Offset of Tax Refund Payments To Collect State Income Tax Obligations

SUMMARY: Under provisions of the Internal Revenue Service Restructuring

and Reform Act of 1998 the Federal tax refund of a taxpayer who owes

past-due, legally enforceable State income tax obligations may be

reduced, or offset, by the amounts owed by the taxpayer. The funds

offset from the taxpayers' Federal tax refunds are forwarded to the

State that reported the State income tax obligation. Effective January

1, 2000, the Department of the Treasury will incorporate the procedures

necessary to collect State income tax obligations reported by States as

part of the centralized offset program operated by the Financial

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

Under this interim rule, past-due, legally enforceable State income tax

obligations include any local income tax that is administered by the

chief tax administration agency of the State.

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

January 19, 2000.

ADDRESSES: All comments should be addressed to Gerry Isenberg,

Financial Program Specialist, Debt Management Services, Financial

Management Service, Department of the Treasury, 401 14th Street S.W.,

Room 151, Washington, D.C. 20227. A copy of this interim rule is being

made available for downloading from the Financial Management Service

web site at the following address: http://www.fms.treas.gov.

FOR FURTHER INFORMATION CONTACT: Dean Balamaci, Division Director, Debt

Management Services, at (202) 874-6660; Ellen Neubauer or Ronda Kent,

Senior Attorneys, at (202) 874-6680.

SUPPLEMENTARY INFORMATION:

Background

General

The Internal Revenue Code authorizes the Secretary of the Treasury

to offset Federal tax refund payments to satisfy debts owed to the

United States and to collect past-due support for States. Under the

Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L.

105-206, 112 Stat. 685, 779 (1998), the authority to offset tax refund

payments was amended to allow for the offset of Federal tax refund

payments to collect past-due, legally enforceable State income tax

obligations reported to the Secretary of the Treasury by States. The

amendments authorizing such offsets are effective beginning January 1,

2000.

Prior to January 1999, offsets of tax refund payments were

conducted by the Internal Revenue Service (IRS) under the tax refund

offset program. Effective January 1, 1999, the IRS tax refund offset

program was merged into the Treasury Offset Program, operated by the

Financial Management Service (FMS). FMS, a bureau of the U.S.

Department of the Treasury, disburses more than 850 million Federal

payments annually, including tax refund payments to taxpayers on behalf

of the IRS. The Treasury Offset Program is a centralized offset program

in which FMS offsets tax refund payments as well as other nontax

Federal payments to collect delinquent debts owed to Federal agencies

and States.

This rule governs only the offset of one type of payment, i.e., tax

refunds, to pay one type of delinquent debt, i.e., past-due, legally

enforceable State income tax obligations. FMS has promulgated separate

rules and procedures governing other types of offset, such as tax

refund offset for the collection of debts owed to the Federal

Government and tax refund offset for the collection of past-due

support. FMS anticipates that Part 285 of this title ultimately will

contain all of the provisions relating to centralized offset for the

collection of debts owed to the Federal Government and to State

governments, including past-due, legally enforceable State income tax

obligations.

The Treasury Offset Program

The Treasury Offset Program currently works as follows. FMS

maintains a delinquent debtor database. The database contains

delinquent debtor information submitted and updated by Federal agencies

owed debts by persons, and by States collecting debts including any

past-due support being enforced by States. This database will be

expanded to include past-due, legally enforceable State income tax

obligations reported by States. As is done by Federal agencies, before

submitting a debt to the database, States will certify to FMS that the

debt is legally enforceable and that all due process prerequisites have

been met. Before a Federal payment is disbursed to a payee, including

Federal tax refund payments, FMS compares the payee information with

debtor information in the delinquent debtor database operated by FMS.

If the payee's name and taxpayer identifying number (TIN) match the

name and TIN of a debtor, the payment is offset, in whole or part, to

satisfy the debt, to the extent allowed by law. FMS transmits amounts

collected to the appropriate agencies or States owed the delinquent

debt after deducting a fee charged to cover the cost of the offset

program. Information about a delinquent debt or past-due, legally

enforceable State income tax obligation will remain in the debtor

database for offset as long as the debt remains past-due and legally

collectible by offset, or until debt collection activity for the debt

is terminated because of full payment, compromise, write-off or other

reasons justifying termination or removal of the debt from the

database.

