Offset of Tax Refund Payments To Collect Past-Due, Legally Enforceable Nontax Debt

DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 285

RIN 1510-AA62

Offset of Tax Refund Payments To Collect Past-Due, Legally

Enforceable Nontax Debt

AGENCY: Financial Management Service, Fiscal Service, Treasury.

ACTION: Interim rule with request for comments.

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SUMMARY: Effective January 1, 1998, the Department of the Treasury

(Treasury) will merge the tax refund offset program with the

centralized administrative offset program operated by the Financial

Management Service (FMS), a bureau of the Department of the Treasury.

The merger of the two offset programs is intended to maximize and

improve Treasury's government-wide collection of delinquent nontax debt

owed to the Federal Government. FMS will administer nontax debt

collection functions that include the tax refund offset program. The

Internal Revenue Service (IRS) will remain responsible for the

administration of the internal revenue laws. To conform with the

requirements of the merged offset program, this interim rule supersedes

the tax refund offset procedures promulgated by the IRS.

DATES: This rule is effective July 25, 1997. This rule applies to tax

refund payments payable after January 1, 1998. Comments will be

received until July 25, 1997.

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

home page at the following address: http://www.fms.treas.gov.

FOR FURTHER INFORMATION CONTACT: Gerry Isenberg, Financial Program

Specialist, at (202) 874-6660; Pamela Dillon, Treasury Offset Program,

at (202) 874-8700; Ellen Neubauer or Ronda Kent, Senior Attorneys, at

(202) 874-6680.

SUPPLEMENTARY INFORMATION:

Background

FMS, as the Treasury disbursing agency, is responsible for the

implementation of centralized administrative offset of Federal payments

for the collection of delinquent nontax debt owed to Federal agencies

and to States, including past-due child support, in accordance with the

provisions of the Debt Collection Improvement Act of 1996 (DCIA),

Public Law 104-134, 110 Stat. 1321-358 et seq. (1996). In addition, FMS

disburses more than 850 million Federal payments annually, including

tax refund payments to taxpayers on behalf of the IRS.

Under 26 U.S.C. 6402(d) and 31 U.S.C. 3720A, the tax refund of a

taxpayer who owes delinquent debt to a Federal agency is reduced, or

offset, by the amounts owed by the taxpayer. The funds offset from the

taxpayers' tax refunds are forwarded to the Federal agency collecting

the delinquent debt. Since 1986, the IRS has been collecting delinquent

debt owed to Federal agencies by tax refund offset.

To improve the efficiency of Treasury's collection of delinquent

debt owed to Federal agencies, effective January 1, 1998, the tax

refund offset program will merge with the centralized administrative

offset program operated by FMS, known as the ``Treasury Offset

Program.'' The Treasury Offset Program, described below, is a

centralized offset program. Under the Treasury Offset Program, a

Federal payment to a person can be reduced, or offset, by a

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delinquent amount owed by that person to a Federal agency or to a

State. In centralizing offset through the Treasury Offset Program, FMS

will consolidate and simplify offset procedures for the Federal

Government. The rules and procedures governing the Treasury Offset

Program will reflect statutory requirements for particular types of

payments or debts, as well as the general rules applicable to

collection of debts by offset.

The DCIA clarified that a Treasury disbursing official may conduct

tax refund offsets (see section 31001(w) of the DCIA, codified at 31

U.S.C. 3720A(h)). To conform with the requirements of the merged

program, this regulation supersedes the procedures governing the tax

refund offset program established by the IRS (codified at 26 CFR

301.6402-6), applicable to the collection of delinquent nontax debts

owed to Federal agencies. The tax refund offset procedures in this rule

supersede the procedures codified at 26 CFR 301.6402-6. 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.

FMS will promulgate separate rules for the offset of tax refund

payments for the collection of past-due child support under 26 U.S.C.

6402(c) (offset of past-due support against overpayments) and 42 U.S.C.

664 (collection of past-due support from Federal tax refunds). In

addition, as authorized by the DCIA, FMS will promulgate rules for the

offset of payments other than tax refund payments for the collection of

debts owed to the United States and debts owed to States. FMS

anticipates that Part 285 of this title will contain all of the

provisions relating to offset by disbursing officials for the

collection of debts owed to the Federal Government and to State

governments, including past-due support.

Under the Treasury Offset Program, before a payment is disbursed to

a payee, FMS will compare the payee information with debtor information

in a database operated by FMS. The database contains debtor information

submitted and updated by Federal and State agencies collecting debts.

