Offset of Tax Refund Payments To Collect Past-Due Support

SUMMARY: Under Federal law, the Federal tax refund of a taxpayer who

owes past-due support is reduced, or offset, by the amounts owed by the

taxpayer. The funds offset from the taxpayers' tax refunds are

forwarded to the State enforcing the collection of the past-due

support. Effective January 1, 1999, the Department of the Treasury will

conduct the tax refund offset program as part of the centralized offset

program operated by the Financial Management Service (FMS), a bureau of

the Department of the Treasury. The provisions of this proposed rule

would prescribe the tax refund offset procedures for all Federal tax

refunds payable after January 1, 1999, to individuals who owe past-due

support being enforced by States. Past-due support includes delinquent

child support or other obligations for the support of a child. This

proposed rule would establish tax refund offset procedures that will

supersede the procedures governing the tax refund offset program

established by the IRS and applicable to the collection of past-due

support (codified at 26 CFR 301.6402-5). The changes in this proposed

rule reflect requirements necessitated by the inclusion of the tax

refund offset program as a part of the Treasury Offset Program.

DATES: Comments will be accepted until September 3, 1998.

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 proposed 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: Gerry Isenberg, Financial Program

Specialist, at (202) 874-6660; Ellen Neubauer or Ronda Kent, Senior

Attorneys, at (202) 874-6680.

SUPPLEMENTARY INFORMATION:

Background

Under the provisions of the Debt Collection Improvement Act of 1996

(DCIA), Pub. L. 104-134, 110 Stat. 1321, 1358 (1996), nontax Federal

payments to a person owing a delinquent nontax debt to the United

States or to a State are reduced, or offset, by the amounts owed by

that person. The offset funds are applied to the person's debt. The

Financial Management Service (FMS), as the disbursing agency of the

Department of the Treasury (Treasury), is responsible for the

implementation of centralized offset of Federal payments for the

collection of delinquent nontax debt owed to Federal agencies and to

States, including past-due support being enforced by the States, in

accordance with the provisions of the DCIA. In addition, FMS disburses

more than 850 million Federal payments annually, including tax refund

payments to taxpayers on behalf of the Internal Revenue Service (IRS).

Under 26 U.S.C. 6402(c) and 42 U.S.C. 664, the tax refund of a

taxpayer who owes past-due support is reduced, or offset, by the

amounts owed by the taxpayer (also referred to as the ``debtor'' in

this rule). The funds offset from the taxpayers' tax refunds are

forwarded to the Department of Health and Human Services (HHS) for

transmission to the State enforcing the collection of the past-due

support. ``Past-due support'' means the amount of support, determined

under a court order, or an order of an administrative process

established under State law, for support and maintenance of a child, or

of a child and the parent with whom the child is living, which has not

been paid.

The IRS has been collecting past-due support for States by tax

refund offset since 1982. FMS has been collecting delinquent nontax

debts and past-due support by the administrative offset of other

Federal payments under its centralized offset program known as the

``Treasury Offset Program.'' To improve the efficiency of Treasury's

collection of debts, operation of the tax refund offset program will be

included as part of the Treasury Offset Program effective January 1,

1999. The provisions and legislative history of the DCIA clarified that

FMS may conduct tax refund offsets to collect past-due support (see

Secs. 31001(v)(2) of the DCIA, codified at 42 U.S.C. 664(a); 142 Cong.

Rec., 104th Cong. 2d Sess., H4087, H4090 (Apr. 25, 1996)).

This proposed rule would govern only the offset of one type of

payment, tax refunds, to pay one type of delinquent debt, past-due

support. FMS has promulgated separate rules and procedures governing

other types of offset, such as tax refund offset for the collection of

debts owed to the Federal Government and the offset of nontax Federal

payments for the collection of past-due child support. FMS also will

promulgate rules governing offset of nontax Federal payments for the

collection of debts (other than child support) owed to Federal agencies

and States. FMS anticipates that Part 285 of this title ultimately will

contain all of the provisions relating to centralized offset by

disbursing officials for the collection of debts owed to the Federal

Government and to State governments, including past-due child support

being enforced by States.

