[Code of Federal Regulations]
[Title 31, Volume 2]
[Revised as of July 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 31CFR285.8]

[Page 117-120]
 
                  TITLE 31--MONEY AND FINANCE: TREASURY
 
         CHAPTER II--FISCAL SERVICE, DEPARTMENT OF THE TREASURY
 
PART 285--DEBT COLLECTION AUTHORITIES UNDER THE DEBT COLLECTION IMPROVEMENT ACT OF 1996--Table of Contents
 
                  Subpart A--Disbursing Official Offset
 
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)

[[Page 118]]

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 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

[[Page 119]]

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

[[Page 120]]

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.

[64 FR 71231, Dec. 20, 1999]