Status report on IRS offset program

Raymond P. Keenan

Status Report on IRS Offset Program


In July 1989, the Internal Revenue Service (IRS) resumed the Business Master File (BMF) Offset Program, the automatic application of overpayments from one business tax type or tax period to satisfy an unpaid balance due on another tax type or period for the same taxpayer. The purpose of the program is to prevent the IRS from refunding overpayments credited to one module of a taxpayer’s account, when this money could or should be used to credit an unpaid liability on a different tax module. We have prepared this article to explain how the revised BMF Offset Program operates.

Authority for BMF Offsets

Section 6402(a) of the Internal Revenue Code provides the basis for offsetting credits: “[i]n the case of any overpayment, the Secretary, within the applicable period of limitations, may credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment, and shall … refund the balance.”


The BMF Offset Program had been suspended since October 1985, due to program and procedural problems which caused Federal Tax Deposits (FTDs) to be misapplied. While the automated offset program was not in use, the IRS used a manual system which frequently overlooked valid offsets, and often refunded overpayments to the taxpayer. The result was a substantial loss of revenue by the United States Government. Some taxpayers, who were unaware they had other unpaid tax liabilities, also suffered when they cashed their refund checks, and discovered subsequently that they were liable for additional interest and penalty assessments for unpaid taxes.

During the suspension period, the IRS Quality Improvement Teams focused on solving the offset problems so that both the taxpayer’s and the government’s interests would be better served. The teams gathered feedback from within the IRS and from taxpayers and tax practitioners. The teams recommended a number of enhancements to the design of the program, as well as improvements in procedures and notices, as discussed below.

For a period of five months after the resumption of BMF offsets, the IRS closely monitored the program to find errors, or the potential for errors. Monitoring included weekly status reports from every service center on problems reported by taxpayers or practitioners. Statistical data was also analyzed on a monthly basis to discover any programming problems. Based on information received from the seven IRS Regional Offices, the program has been working effectively.


One of the major enhancements to the BMF offset program was a complete redesign of Form 8109, the FTD coupon. The IRS now mails the taxpayer a payment booklet containing 23 coupons, plus a reorder form (8109-A). The taxpayer’s name and Employer Identification Number (EIN) are printed on the coupon to ensure proper application of the payment. IRS instructions require taxpayers to use a soft lead pencil to check the type of tax and period; to write in the dollar amount of the payment; and to mail or deliver the completed FTD coupon with a single payment to an authorized Federal Reserve Bank.

IRS processes the FTD coupons with optical scanning equipment, which has improved the ability to properly apply payments. A future enhancement in January 1991 will provide the IRS with the manual capability to flag large corporate taxpayers who have had problems with the proper application of payments.


As a rule, the IRS will not offset a credit involving a FTD payment discrepancy until the taxpayer has been notified. In addition, since June 1990, if a taxpayer has a history of filing and paying timely, the IRS has been sending a notice before any credits are offset. A taxpayer should respond within the time stated in the notice, using the envelope included, so that the IRS can settle the account and promptly issue refunds.

If the type of tax or tax period cannot be determined from the deposit coupon, the IRS issues Notice 108, Notice of Incomplete FTD Coupon, which advises the taxpayer where the credit has been applied. The taxpayer should return the tear-off portion of the notice if the credit is not applied to the proper tax account. The sooner the taxpayer responds to the notice, the sooner the IRS can apply the payment to the proper account module.

If the taxpayer does not complete the Record of Federal Tax Liability Section on Form 941, Employer’s Quarterly Federal Tax Return, the IRS issues Notice 207, Notice of Proposed FTD Penalty. The taxpayer must complete the tax liability schedule within 30 days so the IRS can determine if a deposit penalty should be assessed.

In accounts where taxpayers prepay their liabilities using FTDs, the IRS compares the dollar amounts of deposits shown on the tax return with the amounts of deposits credited to the account. When the IRS account module contains more FTD credits than claimed on the taxpayer’s return, the IRS sends Notice 267, Request to Taxpayer for Excess Credit Resolution, or, if there is also a math error on the return, Notice 268, Math Error – Request to Taxpayer for Excess Credit Resolution.

It is important that the taxpayer provide a response within 30 days to allow the IRS time to correct its records. Beginning in January 1991, the IRS will simplify the language of the text used for Notices 267 and 268. In addition, the notices will show all unresolved credits on the tax account module at the time the return was processed.

COPYRIGHT 1990 Tax Executives Institute, Inc.

COPYRIGHT 2004 Gale Group

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