If the payee's name (or derivation of the name, known as a ``name

control'') and taxpayer identifying number (TIN) match the name control

and TIN of a debtor, the payment will be offset to satisfy the debt, to

the extent allowed by law, including applicable regulations. The

delinquent debt information will remain in the debtor database for

continuous offset of tax refund and all other eligible Federal payments

until debt collection activity for that debt is terminated because of

payment, compromise, write-off or other reasons justifying termination.

After January 1, 1998, tax refund payments will be offset as part

of the Treasury Offset Program, subject to the requirements of 26

U.S.C. 6402 and 31 U.S.C. 3720A. Since FMS issues different payment

types daily, a nontax delinquent debt could be satisfied by the offset

of a variety of Federal payment types, including vendor, salary,

retirement and certain benefit payments, as well as tax refund

payments.

As required by IRS regulation codified at 26 CFR 301.6402-6, under

the Treasury Offset Program and this rule, before submitting the debt

to FMS for offset, creditor agencies are responsible for notifying

debtors that their debt is delinquent and that the creditor agency

intends to collect the debt by offset. In the notice, the creditor

agency must inform debtors of their right to review applicable records

and to seek a review of the determination of the debt. The creditor

agency will certify to FMS that the requirements of this regulation and

applicable Federal law have been met.

After a tax refund offset occurs, FMS will notify the debtor that

the offset has occurred. FMS will provide information to the debtor

regarding the amount and date of the offset, the creditor agency to

which the amount offset was paid or credited, and a contact within the

creditor agency that will handle concerns or questions regarding the

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 a non-debtor

spouse may take to secure his or her proper share of the tax refund.

IRS will continue to be responsible for reviewing refund claims by non-

debtor spouses. FMS will provide creditor agencies with sufficient

information to identify the debt for which amounts have been collected,

but will not disclose the payment source for the amounts collected. FMS

also will report offset information to the IRS at least weekly.

Procedural Changes Under Treasury Offset Program

As described in detail below, this rule supersedes certain

procedures established by the IRS (codified at 26 CFR 301.6402-6)

applicable to the collection of delinquent nontax debts owed to Federal

agencies. The procedural changes do not affect the rights of the debtor

to dispute the nature or amount of the debt or method of collection;

they only reflect the changes necessitated by the merger of tax refund

offset with the Treasury Offset Program and/or enactment of the DCIA.

For example, since FMS will implement tax refund offset, under this

rule, agencies are required to refer delinquent debts and provide

information and certification to FMS, instead of IRS. FMS, rather than

IRS, will provide post-offset notices and information to debtors and

agencies. Under the Treasury Offset Program, agencies will submit debts

for offset on an ongoing basis, rather than annually. Therefore,

agencies may report, as needed, routine increases to the amount of the

debt (such as those resulting from interest, penalties, and costs)

subject to notice and certification requirements.

Under the IRS regulation (codified at 26 CFR 301.6402-6(c)), prior

to referring a debt for tax refund offset, among other things, agencies

are required to attempt to collect the debt by administrative and

salary offset. FMS' Treasury Offset Program implements the DCIA mandate

to conduct centralized administrative offset (31 U.S.C. 3716(c)) and

salary offset (5 U.S.C. 5514(a)). Therefore, when an agency refers a

debt to FMS' Treasury Offset Program, the debt automatically will be

subject to collection by administrative offset, salary offset, and tax

refund offset. Under the IRS regulation (codified at 26 CFR 301.6402-

6(c)), prior to referring a debt for tax refund offset, agencies are

required to report the debt to a consumer reporting agency. The DCIA

requires that agencies report delinquent consumer debt to credit

bureaus, which agencies may do prior to or after submitting a debt to

the Treasury Offset Program. Although agencies are encouraged to report

delinquent debt early in the collection process, credit bureau

reporting is not a prerequisite to tax refund offset under this rule.

Creditor agencies are required to provide the same due process

rights to debtors under this rule as required by the IRS regulation

(codified at 26 CFR 301.6402-6) and agency-specific regulations. Under

the IRS regulation codified at 26 CFR 301.6402-6(d)(1), agencies are

required to mail the pre-offset notice to a debtor at the mailing

address obtained by the IRS. Although agencies may continue to use the

IRS mailing address, this rule allows agencies the flexibility to use

current address information contained in an agency's records, which may

include address information obtained from the debtor, public databases,

and other means. Since 1992, when the IRS promulgated its final rule,

access to address information databases has become widely available at

reasonable

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costs. Also, based on their experience as participants in the tax

refund offset program over the last 10 years, some agencies have

indicated that the debtor address in their files is a more appropriate

mailing address for due process notification than the IRS address. The

change contained in this rule recognizes the fact that, for the purpose

of providing pre-offset notice to the taxpayer, the address obtained by

a creditor agency may be more recent than the address that the IRS can

provide based on a prior year's tax return.

