RECENT DEVELOPMENTS
IRS Offset of Taxes Owed to State and Local Governments

By Kevin R. Appel

Kevin R. Appel is chief deputy treasurer and legal counsel to the treasurer of Arlington County, Virginia.

What if states and local governments could collect delinquent tax obligations by deducting them from federal tax refunds? Currently, thirty-six states and the District of Columbia participate in the Federal Offset Tax Program, which permits the offset of IRS tax refunds to collect, in addition to federal government debts, past-due child support and state income tax obligations. If this program were to be expanded to include all delinquent state and local government tax obligations, it could facilitate the collection of millions and millions of dollars in delinquent revenue by states and local governments.

On July 28, 2005, Rep. Mike Turner (R-Ohio) introduced a bill to do just that in the 109th Congress. The bill, H.R. 3498, was co-sponsored by Reps. Tom Davis (R-Va.) and Jim Moran (D-Va.). It has been referred to the House Committee on Government Reform, chaired by Davis. Congressman Turner is also chair of one of the Government Reform subcommittees (Federalism and the Census). On its way to becoming permanent law, the bill would also have to pass through the Committee on Ways and Means on the House side.

H.R. 3498 would amend Title 31 of the United States Code (the Internal Revenue Code) to allow state governments to collect all past-due, legally enforceable tax debts, in addition to the state income taxes already permitted by law, through offset of the delinquent tax debt against federal tax refund. Even more importantly, from the viewpoint of localities confronting decreasing revenue sources, the bill would similarly enable local governments to use the same offset against federal tax refunds for past-due, legally enforceable tax debts owed to the locality.

Under the program proposed in Congressman Turner’s bill, states will administer claims as the clearinghouse for their respective local governments (e.g., through the state taxing authority). The Federal Offset Tax Program is currently administered so that all data and funds are sent electronically between the states and the federal government, minimizing administrative burden. What’s more, the thirty-seven jurisdictions that participate in the Federal Offset Tax Program already have the required computer programs in place, which can also be used to process claims of local governments in the same manner.

To participate in the program, a local government would have to certify to its state that the delinquent tax debts claimed are in fact past due and are legally enforceable and that a good faith effort has been made to notify the tax debtor to give them an opportunity to resolve the delinquency. On behalf of the local government, the state government would then notify the IRS of the tax debt. The IRS would reduce the tax debtor’s federal tax refund up to the amount of the debt and provide it to the state; if for local taxes, the state would then provide the funds to the local government. Both the IRS and the state government would be able to collect a fee to offset the cost of their services. In the event tax return funds are insufficient to pay all debts, the IRS, federal agencies, and state governments will be paid before local governments.

In processing claims, the IRS will ensure that the tax refund offset will not exceed the tax debt of any individual. When a refund is offset, the IRS will provide to the state the tax debtor’s name, taxpayer identification number, address, and the amount that was deducted from the tax debtor’s tax refund. The IRS also will notify each person whose tax refund was offset and explain why it was offset.

The concept of this bill has been publicly supported by the Association of Public Treasurers of the United States and Canada (APT US&C), the Government Finance Officers’ Association (GFOA), the Federation of Tax Administrators (FTA), the National Association of Counties (NACO), the National Association of County Treasurers and Financial Officers (NACTFO), and the Conference of State Court Administrators (CSCA).

Proponents of H.R. 3498 urge interested states and local governments to let their representatives in Congress and the members of the relevant congressional committees know of the potential benefits of the bill. Contact information for all the members of the full House Committee on Government Reform and the full House Committee on Ways and Means can be found at the hyperlinks that follow.

The hyperlink for the full text of the bill is http://thomas.loc.gov/. Enter H.R. 3498 into the search box to find the bill by number. The hyperlinks to contact information for the relevant congressional committees are: the House Committee on Government Reform, www.visi.com/ juan/congress/cgibin/newcommittee.cgi?site=ctc&lang=& commcode=hgovrefrm; the House Committee on Ways and Means—www.visi.com/juan/congress/cgi-bin/newcommittee. cgi?lang=&commcode=hways&site=ctc&address=&city=&state=&zipcode=&plusfour=.