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United States Government Accountability Office: 
Washington, DC 20548: 

May 7, 2009: 

The Honorable John Lewis:
The Honorable Charles W. Boustany, Jr.
Ranking Member:
Subcommittee on Oversight:
Committee on Ways and Means: 

House of Representatives: 

Subject: Tax Administration: Possible Implications of Expanding Refund 
Offset Provisions: 

Millions of federal taxpayers receive billions of dollars in income tax 
refunds every year. Many of these refunds are paid to taxpayers who owe 
money to the federal government or to their state or local government. 
The law allows certain types of debts to be collected through offsets 
of federal income tax refunds before payments are issued to taxpayers--
in calendar year 2008, over $5 billion was deducted from income tax 
refunds and used instead to pay other federal agency nontax debt, state 
income tax debt, and overdue child support payments. Due in part to the 
current economic downturn and the financial problems of state and local 
governments, interest has grown in potential expansion of the refund 
offset program as a means to collect additional kinds of state or local 
debts. On the basis of your request, this letter's objectives are to 
describe (1) recent proposals to expand the refund offset program, and 
(2) challenges and design issues that would need to be addressed by 
policymakers and program administrators in the event of program 
expansion, including the implications of eliminating the current 
requirement that tax refund offsets for state income tax debts are 
allowed only when the affected taxpayer lives in the state seeking the 

We identified and reviewed recent legislative and interest group 
proposals to expand the tax refund offset program. We reviewed agency 
documentation on program operations and obtained summary data from the 
Department of the Treasury's Financial Management Service (FMS) on debt 
collected through offset. We determined that the data provided by FMS 
were sufficiently reliable for background purposes in this letter. We 
researched the relevant statutory and regulatory provisions pertaining 
to the offset of federal income tax refunds. We interviewed officials 
from the Department of Treasury's FMS, Internal Revenue Service (IRS), 
and Office of Tax Policy to both obtain an understanding of refund 
offset program operations and officials' perspective on possible 
program expansion as suggested in the proposals we identified. We also 
interviewed representatives from external organizations with an 
interest in program expansion, including the Federation of Tax 
Administrators (FTA), and the National Association of State Auditors, 
Comptrollers and Treasurers. We also interviewed an official from the 
office of the Arlington County, Virginia, Treasurer who had been 
closely involved with a proposal to make local government debts 
eligible for federal income tax refund offsets. We conducted our work 
from February 2009 to May 2009 in accordance with all sections of GAO's 
Quality Assurance Framework that are relevant to our objectives. The 
framework requires that we plan and perform the engagement to obtain 
sufficient and appropriate evidence to meet our stated objectives and 
to discuss any limitations in our work. 


FMS offsets tax refunds to collect delinquent child support payments, 
federal nontax debts, and state income tax debts.[Footnote 1] FMS is 
the agency in the Department of Treasury charged with implementing the 
federal government's centralized delinquent debt collection program. 
Under the law, FMS is required to withhold or reduce certain federal 
payments to satisfy delinquent nontax debts owed by payment recipients. 
The main tool FMS uses to carry out this responsibility is the Treasury 
Offset Program (TOP). The TOP uses a computerized process to compare 
the names and taxpayer identification numbers (TIN) of debtors with the 
names and TINs of recipients of federal payments, including tax 
refunds. If there is a match, the federal payment is reduced, or 
offset, to satisfy the overdue debt.[Footnote 2] 

Federal law authorizes tax refund offsets where a taxpayer owes past- 
due child support.[Footnote 3] Child support debt cases fall into two 
categories; TANF-(Temporary Assistance to Needy Families) or non-TANF- 
related. TANF cases are those in which the custodial parent has 
assigned his or her right to child support payments over to the state 
as a condition of participation in TANF. Offsets are applied in TANF- 
related cases when the noncustodial parent owes at least $150; in non- 
TANF cases, the amount owed must be at least $500. State child support 
enforcement agencies, through the Office of Child Support Enforcement 
at the Department of Health and Human Services, certify to the 
Department of the Treasury the names, TINs, and the amount of past-due 
child support for people who are delinquent in their payments. The 
funds offset from a taxpayer's tax refund are forwarded by FMS through 
the Office of Child Support Enforcement to the state child support 
enforcement agency to repay the past-due support debt. 