Offset of Tax Refund Payments To Collect State Income Tax Obligations

Under the Treasury Offset Program

This rule establishes procedures governing the collection of past-

due, legally enforceable State income tax obligations by offsetting

Federal tax refund payments. Procedures for processing claims by non-

debtor spouses and for rejecting a taxpayer's election to apply his or

her refund to future tax liabilities remain governed by IRS rules.

Although tax refund payments issued beginning January 1, 2000, will be

offset to collect past-due, legally enforceable State income tax

obligations as part of the Treasury Offset Program, such offsets will

be made in accordance with the requirements of 26 U.S.C. 6402(e).

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

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

debtor regarding the amount and date of the offset, the State to which

the amount offset was paid, and a contact in the State that would

handle concerns or questions regarding the delinquent debt that

resulted in the tax refund offset. The notice also will advise any non-

debtor spouse who may have filed a joint tax return with the debtor of

the steps that the non-debtor spouse may take to secure his or her

proper share of the tax refund. IRS will continue to be responsible for

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

States with sufficient information to identify the State income tax

obligation for which amounts have been collected from tax refunds. FMS

also will report tax refund offset information to the IRS at least

weekly and to States on a periodic basis.

[[Page 71229]]

Sectional Analysis

Definitions

Several terms included in this interim rule have specific meanings

that are discussed below. Other definitions included in the interim

rule do not require explanation.

The term ``past-due, legally enforceable State income tax

obligation'' means a debt which resulted from a final court judgment or

a final administrative proceeding which has determined that an amount

of State income tax is due. A final court judgment or a final

administrative proceeding is one which is no longer subject to judicial

review. The term ``past-due, legally enforceable State income tax

obligation'' also means a debt which resulted from a final State income

tax assessment which has not been collected provided the debt has not

been delinquent for more than 10 years. A final State income tax

assessment means an assessment for which the time for redetermination

under State law or procedure has expired. The term ``assessment'' is

intended to be interpreted broadly to include self-assessments. The

date of delinquency of a debt which resulted from a final state income

tax assessment for purposes of determining whether or not the debt has

been delinquent for more than 10 years is to be determined in

accordance with State law. For purposes of this interim rule, the term

``past-due, legally enforceable State income tax obligation'' is used

interchangeably with the term ``debt.''

The term ``State'' means the States of the United States. The term

also would include the District of Columbia, American Samoa, Guam, the

United States Virgin Islands, the Commonwealth of the Northern Mariana

Islands, and the Commonwealth of Puerto Rico.

The term ``State income tax'' is intended to cover all taxes

determined under State law to be State income tax. The term includes

any local income tax that is administered by the chief tax

administering agency of the State.

The term ``tax refund offset'' means withholding or reducing a

Federal tax refund payment by an amount necessary to satisfy a debt

owed by the payee(s) of a tax refund payment. This rule only governs

the offset of tax refund payments under 26 U.S.C. 6402(e); it does not

cover the offset of Federal payments other than tax refund payments for

the collection of past-due legally enforceable State income tax

obligations.

The term ``tax refund payment'' means the amount to be refunded to

the taxpayer after the IRS has applied the taxpayer's overpayment to

the taxpayer's past-due tax liabilities in accordance with 26 U.S.C.

6402(a) and 26 CFR 6402-3(a)(6)(i).

(b) General Rule

Upon notification to FMS of a debt by a State, in accordance with

26 U.S.C. 6402(e) and this interim rule, FMS will collect such debt by

means of tax refund offset. The offset will be conducted by comparing

tax refund payment records, certified to FMS by the IRS, with records

of debts certified and submitted to FMS by States. Under FMS's

centralized offset program, a match will occur when the taxpayer

identifying number, as defined at 26 U.S.C. 6109, and name on a payment

certification record are the same as the taxpayer identifying number

and name on a debtor record. Under this interim rule, when a match

occurs, and all other requirements for tax refund offset have been met,

FMS would reduce the amount of the tax refund payment payable to a

debtor by the amount of any past-due, legally enforceable State income

tax obligations owed by the debtor. Any amounts not offset would be

paid to the payee(s) listed in the payment certification record. As

required by law, under this interim rule an offset will not occur if

the address listed on the Federal tax return is not an address within

the State seeking the offset.

