IRS Clarifies Procedures for Issuing Offset Bypass Refunds

UILC: 6402.00-00, 6402.02-00

There is no legal authority that requires the IRS to issue an OBR; rather, the IRS has made a policy decision not to offset an overpayment against an outstanding federal tax liability but instead issue a refund if the taxpayer can demonstrate hardship. Hardship for this purpose is economic hardship within the meaning of IRC § 6343 and the regulations thereunder (i.e., unable to pay basic living expenses).

The IRM provides that an "OBR must be issued before the posting date (Assessment Document Date or the 23C Date) of the original return (TC 150) on which the overpayment was reported." IRM 21.4.6.5.12.1 (8). In addition, the IRM provides that the manual refund document has to be received by the Accounting function no later than the Friday cut-off-time before the 23C date (which is always a Monday). Id. If a taxpayer contacts the IRS to request an OBR and the 23C date has passed, IRS employees are instructed to tell the taxpayer that the overpayment has been applied to the balance due account and the IRS cannot stop it. See IRM 21.4.6.5.12.1(5). See also IRM 3.17.79.3.21(5) ("OBR request must be received and processed before the actual posting date on which the offset of the overpayment is shown (the 23C Date))." Once the offset has been made, the IRS will not reverse the offset unless a clerical error has occurred that prevented processing of the request. See IRM 3.17.79.3.21(5) (Note). Additionally, if a taxpayer has an IRS debt and a Treasury Offset Program debt (i.e., federal agency nontax debt, state income tax obligations, unemployment compensation debt, or child support), IRM 3.17.79.3.21(2)(Note) prohibits the IRS from bypassing either debt.

Although the IRS's policy on OBRs in IRM 3 and IRM 21 appears to be tied to the 23C date, the 23C date isn't actually the significant date. How and when the IRS processes the overpayment claimed on the return and the offset determines whether an OBR can be issued. The TC 150 is the transaction code posted to the account, reflecting that a return has been filed and any tax assessed. See IRS Docurnent 6209. The 23C date is the date the summary record is signed, where the summary record reflects all the TC 150s that are recorded on that date.¹ When a taxpayer files a return, the computer systems reflect that a return has been received, but it sometimes takes up to a week or ten days for the TC 150 to post to the account. Until the tax shown on the return has been assessed and the overpayment is reflected on the account, there is nothing to offset. And the overpayment credit does not exist until the IRS authorizes the scheduling of the refund or credit. See IRC § 6407.

After the return has been processed, the offset and the 23C date are generally the same. The exception, however, is if there is a freeze condition or a refund hold on the account when the taxpayer files his or her return; in those situations, the offset will not occur until the freeze or hold is lifted, which then may be long after the 23C date. Thus, unless there is a freeze condition/refund hold in place, the date of the offset and the 23C date are the same. The date of the offset is the significant date. * * * Once an overpayment has been offset to another liability, the overpayment no longer exists. And unless there has been a clerical error associated with the offset, it is not possible to initiate an OBR after the offset has occurred.

2. Definition of "Clerical Error"

Once the offset has occurred, there is no longer any overpayment to refund. There is nothing in the Code or the regulations that gives the IRS the authority to reverse the offset when there is no longer any overpayment.² There is a "clerical error" doctrine, however, which courts have developed over the years, primarily as a way to allow the IRS to reverse certain errors. See, e.g., Crompton-Richmond Co. v. United States, 311 F. Supp. 1184 (S.D.N.Y. 1970); Bugge v. United States, 99 F.3d 740 (5^th Cir. 1996).³ In creating the OBR process administratively in the IRM, the IRS is relying on the clerical error doctrine to correct errors that prevented the processing of the OBR.

Some employees may automatically equate "clerical error" with an error committed by someone in a clerical job position or an error based on data entry. Applying the legal definition, however, a "clerical error" is

The IRM is not clear on the meaning of "clerical error." The plain meaning would suggest that TAS employees could advocate for the reversal of an offset in a number of appropriate circumstances. To be consistent with the existing guidance in IRM 3.17.79.3.21(5) (Note), an error to justify a reversal of the offset must be one which prevented the processing of the OBR request. * * *⁵ * * *

The following examples are intended to help TAS employees advocate for clarity between (1) clerical errors, and (2) errors in judgment or substantive errors. This is by no means an all-inclusive list of examples; the examples are intended to give some parameters and promote uniformity in OBR cases.