Offset of tax refunds to collect nontax federal debt is also authorized 
under the law.[Footnote 4] Examples of nontax federal debts include (1) 
loans made, insured, or guaranteed by the federal government, such as 
student direct and guaranteed loans, Small Business Administration 
loans, and Department of Housing and Urban Development loans; (2) 
overpayments, such as salary or benefit overpayments, duplicate 
payments, or misused grant funds; (3) the unpaid share of any 
nonfederal partner in a program involving a federal payment and a 
matching or cost-sharing payment by the nonfederal partner (e.g., the 
state share of a benefit-matching program); (4) fines or penalties 
assessed by an agency, such as civil monetary penalties or Occupational 
Safety and Health Administration fines for mine safety violations; and 
other amounts of money or property owed to the federal government, such 
as license fees. Current FMS regulations require the federal agency 
submitting the debt to certify, among other requirements, that the debt 
is at least $25.[Footnote 5] FMS transmits any amounts collected 
through offset to the appropriate creditor agency. 

FMS also offsets federal income tax refunds to collect delinquent state 
income tax debts.[Footnote 6] In calendar year 2008, FMS made offsets 
totaling about $5.4 billion, with the largest share going to repay 
delinquent child support, followed by federal nontax debts, and then 
state income tax debts, as shown in figure 1. The number of taxpayers 
who had their federal income tax refunds offset was about 4.5 million 
in 2008, according to FMS. 

Figure 1: Total Tax Refund Offsets Made by FMS, by Type of Debt, for 
Calendar Year 2008, in Billions of Dollars: 

[Refer to PDF for image: pie-chart] 

Total Tax Refund Offsets Made by FMS: 

Type of Debt: Child support; 
Amount of refund offsets: $2.97 billion. 

Type of Debt: Federal nontax; 
Amount of refund offsets: $2.07 billion. 

Type of Debt: State income tax; 
Amount of refund offsets: $0.39 billion. 

Source: GAO analysis of FMS data. 

Note: Data includes offsets made against economic stimulus payments 
issued in 2008. 

[End of figure] 

The share of tax refund offsets going to satisfy delinquent state 
income tax debts has been significantly smaller than collection of 
child support and nontax federal debts, but these offsets have grown 
significantly since 2000. FMS officials and representatives from the 
Federation of Tax Administrators (FTA) and the National Association of 
State Auditors, Comptrollers and Treasurers (NASACT) said they viewed 
the state income tax offset program as an effective collection tool. 
Since its introduction in January 2000, state participation has grown 
from an initial 7 states to currently include 40 states[Footnote 7] and 
the District of Columbia. Debt collection through offset has steadily 
increased as more states have entered the program, and in fiscal year 
2008, FMS collected more than $380 million in delinquent state income 
tax debt on behalf of states through offset of federal income tax 
refunds as shown in figure 2.[Footnote 8] FMS will only make offsets 
for state income tax debts of $25 or more.[Footnote 9] 

Figure 2: Total Delinquent State Income Tax Offset Collections, Fiscal 
Years 2000-2008: 

[Refer to PDF for image: line graph] 

Fiscal year: 2000; 
Delinquent State Income Tax Offset Collections: $23.5 million. 

Fiscal year: 2001; 
Delinquent State Income Tax Offset Collections: $96.9 million. 

Fiscal year: 2002; 
Delinquent State Income Tax Offset Collections: $121.6 million. 

Fiscal year: 2003; 
Delinquent State Income Tax Offset Collections: $171.5 million. 

Fiscal year: 2004; 
Delinquent State Income Tax Offset Collections: $202.6 million. 

Fiscal year: 2005; 
Delinquent State Income Tax Offset Collections: $236.1 million. 

Fiscal year: 2006; 
Delinquent State Income Tax Offset Collections: $219.4 million. 

Fiscal year: 2007; 
Delinquent State Income Tax Offset Collections: $249.3 million. 

Fiscal year: 2008; 
Delinquent State Income Tax Offset Collections: $380.4 million. 

Source: GAO analysis of FMS data. 

