Final Rule: Federal Income Tax Refund Offset
December 6, 1988
Subj: Federal Income Tax Refund Offset
December 6, 1988
TO:STATE AGENCIES ADMINISTERING CHILD SUPPORT ENFORCEMENT PLANS UNDER TITLE IV-D OF THE SOCIAL SECURITY ACT AND OTHER INTERESTED INDIVIDUALS
SUBJECT:Federal Income Tax Refund Offset
ATTACHMENT:Attached is a final regulation which amends the Child Support Enforcement program regulations governing Federal income tax refund offset. This regulation provides that the Office of Child Support Enforcement will recover its costs from the States for certain services provided in the Federal tax refund offset process. This regulation also makes necessary changes to conform OCSE regulations with the revised method the Internal Revenue Service will use, beginning with the 1988 processing year, to recover costs of the offset process.
EFFECTIVE November 25, 1988.
REGULATION 45 CFR 303.72.
RELATED OCSE-AT-88-12, dated July 12, 1988.
SUPERCEDED OCSE-AT-88-08, dated May 3, 1988.
INQUIRIES TO: OCSE Regional Representatives
Wayne A. Stanton
Family Support Administration
45 CFR Part 303
Office of Child Support Enforcement; Federal Income Tax Refund Offset
AGENCY: Office of Child Support Enforcement, (OCSE), FSA, HHS.
ACTION: Final rule.
SUMMARY: This regulation revises Federal tax refund offset regulations to provide that the Office of Child Support Enforcement (OCSE) will recover its costs from the States for certain services provided in the Federal tax refund offset process. These services are limited to printing and mailing pre_offset notices when OCSE provides this service.
In addition, this regulation makes necessary changes to conform OCSE regulations with the revised method the Internal Revenue Service (IRS) will use beginning in processing year 1988 to recover costs of the offset procedure. The IRS fee will no longer be billed to the State and collected by the Secretary of Health and Human Services. Beginning with the 1988 processing year, the IRS deducted its fee from the offset amount, although States are still required to credit the obligor with the full amount of the offset.
EFFECTIVE DATE: November 25, 1988.
FOR FURTHER INFORMATION CONTACT:
Betsy Matheson, OCSE Policy Branch, (202) 252-5362.
Under the Federal tax refund offset program, States are required to send the absent parent advance notice that his or her case will be referred for offset, pursuant to section 464(a)(3)(A) of the Social Security Act(the Act). During the initial years of the Federal tax refund offset program, OCSE, under its regulatory authority, chose to provide States with the option of having OCSE send the advance notice on behalf of the State IV-D agency, if requested to do so, to encourage use of the offset mechanism. In processing year 1988, 39 States and jurisdictions requested OCSE to provide the advance notice to absent parents for them.
OCSE has always had the statutory authority to charge fees for this service, but until now has not done so to give States an incentive to implement the offset procedure. OCSE believes that State programs have sufficiently developed now so that it is no longer necessary to provide this technical assistance, without cost to States. Moreover, in light ofthe Federal deficit it isno longer appropriate to provide a service at no cost which is clearly the obligation of the State. Accordingly, OCSE will now charge for services it provides in the Federal tax refund offset process. These services include printing and mailing pre-offset notices on behalf of the States. Any fees charged the State will be reimbursable at the current Federal matching rate for child support administrative expenses so that the Federal government will still bear the majority of the cost (68 percent in FY 1988 and 1989). Additional information, including the amount of the fee and its effective date, was issued in Program Instructions dated July 12, 1988 (OCSE-AT-88-12).
Another provision of the Federal tax refund offset program is that the IRS shall charge the State a fee for its costs of applying the offset procedure. Prior to the 1988 processing year, this fee was billed and collected from the State IV-D agency by the Secretary of Health and Human Services (HHS). However, the IRS has changed its cost recovery method, and beginning with the 1988 processing year deducted its fee directly from the offset amount. Therefore, these regulations delete the requirement that the IRS fee be billed and collected from the StateIV-D agency by HHS.