Section Analysis

(a) Definitions

Creditor agency. The term ``creditor agency'' has the same meaning

as found at 31 U.S.C. 3701(e)(1) and includes a Federal agency seeking

to collect a claim through tax refund offset.

Debt or claim. For the purposes of this rule, the terms ``claim''

and ``debt'' are synonymous and interchangeable and have the same

meaning as found at 31 U.S.C. 3701(b). The term includes debt

administered by a third party acting as an agent for the Federal

Government as set forth in 31 U.S.C. 3720A(a).

Tax refund offset. For purposes of this rule, the term ``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. This rule governs the offset of tax refund payments under 26

U.S.C. 6402(d), 31 U.S.C. 3720A and agency regulations promulgated in

accordance with the requirements of this rule. This rule does not cover

the offset of payments other than tax refund payments, nor does it

cover tax refund offset for the collection of past-due support. The

offset of tax refund payments to collect past-due child support is

governed by 26 U.S.C. 6402(c), 42 U.S.C. 664, and additional

regulations issued by FMS and the Department of Health and Human

Services. The offset of other types of Federal payments to collect

delinquent debt is governed by 31 U.S.C. 3716, 5 U.S.C. 5514, and

related regulations issued by FMS, Office of Personnel Management, and

agencies collecting debt.

Tax refund payment. The tax refund payment is 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

Paragraph (b)(1) states the general rule that Federal agencies,

except the Tennessee Valley Authority (TVA), are required to submit

nontax delinquent debt information to the Secretary of the Treasury for

purposes of tax refund offset. TVA may, but is not required to, submit

its delinquent debt information for tax refund offset. Under the IRS

regulation codified at 26 CFR 301.6402-6(a), agencies submit debt

information to the IRS. Under this rule, agencies will submit debt

information to FMS, a bureau of the Treasury. FMS will operate the

delinquent debtor database and agencies are required to submit debtor

information to FMS for offset purposes. Federal agencies will submit

delinquent debtor information to FMS for purposes of tax refund offset

and administrative offset simultaneously. Thus, agencies will not have

to submit duplicate information to the IRS (for tax refund offset) and

FMS or other Federal agencies (for administrative offset).

Paragraph (b)(2) describes the offset process.

Paragraph (b)(3) identifies the types of debts that this rule does

not cover. Tax debts are collected in accordance with the Internal

Revenue Code and related regulations. As noted above, the IRS deducts

any tax liabilities owed by the taxpayer before authorizing the

issuance of the tax refund payment.

Paragraph (b)(4) describes the rules applicable to tax refund

offset for the purpose of collecting Federal Old Age, Survivors and

Disability Insurance (OASDI) overpayments. These rules have not changed

as a result of the merger of the tax refund offset program with the

administrative offset program.

Paragraph (b)(5) clarifies that an agency is not precluded from

using other debt collection tools, such as wage garnishment, after

submitting a debt to FMS for purposes of tax refund and administrative

offset.

(c) Regulations

This paragraph requires agencies to promulgate temporary or final

regulations for administrative and tax refund offset. Agencies that

previously participated in the tax refund offset program may need to

revise existing regulations to conform with the revised requirements in

this rule. Regulations for administrative offset under 31 U.S.C. 3716

are required since any debt submitted to the FMS debtor database will

be subject to administrative and tax refund offset simultaneously (to

the extent that payments are available for offset). Therefore, in

addition to tax refund offset requirements, a creditor agency must meet

the prerequisites for administrative offset before submitting debts for

collection by offset. FMS anticipates that Federal employee salary

offsets (whereby salary payments payable to Federal employees who owe

Federal debt are reduced to satisfy the outstanding obligations) will

be part of the Treasury Offset Program.

(d) Agency Certification and Referral of Debt

This paragraph describes the procedures related to the collection

of past-due legally enforceable debt owed to Federal agencies by tax

refund offset.