[End of figure] 

Some of the increase in offsets from 2007 to 2008 was because of the 
one-time economic stimulus payments issued in 2008. According to FMS, 
about 24 percent of state income tax offsets in 2008 were collected 
from 2008 economic stimulus payments. 

FMS is authorized to charge states and creditor agencies a fee to 
reimburse FMS for the administrative costs associated with offsets 
taken.[Footnote 10] Part of the fee that FMS charges includes 
reimbursement for IRS. Currently FMS charges states $22.00 per offset. 
Following the offset, FMS issues notices to the debtors informing them 
of the date and amount of the offset, as well as a contact point with 
the state or federal agency that the taxpayer should contact with 
questions related to the offset. Taxpayers who wish to dispute an 
offset taken from their income tax refund are directed by FMS to take 
the matter to the federal or state agency that reported them as debtor 
and received the funds deducted from their federal income tax refund. 
The statutes establishing the offset provisions now in place state that 
the federal courts do not have jurisdiction to review refund offset 
actions; however, taxpayers are allowed to dispute the underlying debt 
with the state or federal agency that reported the debt to FMS and 
received the offset payment.[Footnote 11] 

Congress's most recent amendment to the law allowed refund offsets to 
collect unemployment compensation debts resulting from fraud.[Footnote 
12] FMS and the Department of Labor are determining how this offset 
will work, but have not started making offsets. 

Proposals to Expand Refund Offsets: 

Legislation to expand the types of debts or the types of entities 
eligible to participate in federal income tax refund offsets have been 
introduced to Congress in recent years. Congress has also considered 
but not enacted changes to the requirements with regard to existing 

The proposals for adding additional types of debts to the offset 
program include proposals to add state judicial debt.[Footnote 13] 
These are past-due, legally enforceable debts resulting from a state 
criminal or traffic court's judgment or sentence, including court 
costs, fees, fines, assessments, and restitution to victims of crime. 
There have also been proposals to add local government tax debt to the 
list of allowable offsets.[Footnote 14] 

Proposals to expand the offset program to include new types of debts 
submitted by local governments differed in the proposed methods for 
submitting the debt to FMS. For example, one proposal would have 
allowed states to submit local tax debts on behalf of local governments 
for offset by FMS. Another proposal would have allowed eligible local 
governments to not involve the state revenue agency and instead submit 
their tax debt directly to FMS. Another proposal would have tested the 
direct submission of local government tax debt with a limited pilot 

There have also been proposals to alter requirements governing existing 
tax offsets.[Footnote 15] For example, under current law state income 
tax and unemployment compensation offsets are allowed only if the 
address shown on a debtor's federal income tax return is within the 
state seeking offset. Recognizing the effectiveness of the state income 
tax offset program, in 2004 the Senate Committee on Finance recommended 
elimination of this provision,[Footnote 16] though the change was not 

Challenges and Design Issues Associated with Expanding Refund Offsets: 

Residency Requirement: 

As noted above, under current law, federal income tax refunds can only 
be offset for state income tax debt and unemployment compensation debt 
when the address on the taxpayer's federal tax return is in the state 
seeking the offset.[Footnote 17] Some of the legislative proposals we 
reviewed included a similar restriction on new offset provisions. Over 
recent years FTA has also advocated removing this requirement from the 
state income tax debt offset provision. An FMS official responsible for 
managing the offset program estimated that in 2008, about 380,000 
refund offsets worth over $150 million were not applied because of the 
state residency requirement. 

If the restriction preventing offsets for state income tax debts for 
taxpayers whose address on their income tax filing is not in the state 
seeking the offset were eliminated, other aspects of the program (which 
are discussed in the following sections of this letter) such as notice, 
privacy considerations, prioritization, and dispute resolution would 
remain intact unless Congress chose to also alter those aspects of the 
state income tax offset program. As also discussed in a following 
section, the additional offsets generated by such a change could strain 
FMS's systems if the number of new offsets was sufficiently great. 
However, FMS officials noted that the number of new offsets that such a 
change would generate is unknown. FMS only knows the number of offset 
requests that it rejected because of the residency requirement, but not 
the number of offsets that states did not request because state 
officials knew that the debtor had left their state. FMS officials told 
us that while a very large increase in offset volume could mean they 
would need new, larger capacity systems to handle the workload at some 
future point, the existing system capacity could handle processing the 
additional known offsets (i.e., the estimated 380,000 in 2008) that 
would result from eliminating the residency requirement with little to 
no adverse effect. 