The Treasury Offset Program

The Treasury Offset Program currently works as follows. FMS

maintains a delinquent debtor database. The database contains

delinquent debtor information submitted and updated by Federal agencies

owed debts, and by States collecting debts including any past-due

support being enforced by States. Before a Federal payment is disbursed

to a payee, FMS compares the payee information with debtor information

in the delinquent debtor database operated by FMS. If the payee's name

and taxpayer identifying number (TIN) match the name and TIN of a

debtor, the payment is offset, in whole or part, to satisfy the debt,

to the extent allowed by law. FMS transmits amounts collected to the

appropriate agencies or States owed the delinquent debt after deducting

a fee charged to cover the cost of the offset program.

Information about a delinquent debt or past-due support obligation

remains in the debtor database for offset as long as the debt remains

past-due and legally collectible by offset, or until debt collection

activity for the debt is terminated because of full payment,

compromise, write-off or other reasons justifying termination or

removal of the debt from the database.

Offset of Tax Refund Payments To Collect Past-Due Child Support

Under the Treasury Offset Program

This proposed rule would establish tax refund offset procedures

that will supersede the procedures governing the tax refund offset

program established by the IRS and applicable to the collection of

past-due support (codified at 26 CFR 301.6402-5). 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 would

remain governed by IRS rules.

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After January 1, 1999, tax refund payments would be offset to

collect past-due support as part of the Treasury Offset Program,

subject to the requirements of 26 U.S.C. 6402(c) and 42 U.S.C. 664.

Since FMS issues different payment types daily, past-due support could

then be satisfied by the offset of a variety of Federal payment types

including, but not limited to, vendor, salary, and retirement payments,

as well as tax refund payments.

As required under the provisions of 45 CFR 303.72, the HHS rules

implementing 42 U.S.C. 664, either the State agency collecting the

past-due support or HHS will notify debtors of the State's intention to

submit the debt to Treasury for tax refund offset purposes. The debtors

would be notified that the State intends to collect the past-due

support by tax refund offset, administrative offset, or a combination

of both, and of the applicable opportunities for review available to

the debtor. HHS will report to FMS information on past-due support

debts referred to HHS by States for tax refund offset purposes.

Since under current HHS rules States are required to refer past-due

support debts to HHS for offset of Federal payments, HHS would report

those debts to FMS. While nothing in this rule is intended to require

States to refer past-due support claims directly to FMS for tax refund

offset, this rule would provide the flexibility for HHS to amend its

rule if HHS decides to provide States with that option. For States

submitting debts through HHS, the pre-offset procedures established by

HHS (codified at 45 CFR 303.72) for requesting collection of past-due

child support by tax refund offset would apply and would be unchanged

by this rule. The pre-offset procedures contained in this rule would

apply to past-due support debts submitted to FMS directly by States, if

authorized by HHS. When a past-due support debt is referred to FMS for

offset, the referred debt would be subject to collection by tax refund

offset under the provisions of this rule.

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

the offset has occurred. FMS would 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 would 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 would continue to be responsible for

reviewing tax refund claims by non-debtor spouses. FMS would provide

States, whether through HHS or directly, with sufficient information to

identify the past-due support obligation for which amounts have been

collected from tax refunds. FMS also would report tax refund offset

information to the IRS at least weekly, to HHS at such time and in such

manner as FMS and HHS agree but no less than annually, and to States

that deal directly with FMS on a periodic basis.

FMS developed this proposed rule in consultation with the IRS and

HHS and acknowledges their constructive assistance. As required by 42

U.S.C. 664(b)(1), HHS has approved this proposed rule.

Proposed Changes Under Treasury Offset Program

As described in detail below, this proposed rule would change

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

5) applicable to the collection of past-due support on behalf of

States. The changes would not affect a debtor's ability to dispute the

nature or amount of the past-due support obligation since States are

required to provide the same due process opportunities to debtors under

this rule as required by HHS rules codified at 45 CFR 303.72.

The changes in this proposed rule reflect requirements necessitated

by the inclusion of the tax refund offset program as a part of the

Treasury Offset Program. For example, since FMS would implement tax

refund offset, under this rule HHS would transmit past-due support

information to FMS, instead of IRS. FMS, rather than IRS, would provide

post-offset notices and information to debtors and HHS or States. By

including the tax refund offset program as a part of the Treasury

Offset Program, States would be permitted to report increases to the

amount of the debt as long as the State provided proper notice to the

debtor and complied with any other requirements of State law or

procedure.

