[Federal Register Volume 64, Number 243 (Monday, December 20, 1999)]
[Rules and Regulations]
[Pages 71228-71232]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-32679]



[[Page 71227]]

_______________________________________________________________________

Part III





Department of the Treasury





_______________________________________________________________________



Fiscal Service



_______________________________________________________________________



31 CFR Part 285



Offset of Tax Refund Payments to Collect State Income Tax Obligations; 
Final Rule and Proposed Rule

  Federal Register / Vol. 64, No. 243 / Monday, December 20, 1999 / 
Rules and Regulations  

[[Page 71228]]



DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 285

RIN 1510-AA78


Offset of Tax Refund Payments To Collect State Income Tax 
Obligations

AGENCY: Financial Management Service, Fiscal Service, Treasury.

ACTION: Interim Rule with Request for Comments.

-----------------------------------------------------------------------

SUMMARY: Under provisions of the Internal Revenue Service Restructuring 
and Reform Act of 1998 the Federal tax refund of a taxpayer who owes 
past-due, legally enforceable State income tax obligations may be 
reduced, or offset, by the amounts owed by the taxpayer. The funds 
offset from the taxpayers' Federal tax refunds are forwarded to the 
State that reported the State income tax obligation. Effective January 
1, 2000, the Department of the Treasury will incorporate the procedures 
necessary to collect State income tax obligations reported by States as 
part of the centralized offset program operated by the Financial 
Management Service (FMS), a bureau of the Department of the Treasury. 
Under this interim rule, past-due, legally enforceable State income tax 
obligations include any local income tax that is administered by the 
chief tax administration agency of the State.

DATES: Effective January 1, 2000. Comments will be accepted until 
January 19, 2000.

ADDRESSES: All comments should be addressed to Gerry Isenberg, 
Financial Program Specialist, Debt Management Services, Financial 
Management Service, Department of the Treasury, 401 14th Street S.W., 
Room 151, Washington, D.C. 20227. A copy of this interim rule is being 
made available for downloading from the Financial Management Service 
web site at the following address: http://www.fms.treas.gov.

FOR FURTHER INFORMATION CONTACT: Dean Balamaci, Division Director, Debt 
Management Services, at (202) 874-6660; Ellen Neubauer or Ronda Kent, 
Senior Attorneys, at (202) 874-6680.

SUPPLEMENTARY INFORMATION:

Background

General

    The Internal Revenue Code authorizes the Secretary of the Treasury 
to offset Federal tax refund payments to satisfy debts owed to the 
United States and to collect past-due support for States. Under the 
Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 
105-206, 112 Stat. 685, 779 (1998), the authority to offset tax refund 
payments was amended to allow for the offset of Federal tax refund 
payments to collect past-due, legally enforceable State income tax 
obligations reported to the Secretary of the Treasury by States. The 
amendments authorizing such offsets are effective beginning January 1, 
2000.
    Prior to January 1999, offsets of tax refund payments were 
conducted by the Internal Revenue Service (IRS) under the tax refund 
offset program. Effective January 1, 1999, the IRS tax refund offset 
program was merged into the Treasury Offset Program, operated by the 
Financial Management Service (FMS). FMS, a bureau of the U.S. 
Department of the Treasury, disburses more than 850 million Federal 
payments annually, including tax refund payments to taxpayers on behalf 
of the IRS. The Treasury Offset Program is a centralized offset program 
in which FMS offsets tax refund payments as well as other nontax 
Federal payments to collect delinquent debts owed to Federal agencies 
and States.
    This rule governs only the offset of one type of payment, i.e., tax 
refunds, to pay one type of delinquent debt, i.e., past-due, legally 
enforceable State income tax obligations. 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 and tax refund offset for the collection of past-due 
support. FMS anticipates that Part 285 of this title ultimately will 
contain all of the provisions relating to centralized offset for the 
collection of debts owed to the Federal Government and to State 
governments, including past-due, legally enforceable State income tax 
obligations.