Notice and Other Due Process Requirements: 

Current law requires states to notify a taxpayer in advance that the 
state proposes to have the taxpayer's delinquent state income tax debt 
satisfied through the offset of a federal income tax refund. By 
statute, the notice must be sent by certified mail with return receipt 
and the taxpayer must be given 60 days to present evidence to the state 
that all or part of the debt is not past-due or legally enforceable. 
[Footnote 18] The state must consider any evidence presented and 
determine that the debt is indeed past-due and legally enforceable. The 
state must also make reasonable efforts to collect the debt itself. 
States must certify to FMS that they complied with these requirements. 
Federal tax refunds may not be offset to collect state income tax debts 
that have been delinquent for more than 10 years.[Footnote 19] 

Similar but not identical requirements apply to the offset of federal 
income tax refunds for federal nontax debts and past-due child support 
debts.[Footnote 20] For example, regulations require a creditor agency 
to notify the debtor that a debt will be submitted to FMS for offset 
and must give the debtor 60 days to present evidence that all or part 
of the debt is not past-due or legally enforceable. However, FMS's 
regulations on offsets of tax refund payments to collect federal nontax 
debt do not specify that the notification must be by certified mail. As 
with the states, federal agencies must certify to FMS that they 
complied with the applicable requirements. Notice and other due process 
requirements are specific to each of the current offset provisions and 
the appropriate requirements for any new offset would need to be 


Under current law, taxpayer information is protected by section 6103 of 
the Internal Revenue Code, among other provisions. The protection of 
taxpayer information is commonly thought to be critical to voluntary 
compliance with the tax code and necessary to protect taxpayer privacy. 
The tax offset program requires the sharing of limited taxpayer 
information protected by section 6103. Current offsets are permitted in 
section 6103, under which the sharing of information is limited to the 
information necessary to conduct the tax offset program.[Footnote 21] 
Any expansion of the tax offset program to include local government 
entities would require allowing the sharing of taxpayer information. 
This would, in turn, also mean additional work for IRS to ensure that 
local government entities adequately safeguard this taxpayer 


Current law prioritizes the different types of debt to which a tax 
refund offset can be applied.[Footnote 22] After any federal income tax 
debt, the highest priority is given to past-due child support, followed 
by federal nontax debt. Last in line are state income tax debts and 
unemployment compensation debts resulting from fraud.[Footnote 23] FMS 
offsets lower-priority debts only after making offsets for higher- 
priority debts. Any proposal to create new tax offsets would need to 
specify the priority of the new offset. 

Dispute Resolution: 

By statute, no federal court has jurisdiction to restrain or review any 
current tax offset. In addition, no current offset is reviewable by the 
Department of the Treasury in an administrative proceeding. Taxpayers 
whose refunds are offset are only allowed to dispute the underlying 
debt with the state or federal agency that received the offset payment. 
[Footnote 24] When a taxpayer disputes a tax refund offset applied by 
FMS, FMS directs the taxpayer to the entity that receives the offset 
payment. FMS officials told us that some taxpayers file lawsuits 
against the Department of the Treasury disputing an offset and the 
department must then argue in court that the court does not have 
jurisdiction. They said that an increase in the number of offsets would 
likely increase the number of times this happens and that they would 
need more resources to handle these cases, even with the exemptions 
that are in current law. Any new refund offset provisions without such 
limitations to jurisdiction as found in current law would likely mean 
even more burden for FMS to have to resolve disputes or defend offset 
actions in court regarding debts that they do not control. 

