Rev. Rul. 84-171

ISSUE

(1) Must the Internal Revenue Service allow a refund in the following situations?

(2) If so, must the Service allow interest on the refunds in those situations.

FACTS

SITUATION 1: On April 15, 1983, A filed an income tax return for 1982 showing an overpayment of $1,200. The Department of Health and Human Services (HHS) notified the Service to offset $500 of the overpayment for past-due child support under section 6402(c) of the Internal Revenue Code. Due to an error by the Service, the overpayment was offset by $800, and $400 was refunded to the taxpayer within 45 days. Subsequently, the Service determined that the correct offset should have been $500. A second refund of $300 was issued to A on September 13, 1983.

SITUATION 2: B filed a timely income tax return for 1983 showing an overpayment of $800. HHS notified the Service to offset $700 of the overpayment for past-due child support. B protested to the Service that the offset was incorrect. However, the Service offset the amount as instructed by HHS. It was subsequently determined that the state agency made an error when submitting to HHS the notification of liability for past-due support. The offset should have been $200.

SITUATION 3: H and W filed a joint income tax return for 1982 showing an overpayment of $800. Because of a past-due child support obligation attributable to H, the Service tentatively reduced the amount of the overpayment by a $500 offset, refunded the balance, and, pursuant to section 301.6402-5(e) of the Regulations on Procedure and Administration, issued a notice of offset advising that it would divide a joint overpayment between the spouses if the nonliable spouse filed a claim for refund (Form 1040X, Amended U.S. Individual Income Tax Return) showing each spouse's share of the tax and contribution to the overpayment. W filed a claim on that portion of the overpayment attributable to W but offset against the past-due support obligation of H.

LAW AND ANALYSIS

Section 6402(a) of the Code permits the Secretary, within the applicable period of limitations, to credit the amount of any overpayment, including interest allowed, against any internal revenue tax liability of the person who made the overpayment and, subject to subsection (c), refund any balance to the person.

Section 6402(c) of the Code, which was added by Title 23 of the Omnibus Budget reconciliation Act of 1981, directs the Secretary to reduce the amount of any overpayment to be refunded to a person by the amount of any past-due support owed by that person of which the Secretary has been notified by a state in accordance with section 464 of the Social Security Act. The Secretary must remit the portion of the overpayment to the state to which the support has been assigned and notify the person who made the overpayment that so much of the overpayment as was necessary to satisfy the obligation for past-due support has been paid to the state.

Under section 301.6402-5(a)(2) of the regulations the amount of the overpayment not subject to offset for any internal revenue tax liability or for past-due support must be promptly refunded to the taxpayer.

Section 301.6402-5(b) of the regulations defines past-due support as the amount of a delinquency, determined under a court order, or other administrative process established under state law, for support and maintenance of a child or of a child and the parent with whom the child is living. Past-due support qualifies for offset if the amount is not less than $150, has been delinquent for 3 months or longer, and the Secretary of the Treasury has received a notification of liablity.

Under section 301.6402-5(c) of the regulations, a state must submit a notification of a liability for past-due support to HHS by October 1 of each year with information including the name of the taxpayer and the amount of past-due support owed. HHS must transmit this information to the Service by December 1 of each year. If, after submitting a notification of liability, a state determines that an error has been made in the notification, the state must promptly notify the Service, and the Service must make the appropriate corrections.

Under section 6611(a) of the Code, interest will be allowed and paid upon any overpayment of internal revenue tax at an annual rate established under section 6621. Section 6611(b) provides for the payment of interest from the date of the overpayment to a date (to be determined by the Secretary) preceding the date of the refund check by not more than 30 days.

Section 6611(e) of the Code prohibits the payment of interest on any overpayment of income tax refunded within 45 days after the last date prescribed for filing an income tax return (without regard to extensions of time to file) or, if a return is filed after the last date for filing, within 45 days after the return is filed.

Rev. Rul. 74-611, 1974-2 C.B. 399, holds that an overpayment on a joint return filed by a husband and wife for a tax liability paid entirely by the wife may not be credited against the separate tax liability of the husband for a prior year.

Rev. Rul. 80-7, 1980-1 C.B. 296, provides the proper method, in the absence of clear and convincing evidence to the contrary, for computing the amount of an overpayment shown on a joint return that may be credited to one spouse's unpaid separate tax liability from a prior year.

Under section 6611(e) of the Code, the Service has 45 days in which to process a tax return and refund any overpayment to the taxpayer. If the Service makes an error in an offset for past-due support, and the error is corrected within the 45 day period, no interest will be paid on any refund. If the error is corrected after the 45 day period expires, as in Situation 1, interest at the current established rate will be paid.

In Situation 2 the Service made the correct offset pursuant to notification received from HHS. The state agency made the error. Under section 6402(c) of the Code, the Secretary must offset amounts referred to the Service from a state through HHS. The Service may not look behind that referral. Therefore, the Service has no discretion over the application of section 6402(c) to a person for whom a referral is received from a state regardless of whether or not that referral is correct. It is the responsibility of the state to provide relief to individuals whose overpayments have been offset pursuant to an incorrect referral from the state. If a state's claim is erroneous, therefore, the taxpayer is not entitled to a refund from the Service and section 6611 would not apply. Under section 301.64022-5(c) of the regulations the state must promptly notify the Service, and the Service must make the appropriate corrections. However, the Service only need make corrections in the case of an error by the state agency when notified prior to making the offset and refund, if any.

In Situation 3, the Service may tentatively credit the entire amount of a joint overpayment against one spouse's liability for past-due support even though spouses have separate interests in a joint overpayment. However, the overpayment is subject to allocation pursuant to Rev. Rul. 74-611 and Rev. Rul. 80-7 if the non-obligated spouse files a refund claim. The Service will pay interest on such a refund pursuant to section 6611(a) of the Code.

HOLDING

SITUATION 1: The Service must issue the refund of $300 and pay interest on that refund.

SITUATION 2: In the described circumstances, no interest is due because the Service cannot issue a refund. The taxpayer must seek relief directly from the state.

SITUATION 3: Any refund due as a result of W's claim pursuant to section 6611(a) of the Code must be issued by the Service, and interest is payable on such refund.