Federal Advocacy

Federal Legislation to Permit the Offset of Federal Tax Refunds for State and Local Tax Debts

Tax officials are always seeking new ways to collect delinquent tax revenues in order to fund local government services. Many States currently permit local governments to submit their delinquent accounts to the State for offset against any State tax refund issued or any lottery winnings. Prior to issuing the taxpayer a refund, the State checks to see if there are any claims submitted by a local government. If there are any, the State holds up the refund pending notice to the taxpayer, and, if necessary, pays the refund to the locality to resolve the local tax obligation. In many states, this has proven to be a low-cost, highly effective program.

Currently, the federal Department of the Treasury permits the offset of IRS tax refunds against federal government debts, as well as for past-due child support and for state income tax obligations. This proposed legislation would provide for the offset of all State and local government tax obligations against federal tax refunds. The current law, with regard to State income tax obligations, includes several criteria that must be fulfilled. The proposed amendment to expand the setoff program leaves these protections in place with slight modification.

Congress has already authorized the setoff of federal tax refunds for state income tax obligations, and this proposal just expands upon the types of debt and the nature of the governmental creditor to be included in the offset program.

GFOA Position

The Government Finance Officers Association (GFOA) believes state and local governments should be permitted to participate in the offset of federal tax refunds. Therefore, the GFOA supports the legislation proposed by Congressman James Moran of Virginia that would permit the offset of all state and local tax obligations against federal tax refunds as described in the proposed bill.

  • Publication date: June 2001