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Terry, TC Memo 2016-88TC Memo 2016-88

The Tax Court has held that neither IRS, nor the Tax Court in a suit against IRS, has authority to block the offset of a tax refund against a non-tax past-due federal debt for which IRS has received a notice from a federal agency, even if the taxpayer disputes the validity of that debt.

Background. Code Sec. 6402(d)(1)(A) provides that, upon receiving notice from any Federal agency that a named person owes a past-due legally enforceable debt, IRS must reduce the amount of any overpayment payable to such person by the amount of such debt. And, Code Sec. 6402(g) provides that no federal court has jurisdiction to restrain or review a reduction authorized by Code Sec. 6402(d), but that this bar against judicial review does not preclude any action against the Federal agency to which the amount of such reduction was paid.

Facts. Contracting officers at the General Services Administration (GSA) determined that the taxpayer, Mr. Terry, had been overpaid on government contracts and demanded that he pay restitution. Terry alleged that the GSA committed errors in making its determination. The GSA notified IRS that Terry owed “a past-due legally enforceable debt” and requested that IRS collect this debt as provided by Code Sec. 6402(d).

Terry timely filed his Federal income tax return for 2011 showing an overpayment of $1,745. Rather than refunding this sum to Terry, IRS used it to offset in part his GSA debt. Thereafter, Terry filed an amended return for 2011, reporting an additional tax liability of $550; he remitted no payment with this amended return. IRS accepted Terry’s amended return and assessed the additional tax shown thereon plus applicable penalties and interest. Because his original overpayment had already been applied to reduce the GSA debt, the tax liability reported on his amended return gave rise to a balance due.

Terry argued that he didn’t owe the $550 because that amount should have been offset against his $1,745 refund, which should not have been paid to the GSA because he never owed GSA any restitution.

IRS can’t help the taxpayer, and the Court has no jurisdiction. The Tax Court held that: a) IRS acted properly because it lacked the authority to block the offset; and b) the Court lacked jurisdiction to review the propriety of IRS’s offset.

The duty imposed upon IRS by Code Sec. 6402(d) is mandatory and overrides any request by the taxpayer that the overpayment be credited or refunded. Because IRS “is legally required” to make this offset, it cannot review the validity of an agency debt of which it has been properly notified.

And, the Court said, to the extent Terry has any claim for recovery, he must make that claim to the GSA.

RIA observation: Note that IRS did not attempt to get the $550 back from the GSA. IRS’s posture was consistent with Service Center Advice 200051042, which held that, where IRS properly offsets a taxpayer’s overpayment against his past-due support or federal agency debts, except in the case of a clerical error (i.e., a mistake of fact or bookkeeping error), it can’t reverse that offset to instead offset unpaid tax liabilities.

References: For offset of non-tax debts, see FTC 2d/FIN ¶  T-6000  ; United States Tax Reporter ¶  64,024.23  ; TaxDesk ¶  803,026  ; TG ¶  70806  .