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Federal Government Offset Payments to Businesses Owing Money to IRS

by Jason Peckham, Esq.|Director of Business Development|

Businesses Owing Money to IRS receive offset payments

Businesses Owing Money to IRS Receive Offset Payments

The federal government can offset / setoff payments to businesses that owe money to the IRS. In 2011, important and significant changes were made to the system. These changes went into effect as of January 15, 2012. Since January 15, 2012, Tax Guard has directly and indirectly seen an increased occurrence of offsets of federal government receivables.

The offsets occur through a program called the Federal Payment Levy Program. In short, the IRS sends the deficiency information to the Financial Management Service (FMS). When FMS gets an invoice to pay your client, it checks to see whether it needs to offset the payment for some reason. For example, an IRS liability. If FMS matches the invoice with the business (your client) and the IRS liability, it will send some of or the entire invoiced amount to the IRS rather than the business/taxpayer.

In 2004, Congress authorized FMS to offset 100 percent of the invoice as opposed to 15 percent. Due to what amounts to IRS bureaucratic red-tape, the program was used only on a limited basis until recently. In 2011, Congress gave the IRS permission to offset without first issuing a final notice of intent to levy and providing appeal rights. This new rule went into effect on January 15, 2012. The IRS and FMS can offset proceeds regardless of whether the final notice of intent to levy was issued or a federal tax lien was filed. Since January, we have seen a substantial increase in the number of offsets. Some offsets have been at a rate of 15 percent. Others have been 100 percent. It is not clear what criteria the IRS and FMS are using to determine the amount of the offset.

In circumstances where a federal tax lien has not been filed, lenders may be able to argue that because the IRS does not have a secured interest in the receivables, the offset constitutes a “wrongful levy” and the lender should be entitled to equitable relief. However, the lender will likely have to file a lawsuit to make this point. There’s not enough precedent at the moment to make an accurate prediction as to the outcome.

The best solution for avoiding offsets of federal government receivables is the following:

  • Continue to monitor your clients through Tax Guard. We let you know about issues when they arise, which is well before the filing of the federal tax lien.
  • When federal government receivables are involved, an Installment Agreement with the IRS must be secured as soon as possible.

Tax Guard can remove taxpayers from the Federal Payment Levy Program, so no offset/setoff occurs.

Further, once Tax Guard has negotiated an Installment Agreement, the IRS/FMS will not offset payments so long as the agreement remains in good standing.

For more information, please click here to see an article I wrote for the Secured Lender reviewing the Federal Payment Levy Program and these changes in more detail.

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