Paragraph (d)(1) outlines the certification required by an agency

submitting debt to FMS for tax refund offset. Section 3720A(b) of title

31 requires that, before collecting a debt by tax refund offset, an

agency must certify that reasonable efforts to collect the debt have

been made by the agency. Under the IRS regulation codified at 26 CFR

301.6402-6(c), before referring a debt for tax refund offset agencies

are required, among other things, to report the debt to a credit bureau

and attempt collection by salary and administrative offset. This rule

no longer requires credit bureau reporting and offset collection as

prerequisites to tax refund offset because the DCIA mandates that

agencies submit their delinquent debts to Treasury for administrative

offset and participate in matches for salary offset purposes. FMS'

Treasury Offset Program will implement the DCIA mandates to conduct

centralized administrative (31 U.S.C. 3716(c)) and salary offset (5

U.S.C. 5514(a)). Therefore, when an agency refers a debt to FMS'

Treasury Offset Program, the debt automatically will be subject to

collection by administrative offset, salary offset, and tax refund

offset. Under this rule, by complying with the DCIA, agencies will meet

the ``reasonable efforts'' requirement since, before submitting a debt

for tax refund offset, agencies will have demanded payment, notified

the debtor that the agency intends to collect the debt by offset

through FMS' Treasury Offset Program if payment is not received when

due, and provided the debtor with an opportunity for review of the debt

and to enter into a reasonable repayment plan. The DCIA further

requires that agencies report delinquent consumer debt to credit

bureaus, which agencies may do prior to or after submitting a debt to

FMS' Treasury Offset Program. Although agencies are encouraged to

report delinquent debt early in the collection process, credit bureau

reporting is not a prerequisite to tax refund offset under this rule.

Paragraph (d)(1)(iv) requires agencies to certify that the debt is

at least $25. If a debt referred to FMS is over $25 at the time it is

referred, the debt will remain

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subject to collection by offset until it is paid in full even if it

falls below the $25 minimum.

Paragraph (d)(2) governs pre-offset notice and consideration of

evidence. Under the IRS regulation codified at 26 CFR 301.6402-6(d)(1),

agencies are required to mail a pre-offset notice to a debtor at the

mailing address obtained from the IRS. Paragraph (d)(2)(i) of this rule

modifies this requirement. As noted above, many agencies can obtain

updated address information from credit reports, public record

databases and the debtor. In many cases, the address obtained by the

agency is more recent than the address that the IRS can provide based

on a prior year's tax return. Therefore, agencies may mail the required

pre-offset notice to the debtor at the most current address contained

in the agency's records related to the debt. An agency may, but is not

required to, obtain address information from the IRS pursuant to 26

U.S.C. 6103(m)(2), (4), or (5) in accordance with IRS procedures.

Paragraph (d)(2)(ii) requires that agencies provide debtors with at

least 30 days to request review by the agency when an agent of the

creditor agency has handled the review. This requirement is the same as

contained in the IRS regulation codified at 26 CFR 301.6402-6(d)(2).

Paragraph (d)(3) governs referral of past-due, legally enforceable

debt. This paragraph describes the information that agencies must

include for each debt submitted to FMS for purposes of tax refund

offset.

Paragraph (d)(4) describes the procedures for correcting and

updating information transmitted to FMS by a creditor agency. Under the

IRS regulation codified at 26 CFR 301.6402-6(f), agencies are not

permitted to increase the amount of debt after they refer a debt to the

IRS for tax refund offset. Under the Treasury Offset Program and this

rule, agencies may increase the amount of the debt owed, subject to

compliance with certification requirements. As operated by the IRS,

agencies submit debts annually for tax refund offset. Since, in

addition to tax refunds, other types of payments will be offset under

the Treasury Offset Program, agencies will submit debts to the debtor

database, and offsets will occur, on an ongoing basis. Payments will be

offset and applied to a debtor's debt in the order in which the

payments are issued. A tax refund payment is one of many types of

payments that may be offset. Therefore, agencies may increase the

amount of the debt owed if the offset prerequisites have been met.

(e) Priorities for Offset

This paragraph describes how a tax refund payment is applied when a

taxpayer owes multiple debts. The priorities as stated in the IRS

regulation codified at 26 CFR 301.6402-6 have not changed. Before

authorizing FMS to disburse a tax refund payment, the IRS will apply

any amount of overpayment by the taxpayer to tax liabilities of the

taxpayer (see definition of ``tax refund payment'' in paragraph (a) of

this section).

Paragraph (e)(1) states that 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; and third, by the amount of any qualifying past-due

support not assigned to a State.