In addition, while not currently allowed under HHS rules, this

proposed rule would provide the flexibility for HHS to authorize States

to refer information directly to FMS, rather than submitting

information through HHS. This proposed rule also would allow States to

submit debts for collection by tax refund offset on an ongoing basis,

rather than annually, if authorized by HHS.

Section Analysis

(a) Definitions

This rule, as proposed, would include the following definitions.

Debt. For purposes of this rule, the term ``debt'' would mean past-

due support unless otherwise indicated. The definition of debt

contained in this rule would not alter the meaning of the term as

contained in 31 U.S.C. 3701(b)(1) or other regulations governing the

collection of debts other than past-due support. It merely would limit

the scope of this rule to debt based on past-due support.

Past-due support. As defined in 42 U.S.C. 664(c), ``past-due

support'' would mean the amount of support determined under a court

order or an order of an administrative process established under State

law for support and maintenance of a child, or of a child and the

parent with whom the child is living, which has not been paid.

Qualified child. ``Qualified child'' would mean a child (A) who is

a minor, or (B) who, while a minor, was determined to be disabled under

subchapters II or XVI, Chapter 7, Title 42, United States Code, and for

whom an order of support is in force. The age of majority is determined

under State law.

State. ``State'' would mean the several States of the United

States. The term ``State'' 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. Treasury considered including legal subdivisions of States

within the definition of ``State'' to ensure that there were no

impediments to collecting past-due support being enforced at, for

example, the county level. Legal subdivisions of States were not

included in the definition of ``State'' because of concerns about the

potential impact on current relationships between States and their

legal subdivisions in the collection of past-due support. The public is

invited to comment on the impact of including or excluding legal

subdivisions of States in the definition of ``State'' as well as any

other provision of this rule. The public also is invited to comment

about whether tribal governments operating child support enforcement

programs should be treated in the same manner as States for purposes of

this rule.

Tax refund offset. For purposes of this rule, the term ``tax refund

offset'' would mean 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 would

[[Page 41690]]

govern the offset of tax refund payments under 26 U.S.C. 6402(c) and 42

U.S.C. 664. This rule would not cover the offset of Federal payments

other than tax refund payments for the collection of past-due support.

See 31 CFR 285.1.

Tax refund payment. For purposes of this rule, the term ``tax

refund payment'' would mean 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 that past-due support information would be

submitted to FMS, instead of IRS, for collection by tax refund offset.

Currently, the IRS rules governing tax refund offset for collection of

past-due support are codified at 26 CFR 301.6402-5. The procedures in

this rule would supersede the procedures in the IRS rule. This rule

would not change the procedures codified at 45 CFR 303.72 which require

States to submit past-due support to HHS for collection by tax refund

offset. This rule only would give States the option of submitting

information directly to FMS, or through HHS, to the extent authorized

by HHS rules.

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

(c) Notification of Past-Due Support

Paragraph (c) describes the process by which past-due support debt

information would be submitted to FMS for tax refund offset. HHS rules

require States to participate in the tax refund offset program. HHS

rules do not mandate that a State participate in the administrative

offset program (offset of nontax Federal payments) created pursuant to

the DCIA and operated pursuant to the rules in section 285.1 of this

part. For those States electing to collect past-due support debts by

administrative offset as well as tax refund offset, nothing in this

proposed rule or section 285.1 would require a State to submit

duplicate past-due support debt information for collection by offset

under both rules. Further, nothing in this proposed rule would prohibit

a State from combining into a single notice to the debtor the pre-

offset notification required under this proposed rule, Section 285.1,

and other laws or regulations.

Paragraph (c)(1) describes the type of past-due support eligible

for collection by tax refund offset based on the requirements of 26

U.S.C. 6402(c) and 42 U.S.C. 664. HHS rules establish a minimum past-

due support requirement of $150 when support has been assigned to the

State. Paragraph (c)(1)(i)(A) of this proposed rule would not change

the requirement but would provide HHS with the flexibility to reduce

the minimum amount to $25 for assigned cases. Paragraph (c)(1)(i)(B)

reflects the statutory provision in 42 U.S.C. 664(b)(2) that

establishes a minimum past-due support requirement of $500 for cases

for which a State agency is providing support collection services for

parents who are not receiving welfare benefits (non-assigned cases).

