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Application of the Treasury Offset Program to Payments to Issuers of Direct Pay Bonds

Issuers of certain qualified build America bonds (including recovery zone economic development bonds) referred to in Notice 2009-26 and other specified tax credit bonds referred to in Notice 2010-35 (“Direct Pay Bonds”). may elect to receive a direct payment subsidy.  In general, issuers that elect to receive this direct payment subsidy for Direct Pay Bonds receive refundable tax credit payments in lieu of the investors holding such bonds receiving a tax credit.  As provided in section 3.3 of Notice 2009-26, these payments are generally treated as overpayments of tax.  Accordingly, rules relating to overpayments of tax, such as credits against liabilities in respect of an internal revenue tax and offsets under section 6402 of the Code apply to credit payments with respect to Direct Pay Bonds.  The Instructions for Form 8038-CP (Rev. January 2010) note that “If an amount of the credit payment requested is required to be offset against other outstanding taxes or obligations, then the credit payment to be received could be less than the amount [requested.]”  That note alludes to both the offset of outstanding tax liabilities by the Service and the offset of other outstanding debt by the Treasury Offset Program.

The Treasury Offset Program is a centralized offset program, administered by the U.S. Treasury Financial Management Service’s Debt Management Services, to collect delinquent debts owed to Federal and state government agencies, in accordance with 26 U.S.C. § 6402(d), 31 U.S.C. § 3720A, and other applicable laws.  A credit payment requested using Form 8038-CP is considered an overpayment of tax and is an eligible Federal payment.  Before an eligible Federal payment is disbursed to a payee, disbursing officials compare the payment information with debtor information in the Financial Management Service’s delinquent debtor database.  The debtor information is supplied by a creditor agency.

A debtor is provided written notice of an offset both before and after the offset of a Federal payment is applied against an outstanding debt owed to the Federal government.  With respect to the centralized offset of Federal payments, the debt in question must be delinquent and legally enforceable.  Additionally, the creditor agency must certify that it has made a reasonable attempt to provide the debtor with, among other information:  (1) written notification (at least sixty days prior to submitting the debt for offset) of the nature and the amount of the debt; (2) the intention of the creditor agency to collect the debt through offset; and (3) an explanation of the rights of the debtor.  When an offset occurs under the centralized offset of Federal payments program, the payee is notified in writing that an offset has occurred, including a description of the payment and the amount of offset taken, the identity of the creditor agency requesting the offset, and the address and telephone number of the contact point within the creditor agency who will handle concerns regarding the offset.  Under this process, debtors (including States and local governments) receive multiple written notices of an offset.

There is no exemption applicable specifically to States and their political subdivisions for purposes of the Treasury Offset Program.  In legally appropriate cases, a State or a political subdivision will be treated as a debtor for purposes of the Treasury Offset Program and will be subject to having payments (including credit payments requested using Form 8038-CP) offset to collect the debt.  Under the Treasury Offset Program, a State or local government is treated as one entity/debtor regardless of the type of Federal payment or the type of outstanding debt.

More information is available from the public affairs office of the Treasury Offset Program, (202) 874-6750, and at www.fms.treas.gov/debt/top.html.
 

Page Last Reviewed or Updated: 19-Apr-2014