Paragraph (e)(2) states that if a debtor owes more than one past-

due, legally enforceable debt to a Federal agency or agencies, the tax

refund payment shall be credited against the debts in the order in

which the debts accrued. A debt shall be considered to have accrued at

the time at which the agency determines that the debt became past due.

FMS notes that for payments other than tax refunds that are offset

under the Treasury Offset Program, debts not subject to any time

limitation for enforcement will be paid after debts subject to such

limitations. One of the purposes of the DCIA is ``to maximize

collections of delinquent debts owed to the Government by ensuring

quick action to enforce recovery of the debts and the use of all

appropriate collection tools.'' DCIA, Section 31001(b)(1). Generally,

Government policy requires that agencies apply amounts recovered by

offset to debts owed to Federal agencies in accordance with the best

interests of the United States, considering the applicable statute of

limitations. See Federal Claims Collection Standards at 4 CFR Part

102.3(g). It is in the best interests of the United States to first

collect debts that are subject to time limitations restrictions.

Therefore, if a debtor owes multiple debts to the United States,

amounts offset under 31 U.S.C. 3716 will be applied first to older

debts subject to a time limitation, and last to debts for which there

is no limitation to when legal action to collect the debt may be

initiated. See e.g., 20 U.S.C. 1091a (no limitation terminates the

period within which legal action, including offset, may be taken to

collect a student loan). However, unlike 31 U.S.C. 3716, 26 U.S.C.

6402(d)(2) states that a tax refund payment shall be applied to

multiple debts owed to Federal agencies by a taxpayer in the order in

which such debts accrued.

Paragraph (e)(3) 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

shall be applied to estimated tax, or will be refunded to the taxpayer.

(f) Post-Offset Notice to the Debtor, the Creditor Agency, and the IRS

As provided by the IRS under the IRS regulation codified at 26 CFR

301.6402-6(h), under this paragraph (f), once an offset of a tax refund

payment has occurred, FMS will provide notice to the payee and the

creditor agency collecting the debt. FMS will not inform the creditor

agency of the payment source of the amounts collected. Since FMS and

other disbursing agencies will be conducting offsets of various payment

types, debt repayment may result from any one of a number of payment

sources. In its notice to the payee, FMS also will notify a non-debtor

spouse who files a joint income tax return with a debtor and who is

entitled to a tax refund of the procedures that may be taken to secure

his or her proper share of the tax refund. FMS will notify the IRS of

any offsets.

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

Return

This paragraph states that a non-debtor spouse who files a joint

income tax return with a debtor should 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.

(h) Disposition of Amounts Collected

This paragraph describes how amounts collected from tax refund

payments will be transmitted to creditor agencies.

(i) Fees

As did the IRS, FMS will charge a fee to cover the costs of the tax

refund offset program incurred by FMS and IRS. FMS will deduct the fee

from the amount offset before that amount is transmitted to the

creditor agency. The creditor agency may add this fee to the amount of

the debt as an administrative cost if permitted by law. FMS may adjust

the amount of the fee annually to ensure that the fee adequately covers

the

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administrative costs of the tax refund offset program.

(j) Review of Tax Refund Offsets

As provided in the IRS regulation codified at 26 CFR 301.6402-6(l)

and not changed by this rule, the reduction of a taxpayer's refund made

pursuant to 26 U.S.C. 6402(d) 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. Any action taken to recover the

amount of a tax refund offset must be taken against the Federal

creditor agency to which the amount of the reduction was paid. With

respect to recoveries of overpayments of benefits under 42 U.S.C. 404,

any action to recover the amount of the tax refund offset must be taken

against the Commissioner of Social Security.

(k) Access to and Use of Confidential Tax Information

Since creditor agencies will not receive information identifying

the payment source of an offset, FMS does not anticipate that creditor

agencies will have access to and use of confidential tax information

under the merged offset programs. If any such information is disclosed,

however, access to and use of such information is restricted and

governed by 26 U.S.C. 6103.

(l) Effective Date

The merger of the tax refund offset program with the administrative

offset program conducted by FMS will be effective for all tax refund

payments payable after January 1, 1998. Before that date, Federal

agencies must publish or amend tax refund offset regulations and

otherwise comply with tax refund offset prerequisites, such as

providing notice to debtors, to participate in the merged program for

tax refund payments payable after January 1, 1998. Therefore, although

this rule applies to tax refund payments payable after January 1, 1998,

agencies are required to comply with the requirements of this rule on

July 25, 1997.