For non-assigned cases, tax refund offset may be used only to collect

past-due support owed to or on behalf of a qualified child, or in some

circumstances, a qualified child and the parent with whom the child is

living.

Paragraph (c)(2) describes the information that must be included

for each past-due support debt owed when a State submits notification

to HHS for transmission to FMS. The procedures by which States submit

notification of liability to HHS are detailed in 45 CFR 303.72. This

rule would not change those procedures. FMS and HHS will provide States

with more specific instructions regarding the formatting of information

and the required data elements.

Under the existing IRS regulation, codified at 26 CFR 301.6402-5,

States are required to submit past-due support information to HHS,

which transmits the information to IRS for offset. Paragraph (c)(3)

adds a new procedure whereby States, at their option and to the extent

authorized by HHS, would be permitted to submit past-due support

information for offset directly to FMS, instead of through HHS.

Under paragraphs (c)(2) and (c)(3), States would be required to

certify compliance with pre-offset procedures contained in this rule

and imposed by State law or procedures. The certifying official would

be required to have both the knowledge and authority to certify, on

behalf of the State, that the requirements have been met.

Paragraph (c)(4) reiterates the requirements codified at 42 U.S.C.

664 and 45 CFR 303.72 concerning the notice and opportunities that

States are required to provide to individuals who owe past-due support

before initiating collection by tax refund offset. This proposed rule

would not change the procedures.

Paragraph (c)(5) describes the procedures for correcting and

updating information transmitted to FMS by a State. If the information

is transmitted to FMS through HHS, States would correct and update

information through HHS. As currently operated by the IRS, States may

submit past-due support debts once each year for tax refund offset and

may not increase the amount owed after the debt is submitted. As

operated under the Treasury Offset Program, debts would be submitted

for offset on an ongoing basis, rather than annually only, if provided

for in HHS rules. Therefore, unlike the IRS rule codified at 26 CFR

301.6402-5(c)(4), under the Treasury Offset Program and this rule,

States would be able to increase the amount of past-due support owed by

an obligor after the debt is submitted for offset, subject to

compliance with pre-offset State law and certification requirements.

Decreases in the amount owed also will be reported in the manner and

time frames provided by FMS or HHS.

Paragraph (c)(6) would require States that are enforcing a past-due

support order issued by another State, or otherwise have knowledge that

another State is involved in enforcing a particular past-due support

order, to inform any other State involved in enforcing the order that

it has notified FMS of the past-due support and of any amounts received

as a result of an offset. The purpose of this proposed notification is

to avoid duplicate offsets for the same debt referred by more than one

State and to ensure that debt balances are maintained accurately.

(d) Priorities for Offset

This paragraph describes how a tax refund payment would be applied

when a taxpayer owes multiple past-due support debts certified for

offset. Since the priorities are mandated by statute, 26 U.S.C.

6402(c), the priorities as stated in the IRS regulation, codified at 26

CFR 301.6402-5, would not change. Before authorizing FMS to disburse a

tax refund payment, the IRS would 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 (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; and third,

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

State. The public is invited to comment on how a tax refund payment

should be applied to a taxpayer's multiple debts within the same

category e.g., if a taxpayer owes

[[Page 41691]]

two or more support obligations that have been assigned to a State.

Paragraph (d)(2) reiterates that the tax refund payment would be

applied to the outstanding nontax debts of a taxpayer prior to the

taxpayer's future estimated tax liabilities. Any amounts remaining

after offset would be applied to estimated tax, or would be refunded to

the taxpayer.

(e) Post-Offset Notice

Under this paragraph (e), once an offset of a tax refund payment

has occurred, FMS, rather than IRS, would provide notice to the payee

and HHS or the State that refers past-due support directly to FMS. In

its notice to the payee, FMS also would notify a non-debtor spouse who

files a joint income tax return with a debtor of the procedures that

may be taken to secure his or her proper share of the tax refund. FMS

would notify the IRS of any offsets. At such time and in such manner as

FMS and HHS agree, but no less than annually, FMS would provide HHS

with statistical information regarding offsets for collection of past-

due support.

