Action Transmittal AT-94-05 - Part 4
Child Support Collection by IRS through offsetting Federal Income Tax
Refunds
ACTION TRANSMITTAL
AUGUST 23, 1994
OCSE-AT-9405
Continued:
IV. PROCESSING OFFSETS
A. OFFSET PROCESSING BY IRS
Upon receipt of all certified cases from OCSE, IRS will run the
consolidated tape against the IRS taxpayer master file (which
contains all primary tax filers) and against a cross reference file
(which contains secondary tax filers). This will enable States to
obtain an offset even though the noncustodial parent may be listed as
a secondary filer on the return. Cases are matched against the SSN
and the first four letters of the surname. OCSE will be notified,
and in turn will notify State IV-D agencies of any cases that do not
match on the SSN or surname check. (See EXHIBIT K.) Each time a
match is made, IRS will freeze any potential refund which may become
available during the processing year. Because a taxpayer can file
returns for more than one tax year there is the possibility of
multiple offsets in one processing year. The appropriate tax year
for each offset will be identified.
For those cases which did not match, a further explanation of the
errors follows:
o SSN NOT ON FILE - These cases did not match because the taxpayer
has not filed a tax return within the last 4 years and thus is
not on the master file. We recommend that you continue to
submit these cases for offset. Only the delinquency amount need
be verified prior to certification next year as there is no
reason to presume that the name or Social Security Number is
incorrect. It should be noted that IRS will not flag a case for
offset if that individual's spouse has already been submitted by
another Federal Agency (e.g., Department of Education), and that
agency has a higher priority than the non-AFDC child support
debt. This is not a new practice. IRS will not identify cases
in which a spouse has been submitted for offset because of its
confidentiality rules, but will report them as "SSN Not on
File." These cases should be resubmitted next year.
o NAME DOES NOT AGREE - These cases, though they successfully
passed the SSA file, did not match because the name which was
submitted did not exactly match the name on the IRS master file.
In most instances the IRS name will be one letter different from
the State name. In some instances the name may have changed
altogether (e.g., marriage). For these cases we are returning
the first four letters of the name which IRS maintains. We
suggest that you research and verify the discrepancy and when
appropriate resubmit using the IRS name.
o INVALID COMBINATION OF NAME AND SSN - These cases, when
processed by IRS against the SSA validation file, did not
match because the name submitted by the State was different than
any name contained on the SSA file for that SSN, e.g., 'Smith'
rather than 'Johnson'. These cases should be scrutinized to
determine whether the Social Security Number or name was keyed
correctly. For example, a name submitted as 'Christman' instead
of 'Cristman' would not match since three of the first four
letters are not in the correct position. Also included in this
error code, are cases which were rejected for other reasons such
as an account being reviewed by IRS, bankruptcy, etc., but for
disclosure reasons IRS will not tell us which ones these are or
what the reason is. Therefore, if you are confident that you
have the correct name and SSN, we encourage you to resubmit next
year.
o SSN DID NOT VERIFY; HOWEVER A CORRECTED SSN WAS LOCATED BY SSA -
These cases which originally came back from IRS as an Invalid
Combination of Name and SSN were sent to the Social Security
Administration (SSA) to be run through the Enumeration Verification
System (EVS) 220. This system corrects SSNs which are slightly off
or have transposed numbers. If a correction was found, the case is
no longer listed under Invalid Combination of Name and SSN, but will
now fall under this category so that the State may correct the SSNs
before resubmittal.
IRS will run the OCSE tape against the IRS taxpayer master file
during the first IRS processing cycle of the calendar year. An
offset notice (See EXHIBITS F and F1) will be issued by IRS after
each tax return is processed. The IRS Notice of Offset states that
IRS has retained all or part of a tax refund for full or partial
satisfaction of a past-due support obligation.
