Status report on IRS offset program.

• Author: Keenan, Raymond P.

Status Report on IRS Offset Program

Introduction

In July 1989, the Internal Revenue Service (IRS) resumed the Business Master File (BMF) Offset Program, the automatic application of overpayments from one business tax type or tax period to satisfy an unpaid balance due on another tax type or period for the same taxpayer. The purpose of the program is to prevent the IRS from refunding overpayments credited to one module of a taxpayer's account, when this money could or should be used to credit an unpaid liability on a different tax module. We have prepared this article to explain how the revised BMF Offset Program operates.

Authority for BMF Offsets

Section 6402(a) of the Internal Revenue Code provides the basis for offsetting credits: "[i]n the case of any overpayment, the Secretary, within the applicable period of limitations, may credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment, and shall ... refund the balance."

Background

The BMF Offset Program had been suspended since October 1985, due to program and procedural problems which caused Federal Tax Deposits (FTDs) to be misapplied. While the automated offset program was not in use, the IRS used a manual system which frequently overlooked valid offsets, and often refunded overpayments to the taxpayer. The result was a substantial loss of revenue by the United States Government. Some taxpayers, who were unaware they had other unpaid tax liabilities, also suffered when they cashed their refund checks, and discovered subsequently that they were liable for additional interest and penalty assessments for unpaid taxes.

During the suspension period, the IRS Quality Improvement Teams focused on solving the offset problems so that both the taxpayer's and the government's interests would be better served. The teams gathered feedback from within the IRS and from taxpayers and tax practitioners. The teams recommended a number of enhancements to the design of the program, as well as improvements in procedures and notices, as discussed below.

For a period of five months after the resumption of BMF offsets, the IRS closely monitored the program to find errors, or the potential for errors. Monitoring included weekly status reports from every service center on problems reported by taxpayers or practitioners. Statistical data was also analyzed on a monthly basis to...