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

Return

This paragraph (f) 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 would not be

affected by this rule.

(g) Disposition of Amounts Collected

This paragraph (g) describes how amounts collected from tax refund

payments would be transmitted to HHS or the appropriate State.

(h) Fees

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

tax refund offset program incurred by FMS, including any costs charged

to FMS by the IRS. FMS would deduct the fee from the amount offset

before that amount is transmitted to the State or HHS. The fee will be

established annually in such amount as FMS and HHS agree to be

sufficient to reimburse FMS for the full cost of the offset procedure.

FMS would provide notification, in advance, of any changes in 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(c) 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. 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) describes permitted uses of confidential tax information

in connection with tax refund offset.

(k) Effective Date

The inclusion of the tax refund offset program as a part of the

administrative offset program conducted by FMS will be effective for

all tax refund payments payable after January 1, 1999. Before that

date, States would be required to comply with all of the tax refund

offset prerequisites, such as providing notice to debtors, in order to

submit debts for collection from tax refund payments payable after

January 1, 1999.

Regulatory Analyses

This proposed rule is not a significant regulatory action as

defined in Executive Order 12866. It is hereby certified that this rule

will not have a significant economic impact on a substantial number of

small entities. Therefore, a regulatory flexibility analysis is not

required. This regulation will not impose significant costs on small

businesses because this regulation only impacts individuals who receive

tax refunds and who owe past-due support.

The public is invited to submit comments on the proposed 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, Child support, Child

welfare, Claims, Debts, Privacy, Taxes.

Authority and Issuance

For the reasons set forth in the preamble, 31 CFR Part 285 is

proposed to be amended as follows:

PART 285--DEBT COLLECTION AUTHORITIES UNDER THE DEBT COLLECTION

IMPROVEMENT ACT OF 1996

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

follows:

Authority: 26 U.S.C. 6402; 31 U.S.C. 321, 3716, 3720A; 42 U.S.C.

664; E.O. 13019.

2. Section 285.3 is proposed to be added to subpart A to read as

follows:

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

(a) Definitions. For purposes of this section:

Debt as used in this section is synonymous with the term past-due

support unless otherwise indicated.

Debtor as used in this section means a person who owes past-due

support.

FMS means the Financial Management Service, a bureau of the

Department of the Treasury.

HHS means the Department of Health and Human Services, Office of

Child Support Enforcement.

IRS means the Internal Revenue Service, a bureau of the Department

of the Treasury.

Past-due support means the amount of support, determined under a

court order, or an order of an administrative process established under

State law, for support and maintenance of a child, or of a child and

the parent with whom the child is living, which has not been paid, as

defined in 42 U.S.C. 664(c).

Qualified child means a child:

(i) Who is a minor, or

(ii) Who, while a minor, was determined to be disabled under

subchapters II or XVI, Chapter 7, Title 42, United States Code, and for

whom an order of support is in force.

State means the several States of the United States. The term

``State'' also includes the District of Columbia, American Samoa, Guam,

the United States Virgin Islands, the Commonwealth of the Northern

Mariana Islands, and the Commonwealth of Puerto Rico.

Tax refund offset means withholding or reducing a tax refund

payment by an amount necessary to satisfy a debt owed by the payee(s)

of a tax refund payment.

Tax refund payment means any overpayment of Federal taxes to be

refunded to the person making the overpayment after the IRS makes the

appropriate credits as provided in 26 U.S.C. 6402(a) and 26 CFR 6402-

3(a)(6)(i) for any liabilities for any tax on the part of the person

who made the overpayment.

(b) General rule. (1) Past-due support will be collected by tax

refund offset upon notification to FMS in accordance with 26 U.S.C.

6402(c), 42 U.S.C. 664 and this section. Collection by offset under 26

U.S.C. 6402(c) is a collection procedure separate from the collection

procedures provided by 26 U.S.C. 6305 and 26 CFR 301.6305-1, relating

to the assessment and collection of certain child and spousal support

liabilities. Tax refund offset may be used separately or in conjunction

with the collection procedures provided in 26

[[Page 41692]]

U.S.C. 6305, as well as other collection procedures.