Administrative Capacity: 

FMS officials said that expansion of tax refund offsets would need to 
be carefully managed and balanced against other agency priorities. FMS 
officials said that their top priority is the timely disbursement of 
refunds and expressed concern that expansion of refund offsets could 
mean greater administrative demands and disrupt or delay timely refund 

The offset process is highly automated, so any legislative changes to 
the program that would authorize additional government entities to 
certify debt directly to FMS, such as local governments, would require 
FMS to devote additional resources to establishing a reliable working 
relationship with those entities, including training, resolving 
technical issues with the electronic data transmission of debt files, 
and providing legal support. Based on past experience with adding new 
agencies to the program, officials estimated that it usually takes 
between 18 and 24 months for new entities to work out the details 
associated with transmitting the correct debt data in the required 
format. Additionally, officials from the added government entities 
might require training in the legal requirements of the offset program 
and the certification requirements. In regard to the prospect of adding 
local debts to the offset program, FMS officials stated a preference 
for continuing to work through their established channels at the state 
level rather than establishing channels with possibly thousands of 
local entities. 

One of the bills proposing to expand the refund offset program to 
include local government debts would have required local debts to be 
consolidated at the state level and transmitted to FMS by the state. 
Consolidating local debts at the state level in this way could 
eliminate the need for direct interaction between FMS and multiple 
local governments. However, FTA representatives said that it is unclear 
whether some states currently participating in the state income tax 
refund offset program would have the ability to readily handle 
consolidating and certifying local government debts. While some states 
have their own internal offset program for local government debts, 
other states may not have the necessary infrastructure to do this. 
Also, some states do not participate in the state income tax offset 
program. According to FTA, a legislative requirement that local tax 
debts be submitted by the state rather than directly to FMS may impede 
or delay local governments' ability to participate in the program. 

Another concern with adding local government debt involves the way that 
an entity requesting an offset identifies the debtor. FMS regulations 
currently allow tax refund offsets only when there is a name and TIN 
match between IRS's list of tax refund payment recipients and the 
debtor information.[Footnote 25] FMS officials said that they need the 
TIN to correctly match a payment with a debt. However, if tax refund 
offsets were expanded to include local debts, local jurisdictions may 
not know the TINs or Social Security numbers (SSN) of their debtors. 
For example, we spoke to an official in Virginia knowledgeable about 
debt offsets who told us that local officials can obtain SSNs for local 
residents from the state's Department of Motor Vehicles because those 
numbers are required to obtain a Virginia drivers license. However, 
local officials may not know the SSNs of residents who do not have a 
driver's license. The cost of determining names and identifying numbers 
that would allow FMS to apply an offset would likely be the 
responsibility of local officials and may add to their cost of 
collecting debts through such offsets. 

Both FMS and IRS officials stated that, in the event the number of 
debts submitted for offset increases, they would anticipate an increase 
in the number of telephone calls received from taxpayers inquiring 
about offsets. FMS officials said they do not track refund offset- 
related telephone calls separately from other inquiries from taxpayers, 
but they noted that FMS received over 4.3 million telephone calls in 
2008 and that an increase in the number of offsets would likely also 
mean an increase in the number of calls they receive. FMS officials 
said that an increase in call volume associated with a relatively small 
increase in debts might be manageable with existing resources in the 
near term, but a large increase could not be managed with existing 

IRS officials also expressed concern that increasing the number of 
debts in the refund offset program would result in an increase in the 
number of injured spouse cases. An injured spouse is defined by IRS as 
a married partner who claims that their portion of a jointly filed 
income tax refund has been improperly offset to satisfy the other 
partner's debt(s). IRS has procedures in place for individuals who 
claim they are not responsible for the debt that their spouse owes, 
allowing the injured spouse request the return of their share of the 
income tax refund. They said that an increase in the number of offsets 
would likely mean an increase in the number of injured spouse claims 
and IRS would require additional staff to handle them. 

According to FMS officials, the $22.00 per offset fee the agency 
currently charges to state agencies receiving the offset funds covers 
current program costs. However, FMS officials also said that their 
current systems are limited in, for example, how many additional 
offsets can be entered at one time or how many calls their phone system 
can handle. A large increase in the number of offsets or in the number 
of agencies certifying debt to FMS could mean that some offsets could 
not be applied without disrupting the disbursement function of FMS and 
would necessitate expanding FMS systems to handle the increased 
workload. Funds for significant system changes could possibly come from 
an increase in the fee charged per offset, or from an increase in FMS's 
budget for new systems to handle the increased number of offsets. 