The notification will advise the absent parent to contact the
appropriate State agency to correct any errors or to obtain answers
to any other questions. A copy of the IRS notice is contained in the
Attachment. The offset notice will contain the SSN of both the
primary and secondary tax filers. Please note that this notice will
be received by the absent parent before the State receives
notification of the offset. States must respond to taxpayer
complaints and develop specific procedures for promptly refunding any
money incorrectly offset whether the collection has been received
from IRS or not.
OCSE will prepare a report showing the address on the tax return and
mail the report to the individual States. The address report is
combined with the monthly collection report.
The IRS will collect a refund from a joint income tax return to
offset a past-due support obligation if either tax filer is certified
as being legally responsible for providing support. State IV-D
agencies are to refer complaints or questions concerning joint refund
cases directly to IRS. If the non- obligated spouse is not liable
for the support debt, IRS will issue a pro rata refund to the spouse
(upon the filing of an Injured Spouse Claim and Allocation) and the
State will be required to reimburse IRS. IRS encourages the filing
of a form 8379, Injured Spouse Claim and Allocation at the time of
filing. Form 8379 should be attached to the top of the Form 1040 or
1040A, or be filed according to other instructions as indicated on
the Form 8379. This will permit IRS to make direct refunds to the
spouse and thus avoid adjustments to the State. States and OCSE will
be advised by IRS of any adjustments to State collections that are
required.
B. PROCESSING MONIES THAT HAVE BEEN OFFSET
The distribution of monies to States is done through a procedure that
was implemented to improve the efficiency of Federal financial
management and to benefit the State Agencies. This procedure is the
use of Electronic Funds Transfer to make Federal Tax Refund Offset
payments to the State. All payments are now made through the
Treasury Financial Communications System (TFCS). The TFCS provides
on-line access to the Federal Reserve Communications System (FRCS),
enabling payments to be made to financial institutions that have
access to the TFCS. Payments can also be made to institutions that
do not have access to the TFCS through correspondent financial
institutions or Federal Reserve Banks. The TFCS payment method
eliminates mail and processing time associated with payment by check.
The State will receive payment for the previous month's offset
collections, on the fifth work-day of the month. Each TFCS payment
message will contain the appropriate account number. To ensure that
TFCS payments are directed to the correct financial institution and
contain the correct contact information, we are requesting that the
form EXHIBIT BB be returned to OCSE. Also, if the bank name or
address or the financial institution's ABA routing number should
change any time during the year, please notify the Special
Collections Unit at (202) 401-9389 as soon as possible.
C. DISTRIBUTION OF COLLECTIONS FROM OFFSETS
Past-due support amounts collected as a result of the offset
procedure shall be distributed in accordance with section 457(b)(4)
and (d)(3) of the Social Security Act and 45 CFR 303.72(h). These
sections provide that such amounts collected must be used first to
satisfy past unreimbursed assistance payments, or be paid to the
family or used for the benefit of the child in foster care cases if
unreimbursed assistance payments have been paid. In accordance with
the Program Standards Regulation effective October 1990, collections
as a result of tax refund offset must be distributed to the AFDC,
IV-E, or Medicaid Agency if appropriate, or the non-AFDC family
within 30 calendar days of the date of receipt in the IV-D Agency
unless State law requires a post-offset appeal process and an appeal
is filed on-time. If an offset is made to satisfy non-AFDC past-due
support from a refund based upon a joint return, the State may delay
distribution until notified that the unobligated spouse's proper
share of the refund has been paid or for a period not to exceed 6
months from notification of offset, whichever is earlier.
The IRS Service Fee is deducted from the collections of refunds
offset for past-due child support. The State should be reminded that
although the amount received by the State will be the collection less
the IRS fee, the States must distribute and credit the obligor for
the full amount of money offset. States will receive a monthly
accounting of the fee amount withheld. (See EXHIBIT G.) As found in
(53 FR 12041), this allows OCSE regulations to conform with the cost
recovery method of IRS.
Each State must develop specific procedures for distribution of
collections as well as procedures for the prompt refund of any
incorrect offset amounts.
