[Federal Register Volume 63, Number 250 (Wednesday, December 30, 1998)]
[Rules and Regulations]
[Pages 72092-72096]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-34431]



[[Page 72091]]

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Part III





Department of the Treasury





_______________________________________________________________________



Fiscal Service



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31 CFR Part 285



Offset of Tax Refund Payments To Collect Past-Due Support; Final Rule

  Federal Register / Vol. 63, No. 250 / Wednesday, December 30, 1998 / 
Rules and Regulations  

[[Page 72092]]



DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 285

RIN 1510-AA63


Offset of Tax Refund Payments To Collect Past-Due Support

AGENCY: Financial Management Service, Fiscal Service, Treasury.

ACTION: Final rule.

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SUMMARY: Federal law authorizes the Federal tax refund of a taxpayer 
who owes past-due support to be reduced, or offset, by the amounts owed 
by the taxpayer. Past-due support includes delinquent child support or 
other obligations for the support of a child. The funds offset from a 
taxpayer's tax refund are forwarded to the State enforcing the 
collection of the past-due support. Effective January 1, 1999, the 
Department of the Treasury will conduct the tax refund offset program 
as part of the centralized offset program, known as the Treasury Offset 
Program, operated by the Financial Management Service (FMS), a bureau 
of the Department of the Treasury. This final rule establishes tax 
refund offset procedures that supersede the procedures governing the 
tax refund offset program established by the Internal Revenue Service 
(IRS) and applicable to the collection of past-due support (codified at 
26 CFR 301.6402-5). Differences between this rule and the IRS rule 
reflect requirements necessitated by the inclusion of the tax refund 
offset program as a part of the Treasury Offset Program.

EFFECTIVE DATE: December 30, 1998.

FOR FURTHER INFORMATION CONTACT: Gerry Isenberg, Financial Program 
Specialist, at (202) 874-6660; or Ronda Kent or Ellen Neubauer, Senior 
Attorneys, at (202) 874-6680. A copy of this rule is being made 
available for downloading from the Financial Management Service web 
site at the following address: http://www.fms.treas.gov/debt.

SUPPLEMENTARY INFORMATION:

Background

General

    Under 26 U.S.C. 6402(c) and 42 U.S.C. 664, Federal tax payments may 
be withheld or reduced to collect past-due support on behalf of States. 
This process is known as ``offset'' or ``tax refund offset.'' The 
Internal Revenue Service (IRS) has been collecting past-due support for 
States by tax refund offset since 1982. ``Past-due support'' means the 
amount of support, determined under a court order, or an order of an 
administrative process established under State law, for support and 
maintenance of a child, or of a child and the parent with whom the 
child is living, which has not been paid.
    The Debt Collection Improvement Act of 1996 (DCIA), Pub. L. 104-
134, 110 Stat. 1321, 1358 (1996), established a centralized process for 
offsetting eligible nontax Federal payments to collect delinquent debt 
owed to the United States. In addition, the DCIA authorized offset of 
such payments to collect past-due support being enforced by States, as 
well as other debts owed to States.
    The Financial Management Service (FMS), the disbursing agency of 
the Department of the Treasury (Treasury), is responsible for the 
implementation of centralized offset in accordance with the provisions 
of the DCIA. To meet this responsibility, FMS established the 
``Treasury Offset Program.'' To improve the efficiency of Treasury's 
collection of debts, including past-due support, operation of the tax 
refund offset program will be included as part of the Treasury Offset 
Program effective January 1, 1999. The provisions and legislative 
history of the DCIA clarified that FMS may conduct tax refund offsets 
to collect past-due support (see Secs. 31001(v)(2) of the DCIA, 
codified at 42 U.S.C. 664(a); 142 Cong. Rec., 104th Cong. 2d Sess., 
H4087, H4090 (Apr. 25, 1996)).
    On August 4, 1998, FMS issued a notice of proposed rulemaking 
(NPRM) (63 FR 41688, August 4, 1998) proposing changes to the tax 
refund offset procedures for the collection of past-due support after 
January 1, 1999. For tax refund payments after January 1, 1999, the 
revised procedures, as finalized in this rule, supersede the procedures 
governing the tax refund offset program established by the IRS and 
applicable to the collection of past-due support (codified at 26 CFR 
301.6402-5).
    This rule governs only the offset of one type of payment, tax 
refunds, to pay one type of delinquent debt, past-due support. FMS has 
promulgated separate rules and procedures governing other types of 
offset, such as tax refund offset for the collection of debts owed to 
the Federal Government (31 CFR 285.2, 63 FR 46139, August 28, 1998) and 
the offset of nontax Federal payments for the collection of past-due 
child support (31 CFR 285.1, 63 FR 46141, August 28, 1998). See also, 
Offset of Federal Benefit Payments (31 CFR 285.4, 63 FR 44985, August 
21, 1998) and Salary Offset (31 CFR 285.7, 63 FR 23354, April 28, 
1998). FMS will promulgate other rules governing offset of nontax 
Federal payments for the collection of debts (other than child support) 
owed to Federal agencies and States. FMS anticipates that Part 285 of 
this title ultimately will contain all of the provisions relating to 
centralized offset by disbursing officials for the collection of debts 
owed to the Federal Government and to State governments, including 
past-due child support being enforced by States.

