected through offsets
of federal income tax refunds before payments are issued to taxpayers--
in calendar year 2008, over $5 billion was deducted from income tax
refunds and used instead to pay other federal agency nontax debt, state
income tax debt, and overdue child support payments. Due in part to the
current economic downturn and the financial problems of state and local
governments, interest has grown in potential expansion of the refund
offset program as a means to collect additional kinds of state or local
debts. On the basis of your request, this letter's objectives are to
describe (1) recent proposals to expand the refund offset program, and
(2) challenges and design issues that would need to be addressed by
policymakers and program administrators in the event of program
expansion, including the implications of eliminating the current
requirement that tax refund offsets for state income tax debts are
allowed only when the affected taxpayer lives in the state seeking the
offset.
We identified and reviewed recent legislative and interest group
proposals to expand the tax refund offset program. We reviewed agency
documentation on program operations and obtained summary data from the
Department of the Treasury's Financial Management Service (FMS) on debt
collected through offset. We determined that the data provided by FMS
were sufficiently reliable for background purposes in this letter. We
researched the relevant statutory and regulatory provisions pertaining
to the offset of federal income tax refunds. We interviewed officials
from the Department of Treasury's FMS, Internal Revenue Service (IRS),
and Office of Tax Policy to both obtain an understanding of refund
offset program operations and officials' perspective on possible
program expansion as suggested in the proposals we identified. We also
interviewed representatives from external organizations with an
interest in program expansion, including the Federation of Tax
Administrators (FTA), and the National Association of State Auditors,
Comptrollers and Treasurers. We also interviewed an official from the
office of the Arlington County, Virginia, Treasurer who had been
closely involved with a proposal to make local government debts
eligible for federal income tax refund offsets. We conducted our work
from February 2009 to May 2009 in accordance with all sections of GAO's
Quality Assurance Framework that are relevant to our objectives. The
framework requires that we plan and perform the engagement to obtain
sufficient and appropriate evidence to meet our stated objectives and
to discuss any limitations in our work.
Background:
FMS offsets tax refunds to collect delinquent child support payments,
federal nontax debts, and state income tax debts.[Footnote 1] FMS is
the agency in the Department of Treasury charged with implementing the
federal government's centralized delinquent debt collection program.
Under the law, FMS is required to withhold or reduce certain federal
payments to satisfy delinquent nontax debts owed by payment recipients.
The main tool FMS uses to carry out this responsibility is the Treasury
Offset Program (TOP). The TOP uses a computerized process to compare
the names and taxpayer identification numbers (TIN) of debtors with the
names and TINs of recipients of federal payments, including tax
refunds. If there is a match, the federal payment is reduced, or
offset, to satisfy the overdue debt.[Footnote 2]
Federal law authorizes tax refund offsets where a taxpayer owes past-
due child support.[Footnote 3] Child support debt cases fall into two
categories; TANF-(Temporary Assistance to Needy Families) or non-TANF-
related. TANF cases are those in which the custodial parent has
assigned his or her right to child support payments over to the state
as a condition of participation in TANF. Offsets are applied in TANF-
related cases when the noncustodial parent owes at least $150; in non-
TANF cases, the amount owed must be at least $500. State child support
enforcement agencies, through the Office of Child Support Enforcement
at the Department of Health and Human Services, certify to the
Department of the Treasury the names, TINs, and the amount of past-due
child support for people who are delinquent in their payments. The
funds offset from a taxpayer's tax refund are forwarded by FMS through
the Office of Child Support Enforcement to the state child support
enforcement agency to repay the past-due support debt.