In addition to publication of the proposed rule, States were notified well in advance, and through several different media (conferences, action transmittal, letters) of the pending IRS change in its method of recovering costs under the offset procedure. While a small number of States may have difficulties with these changes if conforming State legislative changes are necessary, States have had ample warning and opportunity to implement necessary legislation. In 1986, the IRS notified OCSE of its intention to deduct its fee directly from the offset amount and OCSE informed States in a "Dear Colleague" letter of IRS'intention and asked for comments on whether or not this change would pose any problems. Although the IRS did not implement its proposal in the 1987 processing year, States have been on notice since that time of a potential change in the IRS method for cost recovery.
The revised cost recovery method used by the IRS does not affect current IV-D collection and distribution policy. The State IV-D agency must consider the total amount offset as a support collection and distribute this amount pursuant to Federal regulations at 45 CFR 303.72(h). For example, if the State certifies $2000 for Federal tax refund offset and the IRS offsets $2000 and deducts the IRS offset fee from this amount,the State must credit the absent parent with a $2000 payment and distribute $2000, not $2000 less the IRS fee. The State may recover the IRS fee in non-AFDC cases pursuant to regulations at 45 CFR 302.33(d).
Section 464(a)(3) of the Act requires the State to send notice to an individual that a Federal tax refund offset will be made. Section 464(b)(1) provides that the Secretary of the Treasury shall prescribethe fee that a State must pay toreimburse the Secretary of the Treasury for the full cost of applying the offset procedure.
Section 1102 authorizes the Secretary of HHS to publish regulations (not inconsistent with the Act) necessary to efficiently administer his functions under the Act. Under the title IV-D State plan requirement contained in section 454(13) of the Act, the Secretary may prescribe,and the State must comply with, requirements and standards necessary to establish an effective title IV-D program.
General authority for the Federal government to charge for certain specialized or technical services which it may perform is found in the Intergovernmental Cooperation Act at 31 U.S.C. 6505. This statute states that services may be provided if requested by the State in writing and payment is made.
OMB Circular No. A-97 promulgates rules and regulations permitting Federal agencies to provide specialized or technical services to State and local units of government under title III of the Intergovernmental Cooperation Act. Specifically, this Circular permits Federal agencies to provide (among other services) technical information, data processing, communications and personnel management systems services, and technical advice on improving logistical and management services which the Federal agency normally provides for itself or others under existing authorities. We believe that sending the pre-offset notice on behalf of States meets the above criterion because it provides data processing services which improve the Federal tax refund offset process by ensuring that the offset notice is accurate and timely. The authority for OCSE to provide this service exists because OCSE serves as the agent between the State and the IRS for the offset process. Therefore, OCSE is intrinsically involved inthe actual Federal tax refund offset process and this is just one aspect of that process.
Prior Regulatory Provisions
45 CFR 303.72(e)(1) stated that OCSE or the State IV-D agency if it elects to do so, shall send a written advance notice to inform an absent parent that the amount of his or her past-due support will be referred to the IRS for collection by Federal tax refund offset.
45 CFR 303.72 (i)(1) stated that a refund offset fee, in such amount asthe Secretary of the Treasury and the Secretary of HHS have agreed to be sufficient to reimburse the IRS for the full cost of the offset procedure, shall be billed and collected from the IV_D agency by the Secretary of HHS or designee and credited to the IRS appropriations which bore all or part of the costs involved in making the collection.
This regulation revises 45 CFR 303.72(e)(1) to require that the State IV-D agency, or OCSE, if the State requests and OCSE agrees, shall send the advance notice. This revision isconsistent with section 464(a)(3) of the Act. The revised language merely clarifies that the State is ultimately responsible for sending the advance notice and that OCSE is providing technical assistance to the State when it sends the advance notice on behalf of the State.
Paragraph (i)(1) of this section is revised by deleting the reference tothe IRS cost recovery procedure, i.e., the IRS fee is billed and collected from the IV-D agency by the Secretary of HHS. This change is necessary to conform OCSE regulations to the change in the IRS method for collecting the IRS offset fee. Beginning in processing year 1988, the IRS deducted its fee from the offset collection instead of billing the State and having HHS collect the fee.
A new paragraph (i)(3) has been added to this section. This paragraph provides that a fee will be charged to any State which requests OCSE to send advance written notice in regard to the Federal tax refund offset process, including the printing and mailing of pre_offset notices on behalf of the State. The amount of the fee and the effective date for charging a fee will be established by OCSE in instructions.
