10/14/2015
Treasury Offset Program
Use of Offsets to “Collect” Tax
COST National Conference
Chicago, IL
October 23, 2015
Fred O. Marcus, Horwood Marcus & Berk Chartered
Michael Bryan, Deloitte Tax LLP
Rebecca Paulsen, U.S. Bank, NA
John Paraskevas, Exxon Mobil Corporation
Council On State Taxation
Treasury Offset Program
•
What is the Treasury Offset Program (“TOP”)?
— The Treasury Offset Program is a centralized offset program
administered by the Bureau of the Fiscal Service (“BFS”).
— The TOP collects delinquent debts owed to federal agencies and
states, under 26 U.S.C. §6402(d), and offsets prospective
federal payments in order to satisfy the prospective payee’s
debts.
•
Where does the Bureau of the Fiscal Service get its
authority?
— The federal government’s administrative debt collection activities
are governed by a number of federal laws.
— BFS, as the central disbursing agency of the federal government,
is required to perform such offset pursuant to 31 U.S.C. §
3716(c).
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Treasury Offset Program
• Debt Collections:
— ~$3 Billion total offset collections in 2014
— Biggest component relates to child support payments
— However, ~$600 Million relates to offsets against federal tax
refunds and federal vendor and other non-tax payments
— Relevant State Programs:
— State Income Tax Program (SIT)
— TOP intercepts federal tax refunds to payees who owe
delinquent state income tax obligations
— Participants include 40 states and D.C.
— State Reciprocal Program (SRP)
— TOP intercepts federal vendor and other non-tax
payments
— Participants include 8 states and D.C.
Council On State Taxation
Treasury Offset Program
•
How does the TOP work?
— The BFS disperses federal payments, such as federal tax
refunds, on behalf of payment agencies.
— Creditor agencies submit delinquent debts to the BFS.
— Prospective federal payments and delinquent debts are both
maintained by the TOP database.
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Treasury Offset Program
•
How does the TOP work?
— Before a payee receives a federal payment, the BFS performs a
search of the payee’s Tax Identification Number and name to
determine if there is a match in the delinquent debtor database.
— If the payee owes funds to a creditor agency, the BFS offsets the
payee’s federal payment in whole or in part to satisfy the debt.
— The BFS will continue to offset a delinquent debtor’s federal
payments until the creditor agency suspends or terminates the
offset activity, generally pursuant to full satisfaction of the debt.
Council On State Taxation
Treasury Offset Program
In 2014, the U.S. Department of Treasury Bureau of Fiscal Service (“Fiscal Service”) collected over $3B in delinquent debts on behalf of state governments through the Treasury Offset Program (“TOP”)
TOP Annual Report 2014, available at:
https://fiscal.treasury.gov/fsservices/gov/debtColl/pdf/top/TOP_annual_report_to_states_fy14.pdf
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Treasury Offset Program
•
Due Process Requirements:
— State Tax Obligation must be past due and legally enforceable
— Must result from: (1) a judgment rendered by a court; (2) a
determination after administrative hearing; or (3) amount
which has been assessed but not collected, the time for
redetermination has expired, and is not delinquent for more
than 10 years
— Other Requirements – State must:
— Notify by certified mail that it proposes to refer debt to TOP;
— Provide taxpayer at least 60 days to protest the debt;
— Consider any evidence presented by taxpayer; and
— Make reasonable efforts to obtain payment of the tax
obligation
Council On State Taxation
Treasury Offset Program
•
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Taxpayer Concerns
− Lack of coordination between BSF and creditor agencies
− Offset notices fail to identify the corresponding debt or relevant tax year
− Can take months for creditor agency to identify relevant debt and ensure that
the offset was received and applied to the taxpayer’s account
− TOP continues to intercept payments until the debt is identified and account is
reconciled
− Failure of Due Process
− Notice of deficiency is not always provided prior to offset
− Additional burdens on Taxpayer
− TOP allows for offset of payments to one affiliate related to the debt of
another affiliate
− Causes confusion internally regarding the reason for the withheld
payment
− Forces taxpayers to create internal processes to steward outstanding
debt to tax
− State agencies fail to reply to taxpayer requests for information
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State Statutes Authorizing the Treasury Program
Arizona
— AZ Stat. 23.20.486 allows participation in the federal offset
program.
District of Columbia
— DC Stat. 47-143, DC authorizes participation in the Treasury
Offset Program.