Offset of tax refunds to collect nontax federal debt is also authorized
under the law.[Footnote 4] Examples of nontax federal debts include (1)
loans made, insured, or guaranteed by the federal government, such as
student direct and guaranteed loans, Small Business Administration
loans, and Department of Housing and Urban Development loans; (2)
overpayments, such as salary or benefit overpayments, duplicate
payments, or misused grant funds; (3) the unpaid share of any
nonfederal partner in a program involving a federal payment and a
matching or cost-sharing payment by the nonfederal partner (e.g., the
state share of a benefit-matching program); (4) fines or penalties
assessed by an agency, such as civil monetary penalties or Occupational
Safety and Health Administration fines for mine safety violations; and
other amounts of money or property owed to the federal government, such
as license fees. Current FMS regulations require the federal agency
submitting the debt to certify, among other requirements, that the debt
is at least $25.[Footnote 5] FMS transmits any amounts collected
through offset to the appropriate creditor agency.
FMS also offsets federal income tax refunds to collect delinquent state
income tax debts.[Footnote 6] In calendar year 2008, FMS made offsets
totaling about $5.4 billion, with the largest share going to repay
delinquent child support, followed by federal nontax debts, and then
state income tax debts, as shown in figure 1. The number of taxpayers
who had their federal income tax refunds offset was about 4.5 million
in 2008, according to FMS.
Figure 1: Total Tax Refund Offsets Made by FMS, by Type of Debt, for
Calendar Year 2008, in Billions of Dollars:
[Refer to PDF for image: pie-chart]
Total Tax Refund Offsets Made by FMS:
Type of Debt: Child support;
Amount of refund offsets: $2.97 billion.
Type of Debt: Federal nontax;
Amount of refund offsets: $2.07 billion.
Type of Debt: State income tax;
Amount of refund offsets: $0.39 billion.
Source: GAO analysis of FMS data.
Note: Data includes offsets made against economic stimulus payments
issued in 2008.
[End of figure]
The share of tax refund offsets going to satisfy delinquent state
income tax debts has been significantly smaller than collection of
child support and nontax federal debts, but these offsets have grown
significantly since 2000. FMS officials and representatives from the
Federation of Tax Administrators (FTA) and the National Association of
State Auditors, Comptrollers and Treasurers (NASACT) said they viewed
the state income tax offset program as an effective collection tool.
Since its introduction in January 2000, state participation has grown
from an initial 7 states to currently include 40 states[Footnote 7] and
the District of Columbia. Debt collection through offset has steadily
increased as more states have entered the program, and in fiscal year
2008, FMS collected more than $380 million in delinquent state income
tax debt on behalf of states through offset of federal income tax
refunds as shown in figure 2.[Footnote 8] FMS will only make offsets
for state income tax debts of $25 or more.[Footnote 9]
Figure 2: Total Delinquent State Income Tax Offset Collections, Fiscal
Years 2000-2008:
[Refer to PDF for image: line graph]
Fiscal year: 2000;
Delinquent State Income Tax Offset Collections: $23.5 million.
Fiscal year: 2001;
Delinquent State Income Tax Offset Collections: $96.9 million.
Fiscal year: 2002;
Delinquent State Income Tax Offset Collections: $121.6 million.
Fiscal year: 2003;
Delinquent State Income Tax Offset Collections: $171.5 million.
Fiscal year: 2004;
Delinquent State Income Tax Offset Collections: $202.6 million.
Fiscal year: 2005;
Delinquent State Income Tax Offset Collections: $236.1 million.
Fiscal year: 2006;
Delinquent State Income Tax Offset Collections: $219.4 million.
Fiscal year: 2007;
Delinquent State Income Tax Offset Collections: $249.3 million.
Fiscal year: 2008;
Delinquent State Income Tax Offset Collections: $380.4 million.
Source: GAO analysis of FMS data.
[End of figure]
Some of the increase in offsets from 2007 to 2008 was because of the
one-time economic stimulus payments issued in 2008. According to FMS,
about 24 percent of state income tax offsets in 2008 were collected
from 2008 economic stimulus payments.
FMS is authorized to charge states and creditor agencies a fee to
reimburse FMS for the administrative costs associated with offsets
taken.[Footnote 10] Part of the fee that FMS charges includes
reimbursement for IRS. Currently FMS charges states $22.00 per offset.