Voluntary Compliance: 

When considering refund offset provisions in the 1990s, Congress was 
concerned about how refund offsets might affect taxpayer compliance in 
filing tax returns and paying the amounts they owe. In 1991, we studied 
the effect of refund offsets on taxpayer filing and payment behavior. 
[Footnote 26] We found that while nonfiling increased during the year 
immediately following an offset, there was virtually no effect 2 years 
later. We also found no evidence that an offset taxpayer was more 
likely not to pay taxes due when filing a tax return the year after an 
offset. Our earlier analysis compared the federal revenue lost due to 
nonfiling with the federal debt recovered from people who had defaulted 
on their student loans, finding that the amounts recovered through 
offsets were 4 times greater than the potential revenue lost due to 
nonfiling. In the case of possible new state and local tax refund 
offsets, however, any loss in tax revenue would be to the federal 
government, while the revenue from the offsets would go to state and 
local governments. In our interviews for this engagement, IRS and FMS 
said that neither agency has conducted any recent research on this 
issue. We also could not identify any current research on the effect 
refund offsets may have on taxpayer compliance. 

Agency Comments and Our Evaluation: 

In addition to providing technical corrections which have been 
incorporated into this letter as appropriate, FMS and IRS provided 
additional comments through their respective GAO liaisons related to 
potential expansion of tax refund offsets. 

FMS stated that FMS's statutory mission is to disburse payments in an 
accurate and timely manner, and that implementation of offset programs 
cannot interfere with that function. FMS also repeated its concern that 
at some point, an increase in tax refund offsets of sufficient volume 
might mean the need for additional agency resources, including systems 
hardware and personnel. Additionally, FMS requested that any statutory 
change to the tax refund offset program should include a provision 
enabling the Secretary of Treasury to issue regulations related to 
implementing the revision. 

IRS reiterated a number of potential issues, included in this letter, 
related to adding local government tax debts to the tax refund offset 
program. These issues include establishing safeguards to ensure that 
local governments adequately protect taxpayer information and 
addressing potential agency resource constraints. IRS expressed concern 
that the expansion of tax refund offsets to include additional local 
tax debts might strain agency resources by resulting in an increase in 
telephone call volume and injured spouse cases. IRS stated it could 
handle some increase in this workload without any additional staffing, 
but that a large increase would require additional staffing and 
training. IRS also acknowledged that there is no way to know the number 
of injured spouse cases or offset-related calls it might receive if 
additional offsets were implemented. IRS noted that adding state 
judicial debts and local tax debts may result in the need for obtaining 
additional guidance from its Office of Chief Counsel, possibly slowing 
the refund process to taxpayers seeking recovery of improperly offset 
funds under the injured spouse provision. Before expanding the tax 
refund offset program, IRS stated its preference that additional study 
be conducted on the effect of an expansion on tax administration. 
However, IRS also stated that it supports the idea of eliminating the 
current restriction on refund offsets for state income tax debts when 
the address on the taxpayer's return is in a state other than the state 
seeking the offset. 

We will send copies of this letter to the Secretary of the Treasury; 
the Commissioner of Internal Revenue; and other interested parties. In 
addition, this letter will be available at no charge on the GAO Web 
site at [hyperlink,]. 

If you or your staff have any questions, please contact me on (202) 512-
9110 or Contact points for our offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
letter. David Lewis, Assistant Director; Ellen Rominger; and A.J. 
Stephens made key contributions to this report. 

Signed by: 

James R. White:
Director, Tax Issues:
Strategic Issues Team: 

[End of section] 


[1] IRS sends its list of authorized refunds to FMS after IRS has 
already deducted delinquent federal tax debt for an assessed delinquent 
period from those refund amounts. If a taxpayer is due a refund but 
owes delinquent federal tax debt for another period, in most instances 
the IRS will internally apply the current refund to prior tax debt, 
before informing FMS there is any residual refund payment left for 
additional offsets or to send to the taxpayer. The federal tax refund 
offsets discussed in this letter are those administered by FMS and do 
not include the offsets that IRS takes. 

[2] In addition to offset to collect delinquent nontax debts, the TOP 
also includes the Federal Payment Levy Program, a program whereby 
delinquent federal income tax debts are collected by levying nontax 
federal payments. 