The Treasury Offset Program

    The Treasury Offset Program currently works as follows. FMS 
maintains a delinquent debtor database. The database contains 
delinquent debtor information submitted and updated by Federal agencies 
owed debts, and by States collecting debts including any past-due 
support being enforced by States. Before a Federal payment is disbursed 
to a payee, FMS compares the payee information with debtor information 
in the delinquent debtor database operated by FMS. If the payee's name 
and taxpayer identifying number (TIN) match the name and TIN of a 
debtor, the payment is offset, in whole or part, to satisfy the debt, 
to the extent allowed by law. Since FMS issues different payment types 
daily, the collection of past-due support can be satisfied by the 
offset of a variety of Federal payment types including, but not limited 
to, vendor, salary, and retirement payments, as well as tax refund 
payments.
    FMS transmits amounts collected to the appropriate agencies or 
States owed the delinquent debt after deducting a fee charged to cover 
the cost of the offset program. Information about a delinquent debt or 
past-due support obligation remains in the debtor database for offset 
as long as the debt remains past-due and legally collectible by offset, 
or until debt collection activity for the debt is terminated because of 
full payment, compromise, write-off or other reasons justifying 
termination or removal of the debt from the database.

Offset of Tax Refund Payments To Collect Past-Due Child Support Under 
the Treasury Offset Program

    This rule establishes tax refund offset procedures that supersede 
the procedures governing the tax refund offset program established by 
the IRS and applicable to the collection of past-due support (codified 
at 26 CFR 301.6402-5). Tax refund payments issued after January 1, 
1999, will be offset to collect past-due support as part of the 
Treasury Offset Program in accordance with the requirements of 26

[[Page 72093]]

U.S.C. 6402(c) and 42 U.S.C. 664. Procedures for processing claims by 
non-debtor spouses and for rejecting a taxpayer's election to apply his 
or her refund to future tax liabilities remain governed by IRS rules. 
In addition, nothing in this rule changes the pre-offset procedures 
established by the Department of Health and Human Services (HHS) rules 
implementing 42 U.S.C. 664. See 45 CFR 303.72. HHS issued guidance to 
all States on July 6, 1998, concerning the procedures for States to 
submit past-due support debts for offset purposes, including procedures 
pertaining to the debt certification process. See Office of Child 
Support Enforcement (OCSE) Action Transmittal No. OCSE-AT-98-17 (OCSE's 
AT-98-17).
    The preamble to the NPRM explained the proposed process of 
offsetting tax refund payments to collect past-due support under the 
Treasury Offset Program, as well as the differences between the 
proposed procedures and the IRS procedures. The NPRM also contained a 
section-by-section analysis of the proposed rule. (See 63 FR 41688-
41691)
    FMS developed this final rule in consultation with the IRS and HHS 
and appreciates their assistance. As required by 42 U.S.C. 664(b)(1), 
HHS has approved this final rule.