Following the offset, FMS issues notices to the debtors informing them
of the date and amount of the offset, as well as a contact point with
the state or federal agency that the taxpayer should contact with
questions related to the offset. Taxpayers who wish to dispute an
offset taken from their income tax refund are directed by FMS to take
the matter to the federal or state agency that reported them as debtor
and received the funds deducted from their federal income tax refund.
The statutes establishing the offset provisions now in place state that
the federal courts do not have jurisdiction to review refund offset
actions; however, taxpayers are allowed to dispute the underlying debt
with the state or federal agency that reported the debt to FMS and
received the offset payment.[Footnote 11]
Congress's most recent amendment to the law allowed refund offsets to
collect unemployment compensation debts resulting from fraud.[Footnote
12] FMS and the Department of Labor are determining how this offset
will work, but have not started making offsets.
Proposals to Expand Refund Offsets:
Legislation to expand the types of debts or the types of entities
eligible to participate in federal income tax refund offsets have been
introduced to Congress in recent years. Congress has also considered
but not enacted changes to the requirements with regard to existing
offsets.
The proposals for adding additional types of debts to the offset
program include proposals to add state judicial debt.[Footnote 13]
These are past-due, legally enforceable debts resulting from a state
criminal or traffic court's judgment or sentence, including court
costs, fees, fines, assessments, and restitution to victims of crime.
There have also been proposals to add local government tax debt to the
list of allowable offsets.[Footnote 14]
Proposals to expand the offset program to include new types of debts
submitted by local governments differed in the proposed methods for
submitting the debt to FMS. For example, one proposal would have
allowed states to submit local tax debts on behalf of local governments
for offset by FMS. Another proposal would have allowed eligible local
governments to not involve the state revenue agency and instead submit
their tax debt directly to FMS. Another proposal would have tested the
direct submission of local government tax debt with a limited pilot
project.
There have also been proposals to alter requirements governing existing
tax offsets.[Footnote 15] For example, under current law state income
tax and unemployment compensation offsets are allowed only if the
address shown on a debtor's federal income tax return is within the
state seeking offset. Recognizing the effectiveness of the state income
tax offset program, in 2004 the Senate Committee on Finance recommended
elimination of this provision,[Footnote 16] though the change was not
enacted.
Challenges and Design Issues Associated with Expanding Refund Offsets:
Residency Requirement:
As noted above, under current law, federal income tax refunds can only
be offset for state income tax debt and unemployment compensation debt
when the address on the taxpayer's federal tax return is in the state
seeking the offset.[Footnote 17] Some of the legislative proposals we
reviewed included a similar restriction on new offset provisions. Over
recent years FTA has also advocated removing this requirement from the
state income tax debt offset provision. An FMS official responsible for
managing the offset program estimated that in 2008, about 380,000
refund offsets worth over $150 million were not applied because of the
state residency requirement.
If the restriction preventing offsets for state income tax debts for
taxpayers whose address on their income tax filing is not in the state
seeking the offset were eliminated, other aspects of the program (which
are discussed in the following sections of this letter) such as notice,
privacy considerations, prioritization, and dispute resolution would
remain intact unless Congress chose to also alter those aspects of the
state income tax offset program. As also discussed in a following
section, the additional offsets generated by such a change could strain
FMS's systems if the number of new offsets was sufficiently great.
However, FMS officials noted that the number of new offsets that such a
change would generate is unknown. FMS only knows the number of offset
requests that it rejected because of the residency requirement, but not
the number of offsets that states did not request because state
officials knew that the debtor had left their state. FMS officials told
us that while a very large increase in offset volume could mean they
would need new, larger capacity systems to handle the workload at some
future point, the existing system capacity could handle processing the
additional known offsets (i.e., the estimated 380,000 in 2008) that
would result from eliminating the residency requirement with little to
no adverse effect.