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 by persons, and by States collecting debts including any 
past-due support being enforced by States. This database will be 
expanded to include past-due, legally enforceable State income tax 
obligations reported by States. As is done by Federal agencies, before 
submitting a debt to the database, States will certify to FMS that the 
debt is legally enforceable and that all due process prerequisites have 
been met. Before a Federal payment is disbursed to a payee, including 
Federal tax refund payments, 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. 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, legally 
enforceable State income tax obligation will remain 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 State Income Tax Obligations 
Under the Treasury Offset Program

    This rule establishes procedures governing the collection of past-
due, legally enforceable State income tax obligations by offsetting 
Federal tax refund payments. 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. 
Although tax refund payments issued beginning January 1, 2000, will be 
offset to collect past-due, legally enforceable State income tax 
obligations as part of the Treasury Offset Program, such offsets will 
be made in accordance with the requirements of 26 U.S.C. 6402(e).
    After a tax refund offset occurs, FMS will notify the debtor that 
the offset has occurred. FMS also will provide information to the 
debtor regarding the amount and date of the offset, the State to which 
the amount offset was paid, and a contact in the State that would 
handle concerns or questions regarding the delinquent debt that 
resulted in the tax refund offset. The notice also will advise any non-
debtor spouse who may have filed a joint tax return with the debtor of 
the steps that the non-debtor spouse may take to secure his or her 
proper share of the tax refund. IRS will continue to be responsible for 
reviewing tax refund claims by non-debtor spouses. FMS will provide 
States with sufficient information to identify the State income tax 
obligation for which amounts have been collected from tax refunds. FMS 
also will report tax refund offset information to the IRS at least 
weekly and to States on a periodic basis.

[[Page 71229]]

Sectional Analysis

Definitions

    Several terms included in this interim rule have specific meanings 
that are discussed below. Other definitions included in the interim 
rule do not require explanation.
    The term ``past-due, legally enforceable State income tax 
obligation'' means a debt which resulted from a final court judgment or 
a final administrative proceeding which has determined that an amount 
of State income tax is due. A final court judgment or a final 
administrative proceeding is one which is no longer subject to judicial 
review. The term ``past-due, legally enforceable State income tax 
obligation'' also means a debt which resulted from a final State income 
tax assessment which has not been collected provided the debt has not 
been delinquent for more than 10 years. A final State income tax 
assessment means an assessment for which the time for redetermination 
under State law or procedure has expired. The term ``assessment'' is 
intended to be interpreted broadly to include self-assessments. The 
date of delinquency of a debt which resulted from a final state income 
tax assessment for purposes of determining whether or not the debt has 
been delinquent for more than 10 years is to be determined in 
accordance with State law. For purposes of this interim rule, the term 
``past-due, legally enforceable State income tax obligation'' is used 
interchangeably with the term ``debt.''
    The term ``State'' means the States of the United States. The term 
also would include 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.
    The term ``State income tax'' is intended to cover all taxes 
determined under State law to be State income tax. The term includes 
any local income tax that is administered by the chief tax 
administering agency of the State.
    The term ``tax refund offset'' means withholding or reducing a 
Federal tax refund payment by an amount necessary to satisfy a debt 
owed by the payee(s) of a tax refund payment. This rule only governs 
the offset of tax refund payments under 26 U.S.C. 6402(e); it does not 
cover the offset of Federal payments other than tax refund payments for 
the collection of past-due legally enforceable State income tax 
obligations.
    The term ``tax refund payment'' means the amount to be refunded to 
the taxpayer after the IRS has applied the taxpayer's overpayment to 
the taxpayer's past-due tax liabilities in accordance with 26 U.S.C. 
6402(a) and 26 CFR 6402-3(a)(6)(i).

(b) General Rule

    Upon notification to FMS of a debt by a State, in accordance with 
26 U.S.C. 6402(e) and this interim rule, FMS will collect such debt by 
means of tax refund offset. The offset will be conducted by comparing 
tax refund payment records, certified to FMS by the IRS, with records 
of debts certified and submitted to FMS by States. Under FMS's 
centralized offset program, a match will occur when the taxpayer 
identifying number, as defined at 26 U.S.C. 6109, and name on a payment 
certification record are the same as the taxpayer identifying number 
and name on a debtor record. Under this interim rule, when a match 
occurs, and all other requirements for tax refund offset have been met, 
FMS would reduce the amount of the tax refund payment payable to a 
debtor by the amount of any past-due, legally enforceable State income 
tax obligations owed by the debtor. Any amounts not offset would be 
paid to the payee(s) listed in the payment certification record. As 
required by law, under this interim rule an offset will not occur if 
the address listed on the Federal tax return is not an address within 
the State seeking the offset.