Regulatory Analyses

This interim rule is not a significant regulatory action as defined

in Executive Order 12866. Because no notice of proposed rulemaking is

required for this interim rule, the provisions of the Regulatory

Flexibility Act do not apply.

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, because FMS has determined that a comment period would be

unnecessary, impractical, and contrary to the public interest. A

comment period is unnecessary because this interim rule does not

contain any significant, substantive changes from the IRS regulations

and does not change how the tax refund offset program affects the

taxpayer who owes delinquent nontax debt. This interim rule reflects

changes to procedures under which creditor agencies submit debt

information to Treasury because of DCIA requirements and the merger of

the tax refund offset program with other Federal offset programs. Under

this regulation, creditor agencies will submit delinquent debt

information to FMS, instead of the IRS. Creditor agencies remain

responsible for providing debtors with the same pre-offset notice,

opportunities, and rights to dispute the debt as required under

existing IRS regulations.

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, many agencies have participated in the tax

refund offset program over the last 10 years. Procedures affecting

debtors remain substantially unchanged. The procedural changes in this

rule affect how agencies will participate in the offset program. In

order to implement the merged offset programs for tax refund payments

made after January 1, 1998, agencies may need to modify and/or

promulgate their own offset regulations and provide debtors with pre-

offset notice prior to October 1997. This interim rule provides

critical guidance that will facilitate creditor agencies' participation

in the tax refund offset program in 1998.

The merged offset programs will improve the efficiency of

Treasury's government-wide collection of nontax delinquent debts.

Therefore, FMS believes that good cause exists and that it is in the

public interest to issue the 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.

List of Subjects in 31 CFR Part 285

Administrative practice and procedure, Claims, Privacy, Taxes.

Authority and Issuance

For the reasons set forth in the preamble, part 285 is added to 31

CFR chapter II, subchapter A, to read as follows:

PART 285--DEBT COLLECTION AUTHORITIES UNDER THE DEBT COLLECTION

IMPROVEMENT ACT OF 1996

Subpart A--Disbursing Official Offset

Sec.

285.1 [Reserved]

285.2 Offset of tax refund payments to collect past-due, legally

enforceable nontax debt.

Authority: 26 U.S.C. 6402; 31 U.S.C. 321, 3720A.

Subpart A--Disbursing Official Offset

Sec. 285.1 [Reserved]

Sec. 285.2 Offset of tax refund payments to collect past-due, legally

enforceable nontax debt.

(a) Definitions. For purposes of this section:

Creditor agency means a Federal agency owed a claim that seeks to

collect that claim through tax refund offset.

Debt or claim refers to an amount of money, funds, or property

which has been determined by an agency official to be due the United

States from any person, organization, or entity, except another Federal

agency. For the purposes of this section, the terms ``claim'' and

``debt'' are synonymous and interchangeable and includes debt

administered by a third party acting as an agent for the Federal

Government.

Debtor means a person who owes a debt or claim. The term ``person''

includes any individual, organization or entity, except another Federal

agency.

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.

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 tax on the part of the person

who made the overpayment.

(b) General rule. (1) A Federal agency (as defined in 26 U.S.C.

6402(g)) that is owed by a person a past-due, legally enforceable

nontax debt shall notify FMS of the amount of such debt for collection

by tax refund offset. However, any agency subject to section 9 of the

Act of May 18, 1933 (16 U.S.C. 831h) owed such a debt may, but is not

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required to, notify FMS of the amount of such debt for collection by

tax refund offset.

(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 (or derivation of the name, known as a ``name control'')

of a payment certification record are the same as the taxpayer

identifying number and name control of a 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 debt owed by

the debtor. Any amounts not offset will be paid to the payee(s) listed

in the payment certification record.

(3) This section does not apply to any debt or claim arising under

the Internal Revenue Code.

(4)(i) This section applies to Federal Old Age, Survivors and

Disability Insurance (OASDI) overpayments provided the requirements of

31 U.S.C. 3720A(f)(1) and (2) are met with respect to such

overpayments.

(ii) For purposes of this section, ``OASDI overpayment'' means any

overpayment of benefits made to an individual under title II of the

Social Security Act (42 U.S.C. 401 et seq.).

(5) A creditor agency is not precluded from using debt collection

procedures, such as wage garnishment, to collect debts that have been

submitted to FMS for purposes of offset under this part. Such debt

collection procedures may be used separately or in conjunction with

offset collection procedures.