(2) FMS will compare tax refund payment records, as certified by

the IRS, with records of debts submitted to FMS. A match will occur

when the taxpayer identifying number (as that term is used in 26 U.S.C.

6109) and name of a payment certification record are the same as the

taxpayer identifying number and name of a delinquent debtor record.

When a match occurs and all other requirements for tax refund offset

have been met, FMS will reduce the amount of any tax refund payment

payable to a debtor by the amount of any past-due support debt owed by

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

in the payment certification record.

(c) Notification of past-due support. (1) Past-due support eligible

for tax refund offset. Past-due support qualifies for tax refund offset

if:

(i)(A) There has been an assignment of the support obligation to a

State and the amount of past-due support is not less than $25.00; or

(B) A State agency is providing support collection services under

42 U.S.C. 654(5), the amount of past-due support is not less than

$500.00, and the past-due support is owed to or on behalf of a

qualified child (or a qualified child and the parent with whom the

child is living if the same support order includes support for the

child and the parent); and

(ii) A notification of liability for past-due support has been

received by FMS as prescribed by paragraphs (c)(2) or (c)(3) of this

section.

(2) Notification of liability for past-due support transmitted to

FMS by HHS. States notifying HHS of past-due support shall do so in the

manner and format prescribed by HHS. The notification of liability

shall be accompanied by a certification that the State has complied

with the requirements contained in paragraph (c)(4) of this section and

with any requirements applicable to the offset of Federal tax refunds

to collect past-due support imposed by State law or procedures. HHS

shall consolidate and transmit to FMS the information contained in the

notifications of liability for past-due support submitted by the States

provided that the State has certified that the requirements of

paragraph (c)(4) of this section have been met.

(3) Notification of liability for past-due support transmitted

directly to FMS by States. States notifying FMS of past-due support

shall do so in the manner and format prescribed by FMS to the extent

authorized by HHS regulations. The notification of liability shall be

accompanied by a certification that the State has complied with the

requirements contained in paragraph (c)(4) of this section and with any

requirements applicable to the offset of Federal tax refunds to collect

past-due support imposed by State law or procedures. FMS may reject a

notification of past-due support which does not comply with the

requirements of this section. Upon notification of the rejection and

the reason for rejection, the State may resubmit a corrected

notification.

(4) Advance notification to debtor of intent to collect by tax

refund offset. The State is required to provide a written notification

to the debtor, pursuant to the provisions of 45 CFR 303.72, informing

the debtor that the State intends to refer the debt for collection by

tax refund offset. The notice also shall:

(i) Instruct the debtor of the steps which may be taken to contest

the State's determination that past-due support is owed or the amount

of the past-due support;

(ii) Advise any non-debtor who may file a joint tax return with the

debtor of the steps which a non-debtor spouse may take in order to

secure his or her proper share of the tax refund; and

(iii) In cases when a debt is being enforced by more than one

State, advise the debtor of his or her opportunities to request a

hearing with the State enforcing collection or the State issuing the

support order as prescribed by the provisions of 45 CFR 303.72(g).

(5) Correcting and updating notification. The State shall, in the

manner and in the time frames provided by FMS or HHS, notify FMS or HHS

of any deletion or net decrease in the amount of past-due support

referred to FMS, or HHS as the case may be, for collection by tax

refund offset. The State may notify FMS or HHS of any increases in the

amount of the debt referred to FMS for collection by tax refund offset

provided that the State has complied with the requirements of paragraph

(c)(4) of this section with regard to those debts.

(6) Collection of past-due support enforced by multiple States.

When a State has knowledge that the debt is being enforced by more than

one State, the State notifying FMS, or HHS as the case may be, of the

debt shall inform any such other State involved in enforcing the debt

when it receives the offset amount.

(d) Priorities for offset. (1) As provided in 26 U.S.C. 6402 as

amended, a tax refund payment shall be reduced first by the amount of

any past-due support assigned to a State (welfare cases) which is to be

offset under 26 U.S.C. 6402(c), 42 U.S.C. 664 and this section; second,

by the amount of any past-due, legally enforceable debt owed to a

Federal agency which is to be offset under 26 U.S.C. 6402(d), 31 U.S.C.