Notice and Other Due Process Requirements:
Current law requires states to notify a taxpayer in advance that the
state proposes to have the taxpayer's delinquent state income tax debt
satisfied through the offset of a federal income tax refund. By
statute, the notice must be sent by certified mail with return receipt
and the taxpayer must be given 60 days to present evidence to the state
that all or part of the debt is not past-due or legally enforceable.
[Footnote 18] The state must consider any evidence presented and
determine that the debt is indeed past-due and legally enforceable. The
state must also make reasonable efforts to collect the debt itself.
States must certify to FMS that they complied with these requirements.
Federal tax refunds may not be offset to collect state income tax debts
that have been delinquent for more than 10 years.[Footnote 19]
Similar but not identical requirements apply to the offset of federal
income tax refunds for federal nontax debts and past-due child support
debts.[Footnote 20] For example, regulations require a creditor agency
to notify the debtor that a debt will be submitted to FMS for offset
and must give the debtor 60 days to present evidence that all or part
of the debt is not past-due or legally enforceable. However, FMS's
regulations on offsets of tax refund payments to collect federal nontax
debt do not specify that the notification must be by certified mail. As
with the states, federal agencies must certify to FMS that they
complied with the applicable requirements. Notice and other due process
requirements are specific to each of the current offset provisions and
the appropriate requirements for any new offset would need to be
established.
Privacy:
Under current law, taxpayer information is protected by section 6103 of
the Internal Revenue Code, among other provisions. The protection of
taxpayer information is commonly thought to be critical to voluntary
compliance with the tax code and necessary to protect taxpayer privacy.
The tax offset program requires the sharing of limited taxpayer
information protected by section 6103. Current offsets are permitted in
section 6103, under which the sharing of information is limited to the
information necessary to conduct the tax offset program.[Footnote 21]
Any expansion of the tax offset program to include local government
entities would require allowing the sharing of taxpayer information.
This would, in turn, also mean additional work for IRS to ensure that
local government entities adequately safeguard this taxpayer
information.
Prioritization:
Current law prioritizes the different types of debt to which a tax
refund offset can be applied.[Footnote 22] After any federal income tax
debt, the highest priority is given to past-due child support, followed
by federal nontax debt. Last in line are state income tax debts and
unemployment compensation debts resulting from fraud.[Footnote 23] FMS
offsets lower-priority debts only after making offsets for higher-
priority debts. Any proposal to create new tax offsets would need to
specify the priority of the new offset.
Dispute Resolution:
By statute, no federal court has jurisdiction to restrain or review any
current tax offset. In addition, no current offset is reviewable by the
Department of the Treasury in an administrative proceeding. Taxpayers
whose refunds are offset are only allowed to dispute the underlying
debt with the state or federal agency that received the offset payment.
[Footnote 24] When a taxpayer disputes a tax refund offset applied by
FMS, FMS directs the taxpayer to the entity that receives the offset
payment. FMS officials told us that some taxpayers file lawsuits
against the Department of the Treasury disputing an offset and the
department must then argue in court that the court does not have
jurisdiction. They said that an increase in the number of offsets would
likely increase the number of times this happens and that they would
need more resources to handle these cases, even with the exemptions
that are in current law. Any new refund offset provisions without such
limitations to jurisdiction as found in current law would likely mean
even more burden for FMS to have to resolve disputes or defend offset
actions in court regarding debts that they do not control.
Administrative Capacity:
FMS officials said that expansion of tax refund offsets would need to
be carefully managed and balanced against other agency priorities. FMS
officials said that their top priority is the timely disbursement of
refunds and expressed concern that expansion of refund offsets could
mean greater administrative demands and disrupt or delay timely refund
disbursement.
The offset process is highly automated, so any legislative changes to
the program that would authorize additional government entities to
certify debt directly to FMS, such as local governments, would require
FMS to devote additional resources to establishing a reliable working
relationship with those entities, including training, resolving
technical issues with the electronic data transmission of debt files,
and providing legal support. Based on past experience with adding new
agencies to the program, officials estimated that it usually takes
between 18 and 24 months for new entities to work out the details
associated with transmitting the correct debt data in the required
format. Additionally, officials from the added government entities
might require training in the legal requirements of the offset program
and the certification requirements. In regard to the prospect of adding
local debts to the offset program, FMS officials stated a preference
for continuing to work through their established channels at the state
level rather than establishing channels with possibly thousands of
local entities.