(c) Regulations. Prior to submitting debts to FMS for collection by

tax refund offset, Federal agencies shall promulgate temporary or final

regulations under 31 U.S.C. 3716 and 31 U.S.C. 3720A, governing the

agencies' authority to collect debts by administrative offset, in

general, and offset of tax refund payments, in particular.

(d) Agency certification and referral of debt--(1) Past-due,

legally enforceable debt eligible for tax refund offset. For purposes

of this section, when a Federal agency refers a past-due, legally

enforceable debt to FMS for tax refund offset, the agency will certify

to FMS that:

(i) The debt is past-due and legally enforceable in the amount

submitted to FMS and that the agency will ensure that collections are

properly credited to the debt;

(ii) Except in the case of a judgment debt or as otherwise allowed

by law, the debt is referred for offset within ten years after the

agency's right of action accrues;

(iii) The creditor agency has made reasonable efforts to obtain

payment of the debt in that the agency has:

(A) Submitted the debt to FMS for collection by administrative

offset and complied with the provisions of 31 U.S.C. 3716(a) and

related regulations, to the extent that collection of the debt by

administrative offset is not prohibited by statute;

(B) Notified, or has made a reasonable attempt to notify, the

debtor that the debt is past-due, and unless repaid within 60 days

after the date of the notice, will be referred to FMS for tax refund

offset;

(C) Given the debtor at least 60 days to present evidence that all

or part of the debt is not past-due or legally enforceable, considered

any evidence presented by the debtor, and determined that the debt is

past-due and legally enforceable; and

(D) Provided the debtor with an opportunity to make a written

agreement to repay the amount of the debt;

(iv) The debt is at least $25; and

(v) In the case of an OASDI overpayment--

(A) The individual is not currently entitled to monthly insurance

benefits under title II of the Social Security Act (42 U.S.C. 401 et

seq.);

(B) The notice describes conditions under which the Commissioner of

Social Security is required to waive recovery of the overpayment, as

provided under 42 U.S.C. 404(b); and

(C) If the debtor files a request for a waiver under 42 U.S.C.

404(b) within the 60-day notice period, the agency has considered the

debtor's request.

(2) Pre-offset notice and consideration of evidence for past-due,

legally enforceable debt. (i) For purposes of paragraph (d)(1)(iii)(B)

of this section, a creditor agency has made a reasonable attempt to

notify the debtor if the agency uses the current address information

contained in the agency's records related to the debt. Agencies may,

but are not required to, obtain address information from the IRS

pursuant to 26 U.S.C. 6103(m)(2), (4), or (5).

(ii) For purposes of paragraph (d)(1)(iii)(C) of this section, if

the evidence presented by the debtor is considered by an agent of the

creditor agency, or other entities or persons acting on the agency's

behalf, the debtor must be accorded at least 30 days from the date the

agent or other entity or person determines that all or part of the debt

is past-due and legally enforceable to request review by an officer or

employee of the agency of any unresolved dispute. The agency must then

notify the debtor of its decision.

(3) Referral of past-due, legally enforceable debt. A Federal

agency will submit past-due, legally enforceable debt information for

tax refund offset to FMS in the time and manner prescribed by FMS. For

each debt, the creditor agency will include the following information:

(i) The name and taxpayer identifying number (as defined in 26

U.S.C. 6109) of the debtor who is responsible for the debt;

(ii) The amount of such past-due and legally enforceable debt;

(iii) The date on which the debt became past-due;

(iv) The designation of the Federal agency or subagency referring

the debt; and

(v) In the case of an OASDI overpayment, a certification by the

Commissioner of Social Security designating whether the amount payable

to the agency is to be deposited in either the Federal Old-Age and

Survivors Insurance Trust Fund or the Federal Disability Insurance

Trust Fund, but not both.

(4) Correcting and updating referral. If, after referring a past-

due, legally enforceable debt to FMS as provided in paragraph (d)(3) of

this section, a creditor agency determines that an error has been made

with respect to the information transmitted to FMS, or if an agency

receives a payment or credits a payment to the account of a debtor

referred to FMS for offset, or if the debt amount is otherwise

incorrect, the agency shall promptly notify FMS and make the

appropriate correction of the agency's records. Creditor agencies will

provide certification as required under paragraph (d)(1) of this

section for any increases to amounts owed.

(5) FMS may reject a certification which does not comply with the

requirements of paragraph (d)(1) of this section. Upon notification of

the rejection and the reason for the rejection, a creditor agency may

resubmit the debt with a corrected certification.