(c) Notification of Past-due, Legally Enforceable State Income Tax 
Obligations

    Paragraph (c) of the interim rule describes the process by which 
debt information would be submitted to FMS by States for tax refund 
offset. Paragraph (c)(1) describes the manner in which States would be 
required to submit past-due, legally enforceable State income tax 
debts, including certification requirements. In accordance with the 
requirements of 26 U.S.C. 6402(e), under the interim rule, FMS would be 
able to reject any notification that fails to meet these requirements.
    Paragraph (c)(2) of the interim rule would establish a minimum debt 
requirement of $25.00 or such other amounts as determined by FMS. Where 
an individual owes more than one debt to the same State, the minimum 
amount will be applied to the aggregate amount of the debts owed. FMS 
will inform States on an annual basis of any changes in the minimum 
debt amount. FMS would have the option to reject any debt included in a 
notification which is below this amount.
    Paragraph (c)(3) of the interim rule describes the certification 
requirements that would be required to be provided for each State 
income tax debt owed when a State submits notification to FMS. FMS 
would provide States with more specific instructions regarding the 
formatting of information and the required data elements.
    Under paragraphs (c)(1) and (c)(3), States are required to certify 
compliance with pre-offset procedures contained in this rule and 
imposed by State law or procedures. The certifying official is required 
to have both the knowledge and authority to certify, on behalf of the 
State, that the requirements have been met. The certification and pre-
offset procedures include a requirement that States provide debtors 
with notice that they intend to collect the debt by referral to 
Treasury for tax refund offset; that States afford debtors the 
opportunity to present evidence that all or part of the debt is not 
due; and that States establish procedures for reviewing evidence 
presented by debtors. While we are satisfied that these procedures 
adequately protect taxpayers from erroneous offsets, we are 
nevertheless of the view that special protections are warranted where a 
State is attempting to collect a debt by tax refund offset from an 
enrolled member of an Indian tribe who lives on a reservation and 
derives all of his or her income from that reservation, and therefore 
is immune from state taxation. Thus, procedures established for 
reviewing evidence presented by debtors in response to the notice that 
their debt is being submitted to Treasury for collection by tax refund 
offset, must include specific procedures to handle claims of 
individuals who claim immunity from state taxation on the basis of 
being an enrolled member of an Indian tribe who lives on a reservation 
and derives all of his or her income from that reservation. These 
procedures are intended to ensure that such claims are considered on 
their merits before being submitted for collection by tax refund offset 
even in those cases where the individual claiming immunity has 
previously failed to timely present his or her claim in response to 
notice regarding the imposition of the tax or in response to the use of 
other collection tools. Additionally, as an added safeguard, the rule 
requires that States provide copies of these procedures to the 
Secretary of the Treasury, upon request, for review. This is to ensure 
that the conditions for participation in the program prescribed under 
this rule are being met.
    Paragraph (c)(4) of the interim rule describes the procedures for 
correcting

[[Page 71230]]

and updating information transmitted to FMS by a State. As operated 
under the Treasury Offset Program, debts may be submitted for offset on 
an ongoing basis. Therefore, States will be able to increase the amount 
of the state income tax debt owed by an obligor after the debt is 
submitted for offset, subject to compliance with pre-offset State law 
and certification requirements where applicable. For example, while 
States would likely need to provide additional pre-offset notices to a 
debtor whose debt was being increased due to a new assessment, no 
additional notice would be required where a debt was being increased 
due to accrued interest and penalties of which the debtor had 
previously been notified. Decreases in the amount owed also must be 
reported in the manner and time frames provided by FMS.