Response to Comments
Seven State agencies submitted comments in response to the notice of proposed rulemaking published in the Federal Register (53 FR 12041) on April 12, 1988. A discussion of these comments and our responses follow:
Fee for Printing and Mailing Pre-Offset Notices
Comment 1: Three State agencies expressed concern over the cost to State and local governments resulting from the fee which OCSE will now charge for printing and mailing pre-offset notices.
Response: These regulations at õ303.72, which specify that States requesting OCSE to send pre-offset notices will be charged a fee, will result in some increased costs to State and local governments which opt to have OCSE send their pre-offset notices. Although section 464(a)(3)(A) of the Act clearly requires States to send pre_offset notices to absent parents, OCSE previously provided these services without charge to encourage use of the offset procedure and to assist States during the developmental stages of implementation. Such assistance is no longer necessary. We believe the cost to States will be minimal, since States will receive Federal funding for these expenditures at the applicable matching rate.
Comment 2: One State agency inquired how States will be reimbursed for any overpayment of OCSE's fee.
Response: Refunds will be issued after the printing and sending of pre-offset notices have been completed. Program instructions, issued in an action transmittal (OCSE-AT-88-12) on July 12, 1988, specifically discuss the payment process.
Comment 3: One State agency requested that we revise the proposed regulation at õ303.72(i)(3) to clarify that "the State"refers to States which request OCSE to mail its pre-offset notices.
Response: In response to the commentor's recommendation, final regulations at õ303.72(i)(3) specify that a State which requests OCSE to send written advance notice to absent parents will be charged a corresponding fee.
Comment 4: One State agency suggested that it would be more cost effective for the State agency to send a combined Federal and State pre172offset notice.
Response: States may send a combined State and Federal pre-offset notice if all notice requirements for both processes are met. As we have previously stated in the Federal Register
(50 FR 19636) on May 9, 1985, Federal regulations do not have the same notice requirements for Federal and State offset since procedures, distribution policy and the agency responsible for Federal and State offset may be different depending on State practice. However, many States do use a combined notice, which is cost effective, and we encourage other States to adopt such procedures if feasible.
IRS Cost Recovery method
Comment 1: Two State agencies expressed concern over the administrativ eand financial impact of the new IRS cost recovery method indicating that there will have to be changes made to automated systems and accounting procedures as well as increased budget authority. They requested that the collection method remain unchanged or be delayed for six months to allow time for automated systems and budgetary changes.
Response: Beginning with the 1988 processing year, the IRS deducted the offset fee from the offset amount. Regulations at õ303.72(i)(1) simply reflect changes already made by the IRS to their cost recovery method and these revisions do not increase the fee charged by the IRS for refund offsets. States have always been responsible for paying these fees. The States have had ample notice of this change since 1986 and we believe any additional costs incurred to accommodate this new method will be minimal. The States will be reimbursed for the IRS offset fee at the applicable matching rate.
Comment 2: One State agency asked what authority the IRS has to change their fee collection method.
Response: The revised IRS fee collection method corresponds with the cost recovery method the IRS employs with Federal agencies using the tax refund offset process to collect outstanding debts. This method is routinely applied between Federal and State governments and facilitates efficient settlement of accounts especially in the elimination of delinquent accounts. While alternative methods were considered in regard to the Child Support Enforcement Program, the IRS decided to have one method for collecting fees for all tax refund offset programs. There is no legal prohibition against this method in section 464 of the Act.
Comment 3: One State agency indicated it could find no statutory requirement that the State must credit the full amountof the offset against the obligor's payment record. They would prefer to deduct the IRS fee from the offset before crediting the obligor's account and credit the obligor's account only for the amount the State actually receives from the IRS.
Response: Federal statute and regulations require that the total amount offset must be distributed to or on behalf of the child. Section 464(a)(2)(A) of the Act specifically states that the "State agency shall * * * distribute such amount to or on behalf of the child to whom the support was owed." The term "such amount" directly refers to the amount offset by the IRS. Federal regulations at 45 CFR 303.72(h) specify that for AFDC and non-AFDC offset collections, the offset shall be distributed as past due support as required under õ302.51(b)(4) and (5). However, in States which choose to recover costs in non-AFDC cases, the IRS fee maybe recovered pursuant to regulations at 45 CFR 302.33(d).
Executive Order 12291
Comment: One agency disagreed that this rule will not result in a major increase in costs or prices for State or local governments as defined by Executive Order 12291.