If both assigned and unassigned arrears are submitted for offset, the
assigned arrears will be offset before any payment can be made to the
family. This priority is required by the Internal Revenue Code (26
USC 6402(c)) and applies in all cases regardless of the amount or the
timing of the submittals. Other debts owed to the Federal Government
and submitted for offset will similarly be paid before any unassigned
arrears can be offset.
Any monies collected by the State through the tax refund offset
process can only be applied to the original arrearage amount which
was certified. That amount is the debt which was claimed in the
pre-offset notice. Arrearage amounts accumulated after the
certification for IRS tax refund intercept may not be satisfied by
offset of the income tax refund. This is because the taxpayer will
not have received any notice and consequently will not have had any
opportunity to contest the offset of these added amounts. Thus, if a
noncustodial parent satisfies a portion of the amount of past-due
child support indicated in the pre-offset notice, no subsequent
arrearage accrued can be offset by the tax refund intercept process.
For example, John Smith is certified for $1,000. Upon receipt of the
pre-offset notice, Mr. Smith pays $500, in addition to his current
support obligation, thereby reducing the amount that can be satisfied
by a tax refund offset. However, during the interim between this
payment and actual tax refund offset, Mr. Smith falls into arrears
for another $500, thus bringing his total arrearage amount back up to
$1,000. Nevertheless, only $500 of any tax refund which is due can
be used to satisfy the past-due support obligation, since the
subsequent $500 arrearage accrued following the issuance of the debt
certification and the notice to the taxpayer.
In effect, arrearages in child support obligations that accumulate
after issuance of the debt certification and pre- offset notice may
not be satisfied under the current year tax refund offset process.
In the event that the obligor reduces the original arrearage amount,
and the offset exceeds this lower amount, the excess is to be
returned to the taxpayer. This, of course, does not preclude the
State from negotiating with the noncustodial parent to apply excess
amounts offset for satisfaction of any additional arrearage owed or
from collecting such debts using other remedies that may be available
under State law. These negotiations, if any, may not be used to
circumvent the requirement that States must promptly refund excess
amounts which are offset.
D. PROCESSING OFFSETS FOR CASES SUBMITTED BY TWO OR MORE
STATES
When the same SSN is submitted by more than one State, OCSE will
designate the State that submitted the case first as having first
priority of offset. Subsequent submissions for offset of the same
tax refund will be given priority based upon the amount of the
arrearage (highest to lowest). During the IRS offset process, if the
tax refund is greater than the amount owed to the first State, the
balance will be used to satisfy the debt owed to the remaining States
until the refund is exhausted or all debts are satisfied. Any
remaining amount will be paid to the taxpayer. However, as noted
above, an assigned arrears claim takes priority over a non-AFDC claim
even if the latter claim was submitted first.
E. ADJUSTMENTS TO COLLECTIONS
If an offset for delinquent support is made against a joint tax
refund, the non-obligated spouse may file a request for an Injured
Spouse Claim and Allocation of a joint return (Form 8379), with the
IRS to recoup his or her portion of any refund due. IRS encourages
the injured spouses to file the amended returns at the time the
original tax return is filed. Doing so will preclude the need for an
IRS adjustment. Mention of the simultaneous filing of the Form 8379
is made in the OCSE pre-offset notice. In some community property
States the entire refund may be intercepted to pay either spouse's
debt. If the spouse is entitled to a share of the refund, the IRS
will pay the non-obligated spouse directly. When this occurs, IRS
will send the obligated spouse a shortened version of the offset
notice (see Exhibit F1). This shortened notice should assist States
in determining whether the injured spouse filed a Form 8379 with the
1040 and already received his/her portion. If the amended return is
filed after the original return, IRS will notify the State (through
OCSE) and the State must reimburse IRS. The exact method of the
reimbursement of IRS will depend upon the total collections made for
the State during the month in which the adjustment for the amended
return was made.
In addition to adjustments due to amended returns, there may be
adjustments to collections made by IRS in cases where the wrong
taxpayer was offset due to an error in the SSN or name. Furthermore,
if the State submits a case that is protected by an automatic stay
under bankruptcy proceedings, and there is an offset, IRS will make a
reversal on that case at a later date.