[3] 26 U.S.C. § 6402(c). 

[4] 26 U.S.C. § 6402(d). 

[5] 31 C.F.R. § 285.2(d)(iv). 

[6] 26 U.S.C. § 6402(e). 

[7] Seven states with no individual income tax (Alaska, Florida, 
Nevada, South Dakota, Texas, Washington, and Wyoming) as well as two 
states with state income tax limited to dividends and interest income 
only (New Hampshire and Tennessee) do not participate in the program. 
Michigan also does not participate. U.S. territories and possessions 
are also eligible to participate, though none currently do so. 

[8] IRS also administers the State Income Tax Levy Program (SITLP), an 
automated levy program in which states with an income tax can sign 
agreements with the IRS to permit state tax refunds to be applied to 
federal tax liabilities. According to IRS, as of April 2009, 28 states 
and the District of Columbia participate in SITLP. Agreement between 
IRS and the state of Minnesota has also been reached and the final 
memorandum of understanding is awaiting final signatures as of May 7, 
2009. IRS anticipates adding several more states to the program during 
2009 and 2010. 

[9] 31 C.F.R. § 285.8(c)(2). 

[10] 26 U.S.C. § 6402(e)(6); 31 U.S.C. § 3720A(d); 31 C.F.R. §§ 
285.2(i), 285.3(h), 285.8(h). The fee is only charged for actual 
offsets completed. The fee is established annually by FMS. 

[11] 26 U.S.C. § 6402(g). 

[12] Pub. L. No. 110-328, § 3, 122 Stat. 3570, 3573 (Sept. 30, 2008). 

[13] For example, S. 1321, § 707, 109TH Cong. (2006); S. 3512, 109TH 
Cong. (2006); S. 1287, 110TH Cong. (2007); H.R. 6172, 110TH Cong. 

[14] For example, H.R. 3498, 109TH Cong. (2005); H.R. 1865, 110TH Cong. 
(2007); H.R. 7335, 100TH Cong. (2008). 

[15] For example, S. 882, § 111, 108TH Cong. (2004); H.R. 1528, § 111, 
108TH Cong. (2004); S. 1321, § 305, 109TH Cong. (2006). 

[16] S. Rep. No. 108-257, at 13 (2004). 

[17] 26 U.S.C. § 6402(e)(2), (f)(3). 

[18] 26 U.S.C. § 6402(e)(4). See also, 31 C.F.R. § 285.8. FTA 
representatives told us that they have asked Congress to eliminate the 
requirement that states must send certified letters to taxpayers 
notifying them of the pending offset to their federal income tax 
refund. They said that, while the certified mailing requirement ensures 
that taxpayers have adequate notice of the pending offset, they contend 
that the requirement is both costly and unnecessary because taxpayers 
already receive multiple notices about their state income tax debts 
prior to inclusion in the federal tax refund offset program. 

[19] 26 U.S.C. § 6402(e)(5)(B); 31 C.F.R. § 285.8(a)(3). 

[20] 26 U.S.C. § 6402(c), (d); 42 U.S.C. § 664(a)(3)(A); 31 C.F.R. §§ 
285.2, 285.3. 

[21] 26 U.S.C. § 6103(l)(10). 

[22] 26 U.S.C. § 6402(c), (d)(2), (e)(3), (f)(2). The priority of debts 
for offset was amended by the Deficit Reduction Act of 2005. Pub. L. 
No. 109-171, § 7301(d), 120 Stat. 4, 144 (Feb. 8, 2006) (the effective 
date of these amendments is October 1, 2009, unless a state elects to 
have the amendments apply on an earlier date, as long as that earlier 
date is after September 30, 2008). 

[23] Offsets are also permitted for estimated future federal income tax 

[24] This would remain the case if Congress eliminated the residency 
requirement for state income tax refund offsets, unless Congress made 
other changes to the law. 

[25] 31 C.F.R. §§ 285.2(b)(2), 285.3(b)(2), 285.8(b)(2). 

[26] GAO, Tax Policy: Refund Offset Program Benefits Appear to Exceed 
Costs, [hyperlink,] 
(Washington, D.C.: May 14, 1991). 

[End of section] 

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