(d) Priorities for Offset

    Paragraph (d) of the interim rule describes how a tax refund 
payment will be applied when a taxpayer owes multiple debts certified 
for offset. The priorities are mandated by statute, 26 U.S.C. 6402(e). 
Before authorizing FMS to disburse a tax refund payment, the IRS will 
apply any amount of overpayment by the taxpayer to Federal tax 
liabilities of the taxpayer. See definition of ``tax refund payment'' 
in paragraph (a) of this section.
    Paragraph (d)(1) states that, unless otherwise provided by Federal 
law, the tax refund payment will be reduced and applied to a taxpayer's 
debts in the following order of priority: first by the amount of any 
past-due support assigned to a State; second, by the amount of any 
past-due, legally enforceable debt owed to a Federal agency; third, by 
the amount of any qualifying past-due support not assigned to a State; 
and fourth, by the amount of any past-due legally enforceable State 
income tax obligation.
    Paragraph (d)(2) reiterates that the tax refund payment will be 
applied to the outstanding debts of a taxpayer prior to the taxpayer's 
future estimated tax liabilities. Any amounts remaining after offset 
will be refunded to the taxpayer.
    Paragraph (d)(3) provides that, where FMS receives notice from a 
State that more than one debt subject to this section is owed by the 
debtor, any overpayment will be applied to the oldest debt first.

(e) Post-Offset Notice

    Under paragraph (e) of this interim rule, once an offset of a tax 
refund payment has occurred, FMS will provide notice both to the payee 
and to the State that referred the debt to FMS. FMS will also notify 
the IRS of any offsets.

(f) Offset Made With Regard to a Tax Refund Payment Based Upon Joint 
Return

    Paragraph (f) of the interim rule would provide that a non-debtor 
spouse who files a joint income tax return with a debtor may take 
appropriate action to secure his or her proper share of a tax refund 
from which an offset was made. Such procedures are governed by IRS 
rules and are not affected by this rule.

(g) Disposition of Amounts Collected

    Paragraph (g) of the interim rule, describes how amounts collected 
from tax refund payments would be transmitted to the appropriate State. 
This paragraph also discusses the procedures applicable when an 
erroneous payment is made to a State.

(h) Fees

    Paragraph (h) of the interim rule describes how FMS would determine 
the amount of the fee it would charge a State. It states that the fee 
would be set at an amount necessary for FMS to cover the full cost of 
the offset procedure, including any costs charged to FMS by the IRS. 
Under this interim rule, FMS would deduct the fee from the amount 
offset before that amount is transmitted to the State. Under this 
interim rule, the amount of the fee would be established annually, and 
States would be notified in advance of any changes in the amount of the 
fee.

(i) Review of Tax Refund Offsets

    As provided in 26 U.S.C. 6402(f), the reduction of a taxpayer's 
refund made pursuant to 26 U.S.C. 6402(e) is not subject to review by 
any court of the United States or by the Secretary of the Treasury, 
FMS, or IRS in an administrative proceeding. This provision does not 
impact any rights a debtor may otherwise have to dispute the existence 
or amount of the debt.

(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 governed by 26 U.S.C. 6103. 
Paragraph (j) of the interim rule describes permitted uses of 
confidential tax information in connection with tax refund offset.

(k) Effective Date

    In accordance with section 3711(d) of Pub. L. 105-206, the 
inclusion of past-due, legally enforceable State income tax debts as 
part of the Treasury Offset Program will be effective for all tax 
refund payments payable beginning January 1, 2000.

Regulatory Analyses

    This interim rule is not a significant regulatory action as defined 
in Executive Order 12866.
    Executive Order 12866 and the President's Memorandum of June 1, 
1998 require each agency to write all rules in plain language. We 
invite your comments on how to make this interim rule easier to 
understand.

Special Analyses

    FMS is promulgating this interim rule without opportunity for prior 
public comment pursuant to the Administrative Procedure Act, 5 U.S.C. 
553 (the APA) because a comment period would be unnecessary, 
impracticable and contrary to the public interest. The Internal Revenue 
Code provisions authorizing the offset of Federal tax refunds to 
collect State income tax apply to refunds payable after December 31, 
1999. A comment period is unnecessary because this interim rule does 
not change the ongoing offset process under the Tax Refund Offset 
Program, but rather provides guidance for States and disbursing 
officials to facilitate the addition of State income tax debts into the 
Tax Refund Offset Program. This interim rule merely establishes 
procedural requirements governing the transfer of information to and 
from States and reiterates and clarifies requirements established by 
statute. Since this interim rule provides critical guidance needed to 
facilitate the offset of tax refund payments to collect delinquent 
income tax debts owed to States, FMS believes that it is in the public 
interest to issue this interim rule without opportunity for prior 
public comment.
    The public is invited to submit comments on the interim rule which 
will be taken into account before a final rule is issued. The public is 
specifically invited to comment upon whether this rule should impose 
any requirements on States regarding notification to taxpayers and 
review of delinquent debts in addition to those required by statute and 
reiterated and clarified in this rule.