Prior year adjustments for spousal claims will be reported under the
current year accounting procedures. However, these adjustments will
be identified as prior year claims so that the appropriate collection
record can be identified and updated.
Beginning in processing year 1988, the time period for filing an
Injured Spouse Claim and Allocation was extended to 6 years (28 USC
Section 2401). Therefore, there will now exist the possibility of
States receiving adjustments to offset cases for up to 6 years. This
includes adjustments for all cases within the past 6 years i.e., the
6-year period is retroactive. It is in part because of this that IRS
is suggesting that injured spouses file the Injured Spouse Claim and
Allocation Form 8379 at the time of original return filing. OCSE has
included language to this effect in their pre-offset notices. States
issuing their own notices should do likewise. (See EXHIBIT C.)
Following the processing of amended tax returns and payment by the
IRS, it will be necessary to make certain adjustments to the overall
State collections and individual case records at the Federal and
State levels.
F. RAPID REFUNDS
The current year Debtor Master File is not accessible on-line until
after IRS's cycle "05" which occurs around the second week of
February each year. Until this cycle, it is not possible for IRS
field personnel to determine if a taxpayer has been submitted for
refund offset in the current processing year or to which agency a
debt may be owed.
Prior to cycle 05, IRS uses what is called the Early ELF Liability
File. This file is made up of all taxpayers owing the IRS and of all
valid records submitted by the agencies for refund offset prior to
matching (no unaccountables removed). The file itself is created and
shipped to the ELF processing centers to be run against electronic
filings prior to cycle 05. IRS personnel cannot access this file to
determine if a taxpayer is on it.
Taxpayer's inquiring about their rapid refund prior to cycle 05 that
are told by an IRS representative about a specific debt on the Debtor
Master File have often been given prior year information that does
not apply. This results in further inquiries to the agency
identified by the IRS who may or may not have submitted the debtor
for offset. When the Debtor Master File is available, it is common
to find that the debtor was certified by another agency or their
spouse now owes a debt. If the agency can clearly identify that the
debtor has not been submitted for the current processing year, they
should inform the debtor that the refund denial was not due to a
certification made by that agency and that the debtor should contact
an IRS representative after the second week of February for an
accurate explanation.
The following lists the most common reasons that will probably delay
a refund. Although the transmitter of the electronic return is aware
of these circumstances, it is apparent that the taxpayer doesn't
always receive the information. IRS does not inform the transmitters
of the specific reason for a refund denial.
The following conditions may delay refunds and/or change refund
amounts. Requests generally will not be honored in these cases:
o Taxpayer owes back taxes, either individual or business.
o Taxpayer owes delinquent child support.
o Taxpayer has a delinquent debt, such as student loans, etc.
o The last name and SSN of the primary taxpayer must be the same
as on last year's return or the return may be delayed at least one
week for rematching.
o The Estimated Tax Payments reported on the return do not match
the Estimated Tax Payments recorded by IRS. This generally occurs
when:
a. The spouse made separate payments and filed a joint
return or vice versa; or
b. The return was filed before the January 15 Estimated
Tax Payment was credited to the taxpayer's account.
o Taxpayer is considered to be a first-time filer. This is
defined as taxpayers who, during the past ten years, have not filed a
tax return as a primary taxpayer using their current last name.
o Taxpayer has at least one unfiled return during the past 5
years, and their current year return shows a refund.
o The taxpayer has a Schedule E claiming a deduction for a
questionable tax shelter.
o The taxpayer is claiming a blatantly unallowable deduction.
o Incorrect Direct Deposit information: i.e. Routing Transmit
Number (RTN), or depositor account information.
Please remember that if a taxpayer is certified at IRS, they will be
offset. If an institution incorrectly gives a taxpayer a refund, the
taxpayer will still be offset by IRS and the money sent to the
correct agency. The taxpayer is then liable to the institution for
the money advanced.