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

Obligations

Paragraph (c) of the interim rule describes the process by which

debt information would be submitted to FMS by States for tax refund

offset. Paragraph (c)(1) describes the manner in which States would be

required to submit past-due, legally enforceable State income tax

debts, including certification requirements. In accordance with the

requirements of 26 U.S.C. 6402(e), under the interim rule, FMS would be

able to reject any notification that fails to meet these requirements.

Paragraph (c)(2) of the interim rule would establish a minimum debt

requirement of $25.00 or such other amounts as determined by FMS. Where

an individual owes more than one debt to the same State, the minimum

amount will be applied to the aggregate amount of the debts owed. FMS

will inform States on an annual basis of any changes in the minimum

debt amount. FMS would have the option to reject any debt included in a

notification which is below this amount.

Paragraph (c)(3) of the interim rule describes the certification

requirements that would be required to be provided for each State

income tax debt owed when a State submits notification to FMS. FMS

would provide States with more specific instructions regarding the

formatting of information and the required data elements.

Under paragraphs (c)(1) and (c)(3), States are required to certify

compliance with pre-offset procedures contained in this rule and

imposed by State law or procedures. The certifying official is required

to have both the knowledge and authority to certify, on behalf of the

State, that the requirements have been met. The certification and pre-

offset procedures include a requirement that States provide debtors

with notice that they intend to collect the debt by referral to

Treasury for tax refund offset; that States afford debtors the

opportunity to present evidence that all or part of the debt is not

due; and that States establish procedures for reviewing evidence

presented by debtors. While we are satisfied that these procedures

adequately protect taxpayers from erroneous offsets, we are

nevertheless of the view that special protections are warranted where a

State is attempting to collect a debt by tax refund offset from an

enrolled member of an Indian tribe who lives on a reservation and

derives all of his or her income from that reservation, and therefore

is immune from state taxation. Thus, procedures established for

reviewing evidence presented by debtors in response to the notice that

their debt is being submitted to Treasury for collection by tax refund

offset, must include specific procedures to handle claims of

individuals who claim immunity from state taxation on the basis of

being an enrolled member of an Indian tribe who lives on a reservation

and derives all of his or her income from that reservation. These

procedures are intended to ensure that such claims are considered on

their merits before being submitted for collection by tax refund offset

even in those cases where the individual claiming immunity has

previously failed to timely present his or her claim in response to

notice regarding the imposition of the tax or in response to the use of

other collection tools. Additionally, as an added safeguard, the rule

requires that States provide copies of these procedures to the

Secretary of the Treasury, upon request, for review. This is to ensure

that the conditions for participation in the program prescribed under

this rule are being met.

Paragraph (c)(4) of the interim rule describes the procedures for

correcting

[[Page 71230]]

and updating information transmitted to FMS by a State. As operated

under the Treasury Offset Program, debts may be submitted for offset on

an ongoing basis. Therefore, States will be able to increase the amount

of the state income tax debt owed by an obligor after the debt is

submitted for offset, subject to compliance with pre-offset State law

and certification requirements where applicable. For example, while

States would likely need to provide additional pre-offset notices to a

debtor whose debt was being increased due to a new assessment, no

additional notice would be required where a debt was being increased

due to accrued interest and penalties of which the debtor had

previously been notified. Decreases in the amount owed also must be

reported in the manner and time frames provided by FMS.

(d) Priorities for Offset

Paragraph (d) of the interim rule describes how a tax refund

payment will be applied when a taxpayer owes multiple debts certified

for offset. The priorities are mandated by statute, 26 U.S.C. 6402(e).

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

apply any amount of overpayment by the taxpayer to Federal tax

liabilities of the taxpayer. See definition of ``tax refund payment''

in paragraph (a) of this section.

Paragraph (d)(1) states that, unless otherwise provided by Federal

law, the tax refund payment will be reduced and applied to a taxpayer's

debts in the following order of priority: first by the amount of any

past-due support assigned to a State; second, by the amount of any

past-due, legally enforceable debt owed to a Federal agency; third, by

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

and fourth, by the amount of any past-due legally enforceable State

income tax obligation.

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

applied to the outstanding debts of a taxpayer prior to the taxpayer's

future estimated tax liabilities. Any amounts remaining after offset

will be refunded to the taxpayer.