List of Subjects in 31 CFR Part 285

    Administrative practice and procedure, Claims, Debts, Privacy, 
Taxes.

Authority and Issuance

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

[[Page 71231]]

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

    1. The authority citation for part 285 continues 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 285.8 is added to subpart A to read as follows:


Sec. 285.8  Offset of tax refund payments to collect state income tax 
obligations.

    (a) Definitions. For purposes of this section:
    Debt as used in this section means past-due, legally enforceable 
State income tax obligation unless otherwise indicated.
    Debtor as used in this section means a person who owes a state 
income tax obligation.
    FMS means the Financial Management Service, a bureau of the 
Department of the Treasury.
    IRS means the Internal Revenue Service, a bureau of the Department 
of the Treasury.
    Past-due, legally enforceable State income tax obligation means a 
debt which resulted from:
    (1) A judgment rendered by a court of competent jurisdiction which 
has determined an amount of State income tax to be due,
    (2) A determination after an administrative hearing which has 
determined an amount of state income tax to be due and which is no 
longer subject to judicial review, or
    (3) A State income tax assessment (including self-assessments) 
which has become final in accordance with State law but not collected 
and which has not been delinquent for more than 10 years.
    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.
    State income tax obligation means State income tax obligations as 
determined under State law. For purposes of this section, State income 
tax obligation includes any local income tax administered by the chief 
tax administration agency of the State.
    Tax refund offset means withholding or reducing a tax refund 
overpayment by an amount necessary to satisfy a debt owed by the 
payee(s).
    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) FMS will collect past-due, legally 
enforceable State income tax obligations by tax refund offset upon 
notification to FMS of a past-due, legally enforceable State income tax 
obligation in accordance with 26 U.S.C. 6402(e) and this section.
    (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 on a payment certification record are the same as the 
taxpayer identifying number and name on 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, legally enforceable 
State income tax obligation owed by the debtor. Any amounts not offset 
will be paid to the payee(s) listed in the payment certification 
record.
    (3) FMS only will offset a tax refund payment if the address shown 
on the Federal tax return for the taxable year of the overpayment is an 
address within the State seeking the offset.
    (c) Notification of past-due, legally enforceable State income tax 
obligations. (1) Notification to FMS of past-due, legally enforceable 
State income tax obligations. States notifying FMS of state income tax 
obligations shall do so in the manner and format prescribed by FMS. The 
notification of liability must be accompanied by a certification that 
the debt is past-due and legally enforceable and that the State has 
complied with the requirements contained in paragraph (c)(3) of this 
section and with any requirements applicable to the offset of Federal 
tax refunds to collect past-due, legally enforceable State income tax 
obligations imposed by State law or procedures. The certification must 
specifically state that none of the debts submitted for collection by 
offset are debts owed by an individual who has claimed immunity from 
state taxation by reason of being an enrolled member of an Indian tribe 
who lives on a reservation and derives all of his or her income from 
that reservation unless such claim has been adjudicated de novo on its 
merits in accordance with paragraph (c)(3). FMS may reject a 
notification of past-due, legally enforceable State income tax 
obligations which do 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.
    (2) Minimum amount of past-due, legally enforceable State income 
tax obligations that may be submitted. FMS only will accept 
notification of past-due, legally enforceable State income tax 
obligations of $25 or more or such higher amounts as determined by FMS. 
States will be notified annually of any changes in the minimum debt 
amount.
    (3)(i) Advance notification to the debtor of the State's intent to 
collect by Federal tax refund offset. The State is required to provide 
a written notification to the debtor by certified mail, return receipt 
requested, informing the debtor that the State intends to refer the 
debt for collection by tax refund offset. The notice must also give the 
debtor at least 60 days to present evidence, in accordance with 
procedures established by the State, that all or part of the debt is 
not past-due or not legally enforceable.
    (ii) Determination. The State must, in accordance with procedures 
established by the State, consider any evidence presented by a debtor 
in response to the notice described in paragraph (c)(3)(i) of this 
section and determine whether an amount of such debt is past-due and 
legally enforceable. In those cases where a debtor claims that he or 
she is immune from State taxation by reason of being an enrolled member 
of an Indian tribe who lives on a reservation and derives all of his or 
her income from that reservation, State procedures shall include 
consideration of such claims de novo on the merits unless such claims 
have been previously adjudicated by a court of competent jurisdiction. 
States shall, upon request from the Secretary of the Treasury, make 
such procedures available to the Secretary of the Treasury for review.
    (iii) Reasonable efforts. Prior to submitting a debt to FMS for 
collection by tax refund offset the State must make reasonable efforts 
to collect the debt. Reasonable efforts include making written demand 
on the debtor for payment and complying with any other prerequisites to 
offset established by the State.
    (4) Correcting and updating notification. The State shall, in the 
manner and in the time frames provided by FMS, notify FMS of any 
deletion or decrease in the amount of past-due, legally enforceable 
State income tax obligation referred to FMS for collection by tax 
refund offset. The State may notify FMS of any increases in the