Indiana
— IN Stat. 6-8.1-9.7-7 authorizes the Office of Management and
Budget to enter into an offset agreement with the Secretary of the
Treasury.
Council On State Taxation
State Statutes Authorizing the Treasury Program
Massachusetts
— MA Stat. 151A Sec. 15 allows the director to refer unpaid and
overdue amounts to the Department of Treasury under the
treasury offset program.
Montana
— MT Stat. 15-1-201 allows participation in the treasury offset
program.
North Dakota
— ND Stat. 57-01-02 stating the tax commissioner may participate
in the treasury offset program.
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State Statutes Authorizing the Treasury Program
Ohio
— OH Stat. 131.025 allows to participate in the federal treasury
offset program for the collection of debts certified to the attorney
general.
Oklahoma
— OK Stat. 40-2-619 authorizes to collect under the treasury offset
program.
Oregon
— OR Stat. 150-305.612 allows the DOR to submit state income tax
debt for offset against tax refunds through the Federal Offset
Program.
Council On State Taxation
State Statutes Authorizing the Treasury Program
Pennsylvania
— PA Stat. 1712-E authorizes the Office of the Budget to enter into
an agreement with the US to participate in the Treasury Offset
Program.
New York
— Tax Law § 171-f provides that the Commissioner of Taxation
and Finance may establish procedures for crediting a taxpayer’s
tax overpayment against a past-due legally enforceable debt
owed by the taxpayer to a state agency.
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State Offset Programs and Controversies
New York
— The debts that may be offset by the overpayment are limited to
those that:
(1) the state has obtained a judgment for and provided notice to
the taxpayer; or
(2) (i) the state made a final administrative determination after
the taxpayer was given notice and an opportunity to challenge
the debt via a review proceeding sufficient to satisfy due process
requirements and (ii) the state notified the taxpayer in writing
that the debt could be subject to the state’s tax offset program.
Council On State Taxation
State Offset Programs and Controversies
New York
— Butler v. Wing, 177 Misc. 2d 779, 786, 677 N.Y.S.2d 216, 221 (Sup.
Ct. 1998) rev'd, 275 A.D.2d 273, 713 N.Y.S.2d 33 (2000)
•
Facts: A group of taxpayers brought a class action lawsuit against
the Department of Taxation and Finance (DTF) challenging the
constitutionality of New York’s Statewide Offset Program (SWOP).
The taxpayers were all former recipients of state disability benefits
who received a notice from the state informing them that the state
had overpaid their benefits, and the taxpayers needed to repay the
excess benefits. The taxpayers did not repay the excess benefits to
the state and their disability benefits terminated. In a subsequent
year, when the taxpayers overpaid their state income taxes and
requested a tax refund, the state notified them that their disability
benefit debt had been referred to the SWOP, and their tax refunds
would be reduced by the amount of the debt.
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State Offset Programs and Controversies
New York
— Butler v. Wing, 177 Misc. 2d 779, 786, 677 N.Y.S.2d 216, 221 (Sup.
Ct. 1998) rev'd, 275 A.D.2d 273, 713 N.Y.S.2d 33 (2000)
• Issue: Whether the Commissioner’s process for enforcing the
SWOP did not provide taxpayers with sufficient notice, violating
their due process rights.
• Analysis: The court found that the SWOP process did violate
taxpayers due process rights, because the taxpayers were not
given sufficient notice that they would be subject to the SWOP.
• Holding: On appeal, the lower court’s holding was reversed
because the taxpayers had failed to file their lawsuit contesting
the SWOP enforcement within the 40 day statute of limitations.
• Result: Due to the holding in Butler, the SWOP was amended to
include provision (2)(ii) noted above.
Council On State Taxation
State Offset Programs and Controversies
California
•
•
Cal. Gov’t Code § 12419.5 provides that the Controller may offset a
tax refund owed to a taxpayer by any amount that the taxpayer owes
to a state agency.
Under the State Administrative Manual, if the taxpayer’s debt to the
state is not based on a tax liability, the debt is only subject to the
offset program if the taxpayer has been given notice and afforded an
opportunity object to the offset.
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State Offset Programs and Controversies
California
• Wightman v. Franchise Tax Bd., 202 Cal. App. 3d 966, 970, 249 Cal.