Paragraph (d)(3) provides that, where FMS receives notice from a

State that more than one debt subject to this section is owed by the

debtor, any overpayment will be applied to the oldest debt first.

(e) Post-Offset Notice

Under paragraph (e) of this interim rule, once an offset of a tax

refund payment has occurred, FMS will provide notice both to the payee

and to the State that referred the debt to FMS. FMS will also notify

the IRS of any offsets.

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

Return

Paragraph (f) of the interim rule would provide that a non-debtor

spouse who files a joint income tax return with a debtor may take

appropriate action to secure his or her proper share of a tax refund

from which an offset was made. Such procedures are governed by IRS

rules and are not affected by this rule.

(g) Disposition of Amounts Collected

Paragraph (g) of the interim rule, describes how amounts collected

from tax refund payments would be transmitted to the appropriate State.

This paragraph also discusses the procedures applicable when an

erroneous payment is made to a State.

(h) Fees

Paragraph (h) of the interim rule describes how FMS would determine

the amount of the fee it would charge a State. It states that the fee

would be set at an amount necessary for FMS to cover the full cost of

the offset procedure, including any costs charged to FMS by the IRS.

Under this interim rule, FMS would deduct the fee from the amount

offset before that amount is transmitted to the State. Under this

interim rule, the amount of the fee would be established annually, and

States would be notified in advance of any changes in the amount of the

fee.

(i) Review of Tax Refund Offsets

As provided in 26 U.S.C. 6402(f), the reduction of a taxpayer's

refund made pursuant to 26 U.S.C. 6402(e) is not subject to review by

any court of the United States or by the Secretary of the Treasury,

FMS, or IRS in an administrative proceeding. This provision does not

impact any rights a debtor may otherwise have to dispute the existence

or amount of the debt.

(j) Access to and Use of Confidential Tax Information

Access to and use of confidential tax information in connection

with the tax refund offset program is governed by 26 U.S.C. 6103.

Paragraph (j) of the interim rule describes permitted uses of

confidential tax information in connection with tax refund offset.

(k) Effective Date

In accordance with section 3711(d) of Pub. L. 105-206, the

inclusion of past-due, legally enforceable State income tax debts as

part of the Treasury Offset Program will be effective for all tax

refund payments payable beginning January 1, 2000.

Regulatory Analyses

This interim rule is not a significant regulatory action as defined

in Executive Order 12866.

Executive Order 12866 and the President's Memorandum of June 1,

1998 require each agency to write all rules in plain language. We

invite your comments on how to make this interim rule easier to

understand.

Special Analyses

FMS is promulgating this interim rule without opportunity for prior

public comment pursuant to the Administrative Procedure Act, 5 U.S.C.

553 (the APA) because a comment period would be unnecessary,

impracticable and contrary to the public interest. The Internal Revenue

Code provisions authorizing the offset of Federal tax refunds to

collect State income tax apply to refunds payable after December 31,

1999. A comment period is unnecessary because this interim rule does

not change the ongoing offset process under the Tax Refund Offset

Program, but rather provides guidance for States and disbursing

officials to facilitate the addition of State income tax debts into the

Tax Refund Offset Program. This interim rule merely establishes

procedural requirements governing the transfer of information to and

from States and reiterates and clarifies requirements established by

statute. Since this interim rule provides critical guidance needed to

facilitate the offset of tax refund payments to collect delinquent

income tax debts owed to States, FMS believes that it is in the public

interest to issue this interim rule without opportunity for prior

public comment.

The public is invited to submit comments on the interim rule which

will be taken into account before a final rule is issued. The public is

specifically invited to comment upon whether this rule should impose

any requirements on States regarding notification to taxpayers and

review of delinquent debts in addition to those required by statute and

reiterated and clarified in this rule.

List of Subjects in 31 CFR Part 285

Administrative practice and procedure, Claims, Debts, Privacy,

Taxes.

Authority and Issuance

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

amended as follows:

[[Page 71231]]

PART 285--DEBT COLLECTION AUTHORITIES UNDER THE DEBT COLLECTION

IMPROVEMENT ACT OF 1996

1. The authority citation for part 285 continues to read as

follows:

Authority: 26 U.S.C. 6402; 31 U.S.C. 321, 3701, 3711, 3716,

3720A, 3720B, 3720D; 42 U.S.C. 664; E.O. 13019; 3 CFR, 1996 Comp.,

p. 216.