[[Page 71232]]

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)(3) of this section with regard to those debts.
    (d) Priorities for offset. (1) As provided in 26 U.S.C. 6402, a tax 
refund payment shall be reduced first by the amount of any past-due 
support assigned to a State; second, by the amount of any past-due, 
legally enforceable debt owed to a Federal agency; third, by the amount 
of any qualifying past-due support not assigned to a State and fourth, 
by any past-due, legally enforceable State income tax obligation.
    (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.
    (3) If FMS receives notice from a State of more than one debt 
subject to this section that is owed by a debtor to the State, any 
overpayment by the debtor shall be applied against such debts in the 
order in which such debts accrued.
    (e) Post-offset notice. (1) When an offset occurs, FMS shall notify 
the debtor in writing of:
    (i) The amount and date of the offset and that the purpose of the 
offset was to satisfy a past-due, legally enforceable State income tax 
obligation;
    (ii) The State to which this amount has been paid or credited; and
    (iii) A contact point within the State that will handle concerns or 
questions regarding the offset.
    (2) The notice in paragraph (e)(1) of this section also will advise 
any non-debtor spouse who may have filed a joint return with the debtor 
of the steps which the non-debtor spouse may take in order to secure 
his or her proper share of the tax refund. See paragraph (f) of this 
section.
    (3) FMS will advise States of the names, mailing addresses, and 
taxpayer identifying numbers of the debtors from whom amounts of state 
income tax obligations were collected, and of the amounts collected 
from each debtor through tax refund offset.
    (4) 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, legally enforceable State income tax obligations were 
collected from tax refund offsets and the amounts collected from each 
debtor.
    (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, legally enforceable State income tax obligation 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 future 
amounts payable to the State or that FMS otherwise obtain the funds 
back from the State. FMS, 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 the appropriate State. If FMS learns that an erroneous 
offset payment is made to any State, FMS will notify the appropriate 
State that an erroneous offset payment has been made. FMS may deduct 
the amount of the erroneous offset payment from future amounts payable 
to the State. 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). 
States shall notify FMS any time a State returns an erroneous offset 
payment to an affected taxpayer. FMS, or the appropriate State, will 
adjust their debtor records accordingly.
    (h) Fees. The State will pay a fee to FMS to cover the full cost of 
offsets taken. The fee will be established annually in such amount as 
FMS determines 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 for purposes of collecting past-due, legally 
enforceable State income tax obligations reported to FMS by the States. 
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(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. This subsection does not preclude any legal, 
equitable, or administrative action against the State to which the 
amount of such reduction was paid.
    (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(e) 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(e).
    (k) Effective date. This section applies to tax refund payments 
payable under 26 U.S.C. 6402 beginning January 1, 2000.
Richard L. Gregg,
Commissioner.
[FR Doc. 99-32679 Filed 12-17-99; 8:45 am]
BILLING CODE 4810-35-P