One of the bills proposing to expand the refund offset program to
include local government debts would have required local debts to be
consolidated at the state level and transmitted to FMS by the state.
Consolidating local debts at the state level in this way could
eliminate the need for direct interaction between FMS and multiple
local governments. However, FTA representatives said that it is unclear
whether some states currently participating in the state income tax
refund offset program would have the ability to readily handle
consolidating and certifying local government debts. While some states
have their own internal offset program for local government debts,
other states may not have the necessary infrastructure to do this.
Also, some states do not participate in the state income tax offset
program. According to FTA, a legislative requirement that local tax
debts be submitted by the state rather than directly to FMS may impede
or delay local governments' ability to participate in the program.
Another concern with adding local government debt involves the way that
an entity requesting an offset identifies the debtor. FMS regulations
currently allow tax refund offsets only when there is a name and TIN
match between IRS's list of tax refund payment recipients and the
debtor information.[Footnote 25] FMS officials said that they need the
TIN to correctly match a payment with a debt. However, if tax refund
offsets were expanded to include local debts, local jurisdictions may
not know the TINs or Social Security numbers (SSN) of their debtors.
For example, we spoke to an official in Virginia knowledgeable about
debt offsets who told us that local officials can obtain SSNs for local
residents from the state's Department of Motor Vehicles because those
numbers are required to obtain a Virginia drivers license. However,
local officials may not know the SSNs of residents who do not have a
driver's license. The cost of determining names and identifying numbers
that would allow FMS to apply an offset would likely be the
responsibility of local officials and may add to their cost of
collecting debts through such offsets.
Both FMS and IRS officials stated that, in the event the number of
debts submitted for offset increases, they would anticipate an increase
in the number of telephone calls received from taxpayers inquiring
about offsets. FMS officials said they do not track refund offset-
related telephone calls separately from other inquiries from taxpayers,
but they noted that FMS received over 4.3 million telephone calls in
2008 and that an increase in the number of offsets would likely also
mean an increase in the number of calls they receive. FMS officials
said that an increase in call volume associated with a relatively small
increase in debts might be manageable with existing resources in the
near term, but a large increase could not be managed with existing
resources.
IRS officials also expressed concern that increasing the number of
debts in the refund offset program would result in an increase in the
number of injured spouse cases. An injured spouse is defined by IRS as
a married partner who claims that their portion of a jointly filed
income tax refund has been improperly offset to satisfy the other
partner's debt(s). IRS has procedures in place for individuals who
claim they are not responsible for the debt that their spouse owes,
allowing the injured spouse request the return of their share of the
income tax refund. They said that an increase in the number of offsets
would likely mean an increase in the number of injured spouse claims
and IRS would require additional staff to handle them.
According to FMS officials, the $22.00 per offset fee the agency
currently charges to state agencies receiving the offset funds covers
current program costs. However, FMS officials also said that their
current systems are limited in, for example, how many additional
offsets can be entered at one time or how many calls their phone system
can handle. A large increase in the number of offsets or in the number
of agencies certifying debt to FMS could mean that some offsets could
not be applied without disrupting the disbursement function of FMS and
would necessitate expanding FMS systems to handle the increased
workload. Funds for significant system changes could possibly come from
an increase in the fee charged per offset, or from an increase in FMS's
budget for new systems to handle the increased number of offsets.
Voluntary Compliance:
When considering refund offset provisions in the 1990s, Congress was
concerned about how refund offsets might affect taxpayer compliance in
filing tax returns and paying the amounts they owe. In 1991, we studied
the effect of refund offsets on taxpayer filing and payment behavior.