2. Section 285.8 is added to subpart A to read as follows:

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

obligations.

(a) Definitions. For purposes of this section:

Debt as used in this section means past-due, legally enforceable

State income tax obligation unless otherwise indicated.

Debtor as used in this section means a person who owes a state

income tax obligation.

FMS means the Financial Management Service, a bureau of the

Department of the Treasury.

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

of the Treasury.

Past-due, legally enforceable State income tax obligation means a

debt which resulted from:

(1) A judgment rendered by a court of competent jurisdiction which

has determined an amount of State income tax to be due,

(2) A determination after an administrative hearing which has

determined an amount of state income tax to be due and which is no

longer subject to judicial review, or

(3) A State income tax assessment (including self-assessments)

which has become final in accordance with State law but not collected

and which has not been delinquent for more than 10 years.

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

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

the United States Virgin Islands, the Commonwealth of the Northern

Mariana Islands, and the Commonwealth of Puerto Rico.

State income tax obligation means State income tax obligations as

determined under State law. For purposes of this section, State income

tax obligation includes any local income tax administered by the chief

tax administration agency of the State.

Tax refund offset means withholding or reducing a tax refund

overpayment by an amount necessary to satisfy a debt owed by the

payee(s).

Tax refund payment means any overpayment of Federal taxes to be

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

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

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

person who made the overpayment.

(b) General rule. (1) FMS will collect past-due, legally

enforceable State income tax obligations by tax refund offset upon

notification to FMS of a past-due, legally enforceable State income tax

obligation in accordance with 26 U.S.C. 6402(e) and this section.

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

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

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

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

taxpayer identifying number and name on a delinquent debtor record.

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

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

payable to a debtor by the amount of any past-due, legally enforceable

State income tax obligation owed by the debtor. Any amounts not offset

will be paid to the payee(s) listed in the payment certification

record.

(3) FMS only will offset a tax refund payment if the address shown

on the Federal tax return for the taxable year of the overpayment is an

address within the State seeking the offset.

(c) Notification of past-due, legally enforceable State income tax

obligations. (1) Notification to FMS of past-due, legally enforceable

State income tax obligations. States notifying FMS of state income tax

obligations shall do so in the manner and format prescribed by FMS. The

notification of liability must be accompanied by a certification that

the debt is past-due and legally enforceable and that the State has

complied with the requirements contained in paragraph (c)(3) of this

section and with any requirements applicable to the offset of Federal

tax refunds to collect past-due, legally enforceable State income tax

obligations imposed by State law or procedures. The certification must

specifically state that none of the debts submitted for collection by

offset are debts owed by an individual who has claimed immunity from

state taxation by reason of being an enrolled member of an Indian tribe

who lives on a reservation and derives all of his or her income from

that reservation unless such claim has been adjudicated de novo on its

merits in accordance with paragraph (c)(3). FMS may reject a

notification of past-due, legally enforceable State income tax

obligations which do not comply with the requirements of this section.

Upon notification of the rejection and the reason for rejection, the

State may resubmit a corrected notification.

(2) Minimum amount of past-due, legally enforceable State income

tax obligations that may be submitted. FMS only will accept

notification of past-due, legally enforceable State income tax

obligations of $25 or more or such higher amounts as determined by FMS.

States will be notified annually of any changes in the minimum debt

amount.

(3)(i) Advance notification to the debtor of the State's intent to

collect by Federal tax refund offset. The State is required to provide

a written notification to the debtor by certified mail, return receipt

requested, informing the debtor that the State intends to refer the

debt for collection by tax refund offset. The notice must also give the

debtor at least 60 days to present evidence, in accordance with

procedures established by the State, that all or part of the debt is

not past-due or not legally enforceable.

(ii) Determination. The State must, in accordance with procedures

established by the State, consider any evidence presented by a debtor

in response to the notice described in paragraph (c)(3)(i) of this

section and determine whether an amount of such debt is past-due and

legally enforceable. In those cases where a debtor claims that he or

she is immune from State taxation by reason of being an enrolled member

of an Indian tribe who lives on a reservation and derives all of his or

her income from that reservation, State procedures shall include

consideration of such claims de novo on the merits unless such claims

have been previously adjudicated by a court of competent jurisdiction.