Comments to the NPRM

    In response to the NPRM, FMS received comments from seven (7) State 
child support enforcement agencies which are discussed below.

General Comments

    In response to a commenter's request that the regulation clarify 
that States cannot submit debts directly to FMS for tax refund offset 
purposes unless authorized by HHS rules, Sec. 285.3(c)(3) has been 
revised in the final rule by adding the following first sentence: 
``States must notify HHS of past-due support in accordance with the 
provisions of paragraph (c)(2) of this section unless HHS rules 
authorize notification to FMS directly.'' Though this rule provides 
States with the flexibility to refer past-due support debts directly to 
FMS, current HHS rules governing programs under Chapter 7, Subchapter 
IV, Part D, of title 42 of the U.S. Code (Title IV-D of the Social 
Security Act), require States to report past-due support debts to HHS 
for tax refund offset purposes. This rule does not supersede existing 
HHS rules; it merely provides flexibility should HHS decide to amend 
its rules in the future to allow States to refer past-due support debts 
directly to FMS. States will be notified if HHS amends its rules to 
allow direct submission to FMS. At that time, as suggested by one 
commenter, HHS and FMS will work with States to review any impact 
direct submission may have on the States.
    Another commenter asked whether FMS would require States to use 
administrative offset if HHS rules allowed States to submit debts 
directly to FMS. FMS has no plans to implement such a requirement. In 
response to another commenter's question regarding submission of debts 
to FMS, FMS will allow States to increase balances on debts and to 
submit debts on an on-going basis throughout the year for debts 
submitted through HHS or directly to FMS.

Section 285.3(a)--Definitions

    State. The public was specifically invited to comment on the impact 
of including or excluding legal subdivisions of States in the 
definition of State. Based on two comments received and discussions 
with HHS regarding current procedures for county reporting, FMS 
determined that the definition of State in the NPRM would not create an 
impediment to the collection of past-due support. Counties seeking to 
participate in the offset program may do so by reporting through the 
State's IV-D program. Therefore, the definition of ``State'' was not 
changed to include legal subdivisions.
    The public also was invited to comment about whether tribal 
governments operating child support enforcement programs should be 
treated in the same manner as States for purposes of this rule. One 
commenter noted that treating tribal governments operating child 
support enforcement programs in the same manner as States is consistent 
with the definition of State as defined in section 101, paragraph (19) 
of the Uniform Interstate Family Support Act. For the time being, it is 
anticipated that States will continue to submit past-due support debts 
to the tax refund offset program pursuant to cooperative agreements 
with tribal governments. Therefore, the final rule has not been 
changed. OCSE is in consultation with the tribes and States and will 
formulate policy on this issue as it becomes appropriate. OCSE will 
keep the public advised.