Response: This regulation will not result in a major increase in costs to State or local government agencies. States requesting OCSE to printand mail their pre-offset notices will be charged $.27 per notice for processing year 1989 and will receive 68 percent Federal funding for these expenditures. We estimate OCSE's total cost for printing and mailing pre-offset notices in processing year 1989 to be approximately $380,000, based on requests by 39 States and jurisdictions for this service in processing year 1988. Therefore, the cost to each requesting State for providing this service is not expected to be substantial. With respect to the IRS fee to cover the costs of offset, the methodology for recovering the fee, not the States' responsibility to pay the fee, is changing. States are, and have been since the outset, responsible for paying the IRS fee.
Paperwork Reduction Act
Section 303.72 of this final rule contains information collection requirements. These requirements have been approved by the Office of Management and Budget (OMB) control number as follows: õ303.72 -OMB Control No. 0960-0253.
Executive Order 12291
The Secretary has determined, in accordance with Executive Order 12291, that this rule does not constitute a major rule. A major rule is one that is likely to result in:
(1) An annual effect on the economy of $100 million or more;
(2) A major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies, or geographic regions; or
(3) Significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of United States-based enterprises to compete with foreign-based enterprises in domestic or export markets.
This regulation has been reviewed under Executive Order 12291 and does not meet any of the criteria for a major rule. This regulation permits OCSE to charge the State for providing the advance notice of tax refund offset to the absent parent. In addition, this regulation revises OCSE regulations to conform to the revised cost recovery procedures established by the IRS for collecting offset fees. The cost for sending advance notice to an absent parent is allocated differently, but total expenditures remain the same. The method used by the IRS to recover costs of the offset program is revised, but the IRS fee is not affected by this regulation. Therefore, this rule will have little or no economic effect.
Regulatory Flexibility Analysis
The Secretary certifies, under 5 U.S.C. 605(b), as enacted by the Regulatory Flexibility Act (P.L. 96-354), that this regulation will not result in a significant impact on a substantial number of small entities. The primary impact is on State governments, which are not considered small entities under the Act.
List Of Subjects In 45 CFR Part 303
Child Support, Grant programs/social programs, Reporting and recordkeeping requirements.
(Catalog of Federal Domestic Assistance Program No. 13.783, Child Support Enforcement Program)
Date: August 17, 1988.
Robert C. Harris,
Associate Deputy Director,
Office of Child Support Enforcement.
Approved: October 4, 1988.
Otis R. Bowen,
For the reasons set out in the preamble, Chapter III of Title 45 of theCode of Federal Regulations is amended as follows:
PART 303 - [AMENDED]
1. The authority citation for Part 303 continues to read as follows:
Authority: 42 U.S.C. 651 through 658, 660, 663, 664, 666,
667, 1302, 1396a(a)(25), 1396b(d)(2), 1396b(o), 1396b(p) and 1396(k).
2. Section 303.72 is amended by revising paragraphs (e)(1) introductory text and (j)(1) and adding a new paragraph (i)(3) to read as follows:
õ303.72 Requests for collection of past-due support by Federal tax refund offset.
* * * * *
(e) Notices of offset. (1) Advance. The State IV-D agency,
or the Office, if the State requests and the Office agrees, shall
send a written advance notice to inform an absent parent that the
amount of his or her past_due support will be referred to the IRS
for collection by Federal tax refund offset. The notice must
inform absent parents:
* * * * *
(i) Payment of fee. (1) A refund offset fee, in such amount
as the Secretary of the Treasury and the Secretary of Health and Human Services have agreed to be sufficient to reimburse the IRS for the full cost of the offset procedure, shall be deducted from the offset amount and credited to the IRS appropriations which bore all or part of the costs involved in making the collection. The full amount offset must be credited against the obligor's payment record. The fee which the Secretary of the Treasury may impose with respect to non-AFDC submittals shall not exceed $25 per submittal.
* * * * *
(3) Any State which requests the Office to send the advance written notice under paragraph (e)(1) of this section will be charged a fee, in an amount established by the Office in instructions, for printing and mailing of pre_offset notices. This fee shall be credited to the Health and Human Services appropriations which bore all or part of the costs involved in making the collection.
* * * * *
[FR Doc. 88-27237 Filed 11-23-88; 8:45 am]
BILLING CODE 4150-04-MOCSE-AT-88-18