Rptr. 207, 210 (Ct. App. 1988):
— Facts: three taxpayers with outstanding student-loan and child
support debts challenged the constitutionality of California’s offset
program procedures. When the taxpayers filed for an income tax
refund, they received a notice from the state informing them that
their refunds would be offset by the amount of their debts. The
taxpayers filed suit in circuit court alleging that California’s offset
program procedure violated their due process rights because of
insufficient notice.
Council On State Taxation
State Offset Programs and Controversies
California
• Wightman v. Franchise Tax Bd., 202 Cal. App. 3d 966, 970, 249 Cal.
Rptr. 207, 210 (Ct. App. 1988):
— PP: The circuit court found that the offset program did not violate
the taxpayers’ due process rights.
— Analysis: The state’s notice detailed the amount and nature of the
debt, and the state afforded the taxpayers an opportunity to object
to the offset, including providing the taxpayer with a list of
defenses the taxpayer could raise.
— Holding: The offset program satisfied state and federal due
process requirements because the taxpayers were notified by the
state that the state was going to refer their debts to the offset
program prior to enforcing the offset.
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State Offset Programs and Controversies
Illinois
— 20 ILCS 2505/2505-275 provides that a state tax overpayment may
be offset by any outstanding tax liability owed to the state of Illinois or
the federal government.
— However, the statute does not expressly permit the offset of an
overpayment against any outstanding liability the taxpayer may have
with another state agency.
Council On State Taxation
Intrastate Reciprocal Offset Programs
State Reciprocal Program: 31 U.S.C. § 3716(h) provides that TOP may apply administrative offset to a legally enforceable debt owed to a state under the State Reciprocal Program if (1) the state requests that the offset be performed, and (2) the state adopts a reciprocal agreement and authorizes the program by statute
‐ SRP pilot program launched in June 2007 to test efficacy of reciprocal offset between state and federal agencies (state participants in pilot program included Maryland & New Jersey)
‐ As of 2014, 8 states and DC participate in the reciprocal program, including:
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District of Columbia – D.C. Code Ann. § 47‐143 Kentucky – KY Rev. Stat. Ann. § 44.065 Louisiana – La. Rev. Stat. Ann. § 47:1523 Maryland – MD Code Ann. § 13‐931 Minnesota – MN Stat. Ann. § 16D.18 New Jersey – P.L. 2006 c. 32; N.J. Rev. Stat. § 54:49‐16 to 19 New York – N.Y. Tax Law § 171‐t West Virginia – WV Code § 14‐1‐37 Wisconsin – Wis. Stat. § 73.03(52) Council On State Taxation
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Intrastate Reciprocal Offset Programs
Origins of Offset Programs:
— Primarily individual level taxes and deficiencies
• Health & Human Services Agencies
— Alimony
— Child support
• Property tax benefit programs
— Participation with federal, state, county and city level programs
— In some cases the process is largely manual
Council On State Taxation
Intrastate Offset Programs
In General
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—
—
—
Offsets across tax types
Across tax years
Across entities
Authority?
Remediation can be difficult
— Penalties, Interest
— Payroll tax, transaction tax periods/payments
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Interstate Offset Programs
New Jersey
— State Reciprocal Set-Off
New Jersey currently has agreements with Maryland, New York, and
Connecticut.
— The agreements provide that these states will send income tax
refunds to New Jersey to offset the outstanding New Jersey income
tax liability of a taxpayer. In turn, the Division will send New Jersey
income tax refunds to Maryland, New York, and Connecticut to offset
debts owed to them. (Primarily individual)
Council On State Taxation
Intrastate Offset Programs
New Jersey
• State Vendor (OMB) Set-Off
— Withholds contract payments due to state vendors with tax debts and
applies those payments to the liability.
— Vendors and caseworkers are informed after a successful
garnishment/set-off.
— If a change in the status of the case warrants, supervisors can
authorize the full or partial refund of the set-off payments to the
vendor.
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Intrastate Reciprocal Offset Programs
The Treasury Offset Program DMS (2010); available at: http://taxadmin.org/fta/meet/10am/pres/free.pdf
Council On State Taxation
Contacts
Fred Marcus, Horwood, Marcus & Berk Chartered
Principal, Chicago
312.606.3210 , [email protected]
Michael Bryan, Deloitte Tax LLP
Director – WNT, Multistate
215.977.7564, [email protected]
Rebecca Paulsen, U.S. Bank, NA
VP, Senior State Tax Director, Minneapolis
612.303.4347 , [email protected]
John Paraskevas, Exxon Mobil Corporation
State Tax Manager – Houston, TX
832.624.6805 , [email protected]
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