Section 285.3(c)--Notification of Past-Due Support

    One commenter questioned why the minimum debt referral amount in 
Sec. 285.3(c)(1) was different for debts assigned to a State ($25) than 
for debts not assigned to a State ($500). Federal law prohibits the use 
of tax refund offset for non-assigned past-due support debts less than 
$500. See 42 U.S.C. 664(b)(2)(A). There is no similar statutory minimum 
dollar threshold for past-due support debts assigned to a State. 
Another State questioned whether the $25 minimum for assigned debts 
would create confusion since HHS rules currently set a minimum 
threshold of $150. FMS has set minimum thresholds as low as possible in 
order to maximize the collection of past-due support debts through 
offset. Until States are authorized by HHS to submit debts in Title IV-
D cases at a lower threshold, the current minimum threshold set by HHS 
is applicable. Section 285.3(c)(1)(i)(A) has been revised to allow 
referral of assigned debts not less than $25, or such higher amount as 
HHS rules may allow, whichever is greater.
    FMS received several comments related to the advance notice 
requirements described in paragraphs (c)(4) and (c)(5) of Sec. 285.3. 
HHS rules (see 45 CFR 303.72(e) and OCSE's AT-98-17) describe the 
requirements pertaining to providing advance notice to the debtors of 
the State's intent to submit a debt for offset. Since HHS rules govern 
advance notice requirements, the final rule does not incorporate one 
commenter's suggestion that the regulation be revised to clarify that a 
one-time notice to a debtor, rather than an annual notice, is 
sufficient in all cases. HHS' rules allow States to determine 
specifically how frequently advance notice will be provided. 
Additionally, OCSE's AT-98-17 indicates that because the amount of the 
debt may exceed the amount originally indicated in the notice, States 
are encouraged to send periodic notices, especially where there are 
significant increases in the amount of the debt. In response to other 
comments, the first sentence of Sec. 285.3(c)(4) in the final rule has 
been changed to clarify that, as authorized by 45 CFR 303.72(e), HHS 
may send advance notice to the debtor on behalf of a State. Currently, 
FMS has no plans to send advance notices to debtors on behalf of a 
State.
    With respect to the collection of past-due support enforced by 
multiple States as described in Sec. 285.3(c)(6), one commenter 
suggested that FMS and/or HHS inform States via reports when multiple 
States are enforcing the same debt. When a debt is being enforced by 
multiple States, the rule requires notification to the other enforcing 
State only if a State has knowledge of such multiple enforcement. HHS 
and FMS will work with States to resolve multiple enforcement issues as 
they arise. Although at this time there are no plans for providing 
systematic

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notification to States to alert them to multiple enforcement issues, 
HHS and FMS will review whether such notification is desirable.

Section 285.3(d)--Priorities for Offset

    The public was invited to comment on how a tax refund payment 
should be applied to a taxpayer's multiple debts within the same 
category. Two commenters suggested that any refund be applied 
proportionately to the taxpayer's multiple public assistance debts owed 
to two or more States, using the total past-due amount as 100%. Another 
commenter requested that the debts be paid in the order in which they 
were submitted for offset. OCSE's AT-98-17 indicates that OCSE and FMS 
have agreed to continue preexisting processing procedures during the 
transition of the tax refund offset program from IRS to FMS, thus 
processing and giving priority on a first-in-first-processed basis. In 
the future, recommendations for alternate processing procedures will be 
reviewed by OCSE and FMS.
    The final rule has been changed to reflect recently enacted 
legislation (Pub. L. 105-206, July 22, 1998) authorizing Treasury to 
offset tax refunds to collect delinquent State income tax obligations. 
Section 285.3(d) has been changed to reflect the provisions of the new 
law under which such State income tax obligations will be paid from a 
taxpayer's tax refund only after the tax refund has been applied to 
satisfy the taxpayer's delinquent child support obligations and debts 
owed to the Federal Government. See 26 U.S.C. 6402(e).

Section 285.3(e)--Post-Offset Notice

    One commenter suggested that Sec. 285.3(e)(2) include a reporting 
period regarding FMS' offset report to HHS or the States. As in the 
NPRM, the final rule does not include a reporting period because FMS 
will establish mutually agreed upon periods with HHS or affected 
States.
    With respect to Sec. 285.3(e)(4), the commenter questioned whether 
FMS' report to HHS regarding States' participation in offset 
(submissions of debts and offset collections) would include cases 
submitted to FMS directly and those submitted through HHS. Pursuant to 
the provisions of Sec. 285.3(e)(4), the details and requirements of 
such reports will be developed by HHS and FMS but will not be included 
in the rule. It is anticipated that reports will include information 
about cases submitted to FMS directly and through HHS. Contrary to the 
commenter's concern, if, for some reason, the reporting period is 
limited to annually, the provisions of this regulation allowing States 
to submit cases on an ongoing, rather than annual, basis will not be 
affected.