As discussed above in the Background section, under IRC § 6402(a), the IRS is not obligated to apply a taxpayer's overpayment to an outstanding federal tax liability before issuing the taxpayer a refund; the subsection is phrased as the "Secretary . . . may credit . . ." (emphasis added). In contrast, IRC § 6402(c), (d), (e) and (f) require a taxpayer's overpayment to be applied to any outstanding child support debt, Federal agency nontax debt, state income tax obligation, or unemployment compensation prior to crediting the overpayment to a future tax or making a refund; each of those subsections is phrased as the "Secretary shall . . . " (emphasis added). Thus, the IRS has no discretion to bypass those types of debts.

Additionally, the Code provides certain rules for the priority of offsets. For example, IRC § 6402(e)(3) provides that when a taxpayer has an outstanding state income tax obligation, the overpayment shall be reduced first by any federal tax liability, then applied to past-due child support, then to any other federal agency debt, and then to the state income tax obligation. Similarly, IRC § 6402(f)(2) provides that when a taxpayer has an outstanding unemployment compensation debt, the overpayment shall be reduced first by any federal tax liability, then applied to past-due child support, then to any other federal agency debt. See also Treas. Reg. 301.6402-5(d)(1) ("Thus, if a taxpayer making an overpayment has both an outstanding tax liability and a liability for past-due support subject to this section, then the entire amount of the overpayment shall be credited first against the outstanding tax liability under section 6402(a) and § 301.6402-1 and only the remainder, if any, of the overpayment will be offset by the amount of past due support."). Some of the other rules in IRC §§ 6402(c) and (d) for the priority of offsets do not specify, however, that the federal tax liability must be paid first. Consequently, for consistency and ease of administering offsets, the IRS has adopted a policy of not issuing any OBR when the taxpayer has a federal tax debt and a Treasury Offset Program debt. See IRM 21.4.6.4(3) ("A tax overpayment must offset to an outstanding tax debt before it offsets to non-tax debts or is applied to a credit elect."). See also IRM 3.17.79.3.21(2)(Note) ("if both an IRS and TOP debt exist, you may NOT bypass either offset").

This memorandum was coordinated with the Associate Chief Counsel (Procedure and Administration) and the Office of Division Counsel (Wage and Investment). Please call Susan L. Hartford at * * * or me if you have any further questions. Note that the above advice is based on our understanding of the OBR process. If we have made any error in explaining the process or have used incorrect terminology, please let us know so that we can determine if the analysis or conclusions change.

This writing may contain privileged information. Any unauthorized disclosure of this writing may undermine our ability to protect the privileged information. If disclosure is determined to be necessary, please contact this office for our views.

² In contrast, one spouse (the injured spouse) on a jointly filed tax return can get back his or her share of the overpayment which was offset to a past-due obligation belonging solely to the other spouse. In the injured spouse context, there is still an overpayment that can be refunded because the injured spouse's portion of the overpayment was applied to a debt that the injured spouse had no responsibility to pay. See Treas. Reg. § 301.6402-6(i). See also Form 8379, Injured Spouse Allocation.

³ Both Crompton-Richmond and Bugge dealt with situations in which the IRS abated assessments in error. The courts in those cases concluded that the abatements were accidental mistakes, not mistakes involving errors in judgment. As a result, the IRS was allowed to reinstate the assessments even though the assessment statute expiration date had passed.

⁴ For example, IRC § 6404(e)(1) provides, in relevant part, that the IRS may, within its discretion, abate interest on any deficiency where the interest is attributable to an error or delay by an officer or employee of the IRS in performing a ministerial act. The regulations promulgated under section 6404 define a "ministerial" act as one that does not involve the exercise of judgment or discretion. See Treas. Reg. § 301.6404-2(b)(2). In the interest abatement context, Congress described the concept of a ministerial act as "a procedural action, not a decision in a substantive area of tax law." S. Rep. No. 99-313, at 209 (1986).

⁵ Local Taxpayer Advocates have the delegated authority to determine that a manual refund is appropriate. See IRM 1.2.42.2, Delegation Order 3-1 (Rev. 1) (Feb. 4, 2011). The Local Taxpayer Advocate must sign Form 3753, Manual Refund Posting Voucher, to indicate his or her approval to issue the manual refund.