(e) Priorities for offset. (1) A tax refund payment shall be

reduced first by the amount of any past-due support assigned to a State

under section 402(a)(26) or section 471(a)(17) of the Social Security

Act (42 U.S.C. 602(a)(26) or 42 U.S.C. 671(a)(17)) which is to be

offset under 26 U.S.C. 6402(c), 42 U.S.C. 664 and the regulations

thereunder; second, by the amount of any past-due,

[[Page 34181]]

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 this section; and third,

by the amount of any qualifying past-due support not assigned to a

State which is to be offset under 26 U.S.C. 6402(c), 42 U.S.C. 664 and

the regulations thereunder.

(2) If a debtor owes more than one past-due, legally enforceable

debt to a Federal agency or agencies, the tax refund payment shall be

credited against the debts in the order in which the debts accrued. A

debt shall be considered to have accrued at the time at which the

agency determines that the debt became past due.

(3) Reduction of the tax refund payment pursuant to 26 U.S.C.

6402(a), (c), and (d) 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), and (d) shall be

refunded to the taxpayer, or applied to estimated tax, if elected by

the taxpayer pursuant to IRS regulations.

(f) Post-offset notice to the debtor, the creditor agency, and the

IRS. (1)(i) FMS will notify the payee(s) to whom the tax refund payment

is due, in writing of:

(A) The amount and date of the offset to satisfy a past-due,

legally enforceable nontax debt;

(B) The creditor agency to which this amount has been paid or

credited; and

(C) A contact point within the creditor agency that will handle

concerns or questions regarding the offset.

(ii) The notice in paragraph (f)(1)(i) of this section will also

advise any non-debtor spouse 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 (g) of

this section.

(2) FMS will advise each creditor agency of the names, mailing

addresses, and identifying numbers of the debtors from whom amounts of

past-due, legally enforceable debt were collected and of the amounts

collected from each debtor for that agency. FMS will not advise the

creditor agency of the source of payment from which such amounts were

collected. If a payment from which an amount of past-due, legally

enforceable debt is to be withheld is payable to two individual payees,

FMS will notify the creditor agency and furnish the name and address of

each payee to whom the payment was payable.

(3) At least weekly, FMS will notify the IRS of the names and

taxpayer identifying numbers of the debtors from whom amounts of past-

due, legally enforceable debt were collected and the amounts collected

from each debtor.

(g) 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 debt 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 the

creditor agency. FMS and the creditor agency will adjust their debtor

records accordingly.

(h) Disposition of amounts collected. FMS will transmit amounts

collected for past-due, legally enforceable debts, less fees charged

under paragraph (i) of this section, to the creditor agency's account.

If an erroneous payment is made to any agency, FMS will notify the

creditor agency that an erroneous payment has been made. The agency

shall pay promptly to FMS an amount equal to the amount of the

erroneous payment (without regard to whether any other amounts payable

to such agency have been paid).

(i) Fees. The creditor agency will reimburse FMS and the IRS for

the full cost of administering the tax refund offset program. 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. To

the extent allowed by law, creditor agencies may add the offset fees to

the debt.

(j) Review of tax refund offsets. Any reduction of a taxpayer's

refund made pursuant to 26 U.S.C. 6402(d) 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. Any legal, equitable, or

administrative action by any person seeking to recover the amount of

the reduction of the overpayment must be taken against the Federal

creditor agency to which the amount of the reduction was paid. Any

action which is otherwise available with respect to recoveries of

overpayments of benefits under 42 U.S.C. 404 must be taken against the

Commissioner of Social Security.

(k) Access to and use of confidential tax information. Access to

and use of confidential tax information in connection with the tax

refund offset program are restricted by 26 U.S.C. 6103. Generally,

agencies will not receive confidential tax information from FMS. To the

extent such information is received, agencies are subject to the

safeguard, recordkeeping, and reporting requirements of 26 U.S.C.

6103(p)(4) and the regulations thereunder. The agency shall inform its

officers and employees who access or use confidential tax information

of the restrictions and penalties under the Internal Revenue Code for

misuse of confidential tax information.

(l) Effective date. This section applies to tax refund payments

payable under 26 U.S.C. 6402 after January 1, 1998.

Dated: June 6, 1997.

Russell D. Morris,

Commissioner, Financial Management Service.

[FR Doc. 97-16181 Filed 6-24-97; 8:45 am]

BILLING CODE 4810-35-P