[Footnote 26] We found that while nonfiling increased during the year
immediately following an offset, there was virtually no effect 2 years
later. We also found no evidence that an offset taxpayer was more
likely not to pay taxes due when filing a tax return the year after an
offset. Our earlier analysis compared the federal revenue lost due to
nonfiling with the federal debt recovered from people who had defaulted
on their student loans, finding that the amounts recovered through
offsets were 4 times greater than the potential revenue lost due to
nonfiling. In the case of possible new state and local tax refund
offsets, however, any loss in tax revenue would be to the federal
government, while the revenue from the offsets would go to state and
local governments. In our interviews for this engagement, IRS and FMS
said that neither agency has conducted any recent research on this
issue. We also could not identify any current research on the effect
refund offsets may have on taxpayer compliance.
Agency Comments and Our Evaluation:
In addition to providing technical corrections which have been
incorporated into this letter as appropriate, FMS and IRS provided
additional comments through their respective GAO liaisons related to
potential expansion of tax refund offsets.
FMS stated that FMS's statutory mission is to disburse payments in an
accurate and timely manner, and that implementation of offset programs
cannot interfere with that function. FMS also repeated its concern that
at some point, an increase in tax refund offsets of sufficient volume
might mean the need for additional agency resources, including systems
hardware and personnel. Additionally, FMS requested that any statutory
change to the tax refund offset program should include a provision
enabling the Secretary of Treasury to issue regulations related to
implementing the revision.
IRS reiterated a number of potential issues, included in this letter,
related to adding local government tax debts to the tax refund offset
program. These issues include establishing safeguards to ensure that
local governments adequately protect taxpayer information and
addressing potential agency resource constraints. IRS expressed concern
that the expansion of tax refund offsets to include additional local
tax debts might strain agency resources by resulting in an increase in
telephone call volume and injured spouse cases. IRS stated it could
handle some increase in this workload without any additional staffing,
but that a large increase would require additional staffing and
training. IRS also acknowledged that there is no way to know the number
of injured spouse cases or offset-related calls it might receive if
additional offsets were implemented. IRS noted that adding state
judicial debts and local tax debts may result in the need for obtaining
additional guidance from its Office of Chief Counsel, possibly slowing
the refund process to taxpayers seeking recovery of improperly offset
funds under the injured spouse provision. Before expanding the tax
refund offset program, IRS stated its preference that additional study
be conducted on the effect of an expansion on tax administration.
However, IRS also stated that it supports the idea of eliminating the
current restriction on refund offsets for state income tax debts when
the address on the taxpayer's return is in a state other than the state
seeking the offset.
We will send copies of this letter to the Secretary of the Treasury;
the Commissioner of Internal Revenue; and other interested parties. In
addition, this letter will be available at no charge on the GAO Web
site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions, please contact me on (202) 512-
9110 or whitej@gao.gov. Contact points for our offices of Congressional
Relations and Public Affairs may be found on the last page of this
letter. David Lewis, Assistant Director; Ellen Rominger; and A.J.
Stephens made key contributions to this report.
Signed by:
James R. White:
Director, Tax Issues:
Strategic Issues Team:
[End of section]
Footnotes:
[1] IRS sends its list of authorized refunds to FMS after IRS has
already deducted delinquent federal tax debt for an assessed delinquent
period from those refund amounts. If a taxpayer is due a refund but
owes delinquent federal tax debt for another period, in most instances
the IRS will internally apply the current refund to prior tax debt,
before informing FMS there is any residual refund payment left for
additional offsets or to send to the taxpayer. The federal tax refund
offsets discussed in this letter are those administered by FMS and do
not include the offsets that IRS takes.
[2] In addition to offset to collect delinquent nontax debts, the TOP
also includes the Federal Payment Levy Program, a program whereby
delinquent federal income tax debts are collected by levying nontax
federal payments.
[3] 26 U.S.C. § 6402(c).
[4] 26 U.S.C. § 6402(d).
[5] 31 C.F.R. § 285.2(d)(iv).