3720A and Sec. 285.2 of this part; and third, by the amount of any

qualifying past-due support not assigned to a State (non-welfare cases)

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

section.

(2) 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.

(e) Post-offset notice. (1) (i) FMS shall notify the debtor in

writing of:

(A) The amount and date of the offset to satisfy past-due support;

(B) The State to which this amount has been paid or credited; and

(C) A contact point within the State that will handle concerns or

questions regarding the offset.

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

advise any non-debtor who may have filed a joint tax return with the

debtor of the steps which a non-debtor spouse may take in order to

secure his or her proper share of the tax refund. See paragraph (f) of

this section.

(2) FMS will advise HHS of the names, mailing addresses, and

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

support were collected, of the amounts collected from each debtor

through tax refund offset, the names of any non-debtor spouses who may

have filed a joint return with the debtor, and of the State on whose

behalf each collection was made. Alternatively, FMS will provide such

information to each State that refers debts directly to FMS. FMS will

inform HHS and each State that the payment source is a tax refund

payment.

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

taxpayer identifying numbers of the debtors from whom amounts owed for

past-due support were collected from tax refund offsets and the amounts

collected from each debtor.

(4) At such time and in such manner as FMS and HHS agree, but no

less than annually, FMS will advise HHS of the States which have

furnished notices of past-due support, the number of cases in each

State with respect to which such notices have been furnished, the

amount

[[Page 41693]]

of past-due support sought to be collected by each State, and the

amount of such tax refund offset collections actually made in the case

of each State.

(f) Offset made with regard to a tax refund payment based upon

joint return. If the person filing a joint return with a debtor owing

the past-due support takes appropriate action to secure his or her

proper share of a tax refund from which an offset was made, the IRS

will pay the person his or her share of the refund and request that FMS

deduct that amount from amounts payable to HHS or the State, as the

case may be. FMS and HHS, or the appropriate State, will adjust their

debtor records accordingly.

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

collected for debts, less fees charged under paragraph (h) of this

section, to HHS or to the appropriate State. If FMS learns that an

erroneous offset payment is made to HHS or any State, FMS will notify

HHS or the appropriate State that an erroneous offset payment has been

made. FMS may deduct the amount of the erroneous offset payment from

amounts payable to HHS or the State, as the case may be. Alternatively,

upon FMS'' request, the State shall return promptly to the affected

taxpayer or FMS an amount equal to the amount of the erroneous payment

(unless the State previously has paid such amounts, or any portion of

such amounts, to the affected taxpayer). HHS and States shall notify

FMS any time HHS or a State returns an erroneous offset payment to an

affected taxpayer. FMS and HHS, or the appropriate State, will adjust

their debtor records accordingly.

(h) Fees. The State will pay a fee to FMS for the full cost of

administering the tax refund offset program. The fee will be

established annually in such amount as FMS and HHS agree to be

sufficient to reimburse FMS for the full cost of the offset procedure.

FMS will deduct the fees from amounts collected prior to disposition

and transmit a portion of the fees deducted to reimburse the IRS for

its share of the cost of administering the tax refund offset program.

Fees will be charged only for actual tax refund offsets completed.

(i) Review of tax refund offsets. In accordance with 26 U.S.C.

6402(f), any reduction of a taxpayer's refund made pursuant to 26

U.S.C. 6402(c) shall not be subject to review by any court of the

United States or by the Secretary of the Treasury, FMS or IRS in an

administrative proceeding. No action brought against the United States

to recover the amount of this reduction shall be considered to be a

suit for refund of tax.

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

and use of confidential tax information in connection with the tax

refund offset program is permitted to the extent necessary in

establishing appropriate agency records, locating any person with

respect to whom a reduction under 26 U.S.C. 6402(c) is sought for

purposes of collecting the debt, and in the defense of any litigation

or administrative procedure ensuing from a reduction made under section

6402(c).

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

payable under 26 U.S.C. 6402 after January 1, 1999.

Dated: July 29, 1998.

Richard L. Gregg,

Commissioner.

[FR Doc. 98-20731 Filed 8-3-98; 8:45 am]

BILLING CODE 4810-35-P