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.