[6] 26 U.S.C. § 6402(e).
[7] Seven states with no individual income tax (Alaska, Florida,
Nevada, South Dakota, Texas, Washington, and Wyoming) as well as two
states with state income tax limited to dividends and interest income
only (New Hampshire and Tennessee) do not participate in the program.
Michigan also does not participate. U.S. territories and possessions
are also eligible to participate, though none currently do so.
[8] IRS also administers the State Income Tax Levy Program (SITLP), an
automated levy program in which states with an income tax can sign
agreements with the IRS to permit state tax refunds to be applied to
federal tax liabilities. According to IRS, as of April 2009, 28 states
and the District of Columbia participate in SITLP. Agreement between
IRS and the state of Minnesota has also been reached and the final
memorandum of understanding is awaiting final signatures as of May 7,
2009. IRS anticipates adding several more states to the program during
2009 and 2010.
[9] 31 C.F.R. § 285.8(c)(2).
[10] 26 U.S.C. § 6402(e)(6); 31 U.S.C. § 3720A(d); 31 C.F.R. §§
285.2(i), 285.3(h), 285.8(h). The fee is only charged for actual
offsets completed. The fee is established annually by FMS.
[11] 26 U.S.C. § 6402(g).
[12] Pub. L. No. 110-328, § 3, 122 Stat. 3570, 3573 (Sept. 30, 2008).
[13] For example, S. 1321, § 707, 109TH Cong. (2006); S. 3512, 109TH
Cong. (2006); S. 1287, 110TH Cong. (2007); H.R. 6172, 110TH Cong.
(2008).
[14] For example, H.R. 3498, 109TH Cong. (2005); H.R. 1865, 110TH Cong.
(2007); H.R. 7335, 100TH Cong. (2008).
[15] For example, S. 882, § 111, 108TH Cong. (2004); H.R. 1528, § 111,
108TH Cong. (2004); S. 1321, § 305, 109TH Cong. (2006).
[16] S. Rep. No. 108-257, at 13 (2004).
[17] 26 U.S.C. § 6402(e)(2), (f)(3).
[18] 26 U.S.C. § 6402(e)(4). See also, 31 C.F.R. § 285.8. FTA
representatives told us that they have asked Congress to eliminate the
requirement that states must send certified letters to taxpayers
notifying them of the pending offset to their federal income tax
refund. They said that, while the certified mailing requirement ensures
that taxpayers have adequate notice of the pending offset, they contend
that the requirement is both costly and unnecessary because taxpayers
already receive multiple notices about their state income tax debts
prior to inclusion in the federal tax refund offset program.
[19] 26 U.S.C. § 6402(e)(5)(B); 31 C.F.R. § 285.8(a)(3).
[20] 26 U.S.C. § 6402(c), (d); 42 U.S.C. § 664(a)(3)(A); 31 C.F.R. §§
285.2, 285.3.
[21] 26 U.S.C. § 6103(l)(10).
[22] 26 U.S.C. § 6402(c), (d)(2), (e)(3), (f)(2). The priority of debts
for offset was amended by the Deficit Reduction Act of 2005. Pub. L.
No. 109-171, § 7301(d), 120 Stat. 4, 144 (Feb. 8, 2006) (the effective
date of these amendments is October 1, 2009, unless a state elects to
have the amendments apply on an earlier date, as long as that earlier
date is after September 30, 2008).
[23] Offsets are also permitted for estimated future federal income tax
liabilities.
[24] This would remain the case if Congress eliminated the residency
requirement for state income tax refund offsets, unless Congress made
other changes to the law.
[25] 31 C.F.R. §§ 285.2(b)(2), 285.3(b)(2), 285.8(b)(2).
[26] GAO, Tax Policy: Refund Offset Program Benefits Appear to Exceed
Costs, [hyperlink, http://www.gao.gov/products/GAO/GGD-91-64]
(Washington, D.C.: May 14, 1991).
[End of section]
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