In the case of Terry v. Commissioner, TC Memo 2016-88, the taxpayer was disputing paying $550 in taxes that represented the increase in taxes shown as due on the amended return he had filed. 

That might seem usual, since Mr. Terry had admitted he had understated his 2011 taxes by $550.  However, Mr., Terry pointed out that his original return had shown a refund due of $1,745 and, in fact, the IRS had not yet sent those funds to him or applied them against taxes for another year.

Rather the IRS had retained the funds and advanced them to the General Services Administration as that agency claimed Mr. Terry owed the GSA restitution for overpayments on government contracts.

IRC §6402(d) provides:

(d) Collection of debts owed to Federal agencies

(1) In general Upon receiving notice from any Federal agency that a named person owes a past-due legally enforceable debt (other than past-due support subject to the provisions of subsection (c)) to such agency, the Secretary shall—

(A) reduce the amount of any overpayment payable to such person by the amount of such debt;

(B) pay the amount by which such overpayment is reduced under subparagraph (A) to such agency; and

(C) notify the person making such overpayment that such overpayment has been reduced by an amount necessary to satisfy such debt.

Mr. Terry argued that the GSA was mistaken and, in fact, there was no such debt that he owed.  Thus, in his view, he owed the IRS nothing at this point.  The taxpayer filed with the Tax Court after the IRS, in a Collection Due Process hearing, to uphold a notice of intent to levy to collect the $550.

The Tax Court disagreed with Mr. Terry’s argument that the IRS should not seek to collect the $550 since he had fully paid the agency or that he should be able to argue the validity of the GSA debt before the IRS.  In fact, the Court noted, neither the Tax Court nor the IRS has any right to look into the details of the debt from the other agency once the basic requirements of §6402(d) were met by the other agency.

The Court notes:

The duty imposed upon the Commissioner by this statute is mandatory and overrides any request by the taxpayer that the over- [*8] payment be credited or refunded. See Jordan v. Commissioner, T.C. Memo. 2006-95, 91 T.C.M. (CCH) 1129, 1132, aff’d