States shall, upon request from the Secretary of the Treasury, make

such procedures available to the Secretary of the Treasury for review.

(iii) Reasonable efforts. Prior to submitting a debt to FMS for

collection by tax refund offset the State must make reasonable efforts

to collect the debt. Reasonable efforts include making written demand

on the debtor for payment and complying with any other prerequisites to

offset established by the State.

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

manner and in the time frames provided by FMS, notify FMS of any

deletion or decrease in the amount of past-due, legally enforceable

State income tax obligation referred to FMS for collection by tax

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

[[Page 71232]]

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

provided that the State has complied with the requirements of paragraph

(c)(3) of this section with regard to those debts.

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

refund payment shall be reduced first by the amount of any past-due

support assigned to a State; second, by the amount of any past-due,

legally enforceable debt owed to a Federal agency; third, by the amount

of any qualifying past-due support not assigned to a State and fourth,

by any past-due, legally enforceable State income tax obligation.

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

6402(a), (c), (d) and (e) shall occur prior to crediting the

overpayment to any future liability for an internal revenue tax. Any

amount remaining after tax refund offset under 26 U.S.C. 6402(a), (c),

(d) and (e) shall be refunded to the taxpayer, or applied to estimated

tax, if elected by the taxpayer pursuant to IRS regulations.

(3) If FMS receives notice from a State of more than one debt

subject to this section that is owed by a debtor to the State, any

overpayment by the debtor shall be applied against such debts in the

order in which such debts accrued.

(e) Post-offset notice. (1) When an offset occurs, FMS shall notify

the debtor in writing of:

(i) The amount and date of the offset and that the purpose of the

offset was to satisfy a past-due, legally enforceable State income tax

obligation;

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

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

questions regarding the offset.

(2) The notice in paragraph (e)(1) of this section also will advise

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

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

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

section.

(3) FMS will advise States of the names, mailing addresses, and

taxpayer identifying numbers of the debtors from whom amounts of state

income tax obligations were collected, and of the amounts collected

from each debtor through tax refund offset.

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

taxpayer identifying numbers of the debtors from whom amounts owed for

past-due, legally enforceable State income tax obligations were

collected from tax refund offsets and the amounts collected from each

debtor.

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

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

the past-due, legally enforceable State income tax obligation takes

appropriate action to secure his or her proper share of a tax refund

from which an offset was made, the IRS will pay the person his or her

share of the refund and request that FMS deduct that amount from future

amounts payable to the State or that FMS otherwise obtain the funds

back from the State. FMS, or the appropriate State, will adjust their

debtor records accordingly.

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

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

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

offset payment is made to any State, FMS will notify the appropriate

State that an erroneous offset payment has been made. FMS may deduct

the amount of the erroneous offset payment from future amounts payable

to the State. Alternatively, upon FMS' request, the State shall return

promptly to the affected taxpayer or FMS an amount equal to the amount

of the erroneous payment (unless the State previously has paid such

amounts, or any portion of such amounts, to the affected taxpayer).

States shall notify FMS any time a State returns an erroneous offset

payment to an affected taxpayer. FMS, or the appropriate State, will

adjust their debtor records accordingly.

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

offsets taken. The fee will be established annually in such amount as

FMS determines to be sufficient to reimburse FMS for the full cost of

the offset procedure. FMS will deduct the fees from amounts collected

prior to disposition and transmit a portion of the fees deducted to

reimburse the IRS for its share of the cost of administering the tax

refund offset program for purposes of collecting past-due, legally

enforceable State income tax obligations reported to FMS by the States.

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

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

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

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

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

administrative proceeding. No action brought against the United States

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

suit for refund of tax. This subsection does not preclude any legal,

equitable, or administrative action against the State to which the

amount of such reduction was paid.

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

and use of confidential tax information in connection with the tax

refund offset program is permitted to the extent necessary in

establishing appropriate agency records, locating any person with

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

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

or administrative procedure ensuing from a reduction made under section

6402(e).

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

payable under 26 U.S.C. 6402 beginning January 1, 2000.

Richard L. Gregg,

Commissioner.

[FR Doc. 99-32679 Filed 12-17-99; 8:45 am]

BILLING CODE 4810-35-P