Hold Period for Joint, Non-IV-A Tax Refund Offsets
POLICY INTERPRETATION QUESTIONS
DATE: July 14, 2003
TO: State IV-D Directors
FROM: Sherri Z. Heller, Ed.D.
Office of Child Support Enforcement
SUBJECT: Hold Period for Joint, Non-IV-A Tax Refund Offsets
The Office of Child Support Enforcement has received inquiries from states asking for policy guidance regarding the hold period for joint, non-IV-A tax refund offsets, in instances where the offset represents more than the amount due at the time the offset is received.
It is clear in 45 CFR 303.72(h)(5) that, in a non-IV-A past-due support case, the state IV-D agency may delay distribution of a tax refund offset based on a joint return for a limited period. Distribution may be delayed until the state is notified that the unobligated spouse's proper share of the refund has been paid or for a period not to exceed 6 months, whichever is earlier. Treatment of offsets representing more than the outstanding support balance is less clear. Two examples of the correct treatment of such payments are given below.
Q1. The state IV-D agency receives a $1,000 non-TANF tax refund offset (joint). The outstanding support balance is $600. Must the state immediately return $400 to the noncustodial parent, or can the state hold the whole amount for 6 months? This is important because a state may be left with an uncollectible debt under the following scenario--
- IRS forwards a tax refund offset of $1,000 to the state
- the state refunds $400 to the noncustodial parent who only owes $600 at the time of offset
- the state holds $600 pending an injured spouse claim
- an injured spouse claim is filed for $800; the IRS refunds $800 to the spouse and debits the state for it, since the state was sent $1,000 in offset funds
- the state only has $600 remaining, since $400 was immediately returned to the noncustodial parent
- the state now has to pursue the noncustodial parent to collect a state debt of $200
Note that the state does submit state payment amounts to OCSE bi-weekly (these are system transactions noting money paid to the obligor by the state, because the amount withheld was more than the support owed), but if the state does not hold the whole amount for 6 months, there is a greater likelihood that this problem could occur.
A1: First, this question reinforces that states should send timely updates on the amount of past-due support owed, so that the amounts withheld by IRS from tax refunds are as accurate as possible. The guidance given in OCSE AT-99-14 is that states must update balances at least once per month, but more frequent updates are encouraged and will help solve this problem. The state may hold an amount equal to the amount due, but any money over that balance must be refunded to the noncustodial parent "within a reasonable period in accordance with state law," consistent with 45 CFR 303.72(h)(4). A "reasonable period" implies a prompt return of tax refund amounts withheld, but not owed. Upon refunding the over-withheld amount to the noncustodial parent, the state should immediately send a state payment transaction to OCSE (please see the Offset User Guide for further details on this transaction), so that IRS will not reverse money that has already been sent to the noncustodial parent. In this case, the state could retain $600 for up to 6 months, but must return the overpayment of support (the other $400) to the noncustodial parent. The state then sends a state payment transaction for $400 to OCSE, which forwards the information to FMS/IRS. Subsequently, if the spouse files an injured spouse claim, IRS can only reverse up to $600. The state is left with any collection remaining after a reversal, the noncustodial parent still owes what is unpaid, and the state remains whole.
Q2. Similarly, if the balance is $0 when the joint refund offset collection is received, must the state return the entire offset amount to the noncustodial parent immediately, or can the state hold the offset amount for 6 months? The rationale in this situation is the same as in the first question.
A2: The answer is the same as the answer to the first question. The state may only hold an amount equal to the amount due, consistent with 45 CFR 303.72(h)(4).
cc: ACF Regional Administrators
Regional Program Managers