Section 285.3(h)--Fees

    The final rule does not incorporate a commenter's suggestion that 
Sec. 285.3(h) specify a time frame within which States would be 
notified of fee changes prior to any change. FMS will work with HHS and 
States to ensure that States have sufficient advance notification of 
any fee changes.
    Another commenter recommended that the fee structure be identified 
in the regulation and remain at a level that will allow for the offset 
program to be successful. Under 42 U.S.C. 664, Treasury is authorized 
to charge fees to recover the full cost of applying the offset 
procedure. This rule requires that the fee be established annually in 
such amount as FMS and HHS agree. The fee will be no more than $25 per 
case submitted per year. FMS will work with HHS to ensure that States 
are provided with information concerning the fee structure, and that 
the amount of the fee does not negatively impact the success of the 
program.

Regulatory Analyses

    This final rule is not a significant regulatory action as defined 
in Executive Order 12866. It is hereby certified that this rule will 
not have a significant economic impact on a substantial number of small 
entities. The basis for this certification is that this rule impacts 
only individuals who receive tax refunds and who owe past-due support. 
Therefore, a regulatory flexibility analysis is not required.
    FMS has determined that this rule may affect family well-being. It 
is hereby certified that this rule has been assessed in accordance with 
Section 654 of the Treasury Department Appropriations Act, 1999, 
enacted as part of the Omnibus Consolidated and Emergency Supplemental 
Appropriations Act, 1999 (Pub. L. 105-277). This rule will not have a 
negative impact on family well-being because it strengthens the 
financial well-being of families by assisting in the collection of 
past-due child support.

Special Analysis

    FMS has determined that good cause exists to make this final rule 
effective upon publication without providing the 30 day period between 
publication and the effective date contemplated by 5 U.S.C. 553(d). The 
purpose of a delayed effective date is to afford persons affected by a 
rule a reasonable time to prepare for compliance. However, in this 
case, Treasury has been collecting past-due support for States by tax 
refund offset since 1982. Procedures affecting States submitting 
delinquent child support obligations for collection and persons owing 
delinquent child support obligations remain substantially unchanged. 
Effective January 1, 1999, the tax refund offset program will be part 
of the centralized offset program operated by FMS. This final rule 
provides important guidance that is expected to facilitate States' 
participation in the tax refund offset program. Therefore, FMS believes 
that good cause exists to make the rule effective upon publication.

List of Subjects in 31 CFR Part 285

    Administrative practice and procedure, Child support, Child 
welfare, Claims, Debts, Privacy, Taxes.

Authority and Issuance

    For the reasons set forth in the preamble, 31 CFR Part 285 is 
amended as follows:

PART 285--DEBT COLLECTION AUTHORITIES UNDER THE DEBT COLLECTION 
IMPROVEMENT ACT OF 1996

    1. The authority citation for part 285 is revised to read as 
follows:

    Authority: 26 U.S.C. 6402; 31 U.S.C. 321, 3701, 3711, 3716, 
3720A, 3720B, 3720D; 42 U.S.C. 664; E.O. 13019; 3 CFR, 1996 Comp., 
p. 216.

    2. Section 285.3 is added to subpart A to read as follows:


Sec. 285.3  Offset of tax refund payments to collect past-due support.

    (a) Definitions. For purposes of this section:
    Debt as used in this section is synonymous with the term past-due 
support unless otherwise indicated.
    Debtor as used in this section means a person who owes past-due 
support.
    FMS means the Financial Management Service, a bureau of the 
Department of the Treasury.
    HHS means the Department of Health and Human Services, Office of 
Child Support Enforcement.
    IRS means the Internal Revenue Service, a bureau of the Department 
of the Treasury.
    Past-due support means the amount of support, determined under a 
court order, or an order of an administrative process established under 
State law, for support and maintenance of a child, or of a child and 
the parent with whom the child is living, which has not been paid, as 
defined in 42 U.S.C. 664(c).

[[Page 72095]]

    Qualified child means a child:
    (i) Who is a minor, or
    (ii) Who, while a minor, was determined to be disabled under 
subchapters II or XVI, Chapter 7, Title 42, United States Code, and for 
whom an order of support is in force.
    State means the several States of the United States. The term 
``State'' also includes the District of Columbia, American Samoa, Guam, 
the United States Virgin Islands, the Commonwealth of the Northern 
Mariana Islands, and the Commonwealth of Puerto Rico.
    Tax refund offset means withholding or reducing a tax refund 
payment by an amount necessary to satisfy a debt owed by the payee(s) 
of a tax refund payment.
    Tax refund payment means any overpayment of Federal taxes to be 
refunded to the person making the overpayment after the IRS makes the 
appropriate credits as provided in 26 U.S.C. 6402(a) and 26 CFR 6402-
3(a)(6)(i) for any liabilities for any Federal tax on the part of the 
person who made the overpayment.
    (b) General rule. (1) Past-due support will be collected by tax 
refund offset upon notification to FMS in accordance with 26 U.S.C. 
6402(c), 42 U.S.C. 664 and this section. Collection by offset under 26 
U.S.C. 6402(c) is a collection procedure separate from the collection 
procedures provided by 26 U.S.C. 6305 and 26 CFR 301.6305-1, relating 
to the assessment and collection of certain child and spousal support 
liabilities. Tax refund offset may be used separately or in conjunction 
with the collection procedures provided in 26 U.S.C. 6305, as well as 
other collection procedures.
    (2) FMS will compare tax refund payment records, as certified by 
the IRS, with records of debts submitted to FMS. A match will occur 
when the taxpayer identifying number (as that term is used in 26 U.S.C. 
6109) and name of a payment certification record are the same as the 
taxpayer identifying number and name of a delinquent debtor record. 
When a match occurs and all other requirements for tax refund offset 
have been met, FMS will reduce the amount of any tax refund payment 
payable to a debtor by the amount of any past-due support debt owed by 
the debtor. Any amounts not offset will be paid to the payee(s) listed 
in the payment certification record.
    (c) Notification of past-due support. (1) Past-due support eligible 
for tax refund offset. Past-due support qualifies for tax refund offset 
if:
    (i)(A) There has been an assignment of the support obligation to a 
State and the amount of past-due support is not less than $25.00, or 
such higher amount as HHS rules may allow, whichever is greater; or
    (B) A State agency is providing support collection services under 
42 U.S.C. 654(4), the amount of past-due support is not less than 
$500.00, and the past-due support is owed to or on behalf of a 
qualified child (or a qualified child and the parent with whom the 
child is living if the same support order includes support for the 
child and the parent); and
    (ii) A notification of liability for past-due support has been 
received by FMS as prescribed by paragraphs (c)(2) or (c)(3) of this 
section.
    (2) Notification of liability for past-due support and transmission 
of information to FMS by HHS. States notifying HHS of past-due support 
shall do so in the manner and format prescribed by HHS. The 
notification of liability shall be accompanied by a certification that 
the State has complied with the requirements contained in paragraph 
(c)(4) of this section and with any requirements applicable to the 
offset of Federal tax refunds to collect past-due support imposed by 
State law or procedures. HHS shall consolidate and transmit to FMS the 
information contained in the notifications of liability for past-due 
support submitted by the States provided that the State has certified 
that the requirements of paragraph (c)(4) of this section have been 
met.
    (3) Notification of liability for past-due support transmitted 
directly to FMS by States. States must notify HHS of past-due support 
in accordance with the provisions of paragraph (c)(2) of this section 
unless HHS rules authorize notification to FMS directly. If authorized 
by HHS rules, States may notify FMS directly of past-due support. 
States notifying FMS directly of past-due support shall do so in the 
manner and format prescribed by FMS. The notification of liability 
shall be accompanied by a certification that the State has complied 
with the requirements contained in paragraph (c)(4) of this section and 
with any requirements applicable to the offset of Federal tax refunds 
to collect past-due support imposed by State law or procedures. FMS may 
reject a notification of past-due support which does not comply with 
the requirements of this section. Upon notification of the rejection 
and the reason for rejection, the State may resubmit a corrected 
notification.
    (4) Advance notification to debtor of intent to collect by tax 
refund offset. The State, or HHS if the State requests and HHS agrees, 
is required to provide a written notification to the debtor, pursuant 
to the provisions of 42 U.S.C. 664(a)(3) and 45 CFR 303.72(e), 
informing the debtor that the State intends to refer the debt for 
collection by tax refund offset. The notice also shall:
    (i) Instruct the debtor of the steps which may be taken to contest 
the State's determination that past-due support is owed or the amount 
of the past-due support;
    (ii) Advise any non-debtor who may file a joint tax return with the 
debtor of the steps which a non-debtor spouse may take in order to 
secure his or her proper share of the tax refund; and
    (iii) In cases when a debt is being enforced by more than one 
State, advise the debtor of his or her opportunities to request a 
review with the State enforcing collection or the State issuing the 
support order as prescribed by the provisions of 45 CFR 303.72(g).
    (5) Correcting and updating notification. The State shall, in the 
manner and in the time frames provided by FMS or HHS, notify FMS or HHS 
of any deletion or net decrease in the amount of past-due support 
referred to FMS, or HHS as the case may be, for collection by tax 
refund offset. The State may notify FMS or HHS of any increases in the 
amount of the debt referred to FMS for collection by tax refund offset 
provided that the State has complied with the requirements of paragraph 
(c)(4) of this section with regard to those debts.
    (6) Collection of past-due support enforced by multiple States. 
When a State has knowledge that the debt is being enforced by more than 
one State, the State notifying FMS, or HHS as the case may be, of the 
debt shall inform any such other State involved in enforcing the debt 
when it receives the offset amount.
    (d) Priorities for offset. (1) As provided in 26 U.S.C. 6402 as 
amended, a tax refund payment shall be reduced in the following order 
of priority:
    (i) First by the amount of any past-due support assigned to a State 
(welfare cases) which is to be offset under 26 U.S.C. 6402(c), 42 
U.S.C. 664 and this section;
    (ii) Second, by the amount of any past-due, legally enforceable 
debt owed to a Federal agency which is to be offset under 26 U.S.C. 
6402(d), 31 U.S.C. 3720A and Sec. 285.2 of this part;
    (iii) Third, by the amount of any qualifying past-due support not 
assigned to a State (non-welfare cases) which is to be offset under 26 
U.S.C. 6402(c), 42 U.S.C. 664 and this section; and

[[Page 72096]]

    (iv) Fourth, by the amount of any past-due, legally enforceable 
State income tax obligation which is to be offset under 26 U.S.C. 
6402(e).
    (2) Reduction of the tax refund payment pursuant to 26 U.S.C. 
6402(a), (c), (d), and (e) shall occur prior to crediting the 
overpayment to any future liability for an internal revenue tax. Any 
amount remaining after tax refund offset under 26 U.S.C. 6402(a), (c), 
(d), and (e) shall be refunded to the taxpayer, or applied to estimated 
tax, if elected by the taxpayer pursuant to IRS regulations.
    (e) Post-offset notice. (1) (i) FMS shall notify the debtor in 
writing of:
    (A) The amount and date of the offset to satisfy past-due support;
    (B) The State to which this amount has been paid or credited; and
    (C) A contact point within the State that will handle concerns or 
questions regarding the offset.
    (ii) The notice in paragraph (e)(1)(i) of this section also will 
advise any non-debtor who may have filed a joint tax return with the 
debtor of the steps which a non-debtor spouse may take in order to 
secure his or her proper share of the tax refund. See paragraph (f) of 
this section.
    (2) FMS will advise HHS of the names, mailing addresses, and 
identifying numbers of the debtors from whom amounts of past-due 
support were collected, of the amounts collected from each debtor 
through tax refund offset, the names of any non-debtor spouses who may 
have filed a joint return with the debtor, and of the State on whose 
behalf each collection was made. Alternatively, FMS will provide such 
information to each State that refers debts directly to FMS. FMS will 
inform HHS and each State that the payment source is a tax refund 
payment.
    (3) At least weekly, FMS will notify the IRS of the names and 
taxpayer identifying numbers of the debtors from whom amounts owed for 
past-due support were collected from tax refund offsets and the amounts 
collected from each debtor.
    (4) At such time and in such manner as FMS and HHS agree, but no 
less than annually, FMS will advise HHS of the States which have 
furnished notices of past-due support, the number of cases in each 
State with respect to which such notices have been furnished, the 
amount of past-due support sought to be collected by each State, and 
the amount of such tax refund offset collections actually made in the 
case of each State. As FMS and HHS may agree, FMS may provide 
additional offset-related information about States which have furnished 
notices of past-due support.
    (f) Offset made with regard to a tax refund payment based upon 
joint return. If the person filing a joint return with a debtor owing 
the past-due support takes appropriate action to secure his or her 
proper share of a tax refund from which an offset was made, the IRS 
will pay the person his or her share of the refund and request that FMS 
deduct that amount from amounts payable to HHS or the State, as the 
case may be. FMS and HHS, or the appropriate State, will adjust their 
debtor records accordingly.
    (g) Disposition of amounts collected. FMS will transmit amounts 
collected for debts, less fees charged under paragraph (h) of this 
section, to HHS or to the appropriate State. If FMS learns that an 
erroneous offset payment is made to HHS or any State, FMS will notify 
HHS or the appropriate State that an erroneous offset payment has been 
made. FMS may deduct the amount of the erroneous offset payment from 
amounts payable to HHS or the State, as the case may be. Alternatively, 
upon FMS' request, the State shall return promptly to the affected 
taxpayer or FMS an amount equal to the amount of the erroneous payment 
(unless the State previously has paid such amounts, or any portion of 
such amounts, to the affected taxpayer). HHS and States shall notify 
FMS any time HHS or a State returns an erroneous offset payment to an 
affected taxpayer. FMS and HHS, or the appropriate State, will adjust 
their debtor records accordingly.
    (h) Fees. The State will pay a fee to FMS for the full cost of 
administering the tax refund offset program. The fee (not to exceed $25 
per case submitted) will be established annually in such amount as FMS 
and HHS agree to be sufficient to reimburse FMS for the full cost of 
the offset procedure. FMS will deduct the fees from amounts collected 
prior to disposition and transmit a portion of the fees deducted to 
reimburse the IRS for its share of the cost of administering the tax 
refund offset program. Fees will be charged only for actual tax refund 
offsets completed.
    (i) Review of tax refund offsets. In accordance with 26 U.S.C. 
6402(f), any reduction of a taxpayer's refund made pursuant to 26 
U.S.C. 6402(c), (d), or (e) shall not be subject to review by any court 
of the United States or by the Secretary of the Treasury, FMS or IRS in 
an administrative proceeding. No action brought against the United 
States to recover the amount of this reduction shall be considered to 
be a suit for refund of tax.
    (j) Access to and use of confidential tax information. Access to 
and use of confidential tax information in connection with the tax 
refund offset program is permitted to the extent necessary in 
establishing appropriate agency records, locating any person with 
respect to whom a reduction under 26 U.S.C. 6402(c) is sought for 
purposes of collecting the debt, and in the defense of any litigation 
or administrative procedure ensuing from a reduction made under section 
6402(c).
    (k) Effective date. This section applies to tax refund payments 
payable under 26 U.S.C. 6402 after January 1, 1999.

    Dated: December 16, 1998.
Richard L. Gregg,
Commissioner.
[FR Doc. 98-34431 Filed 12-30-98; 8:45 am]
BILLING CODE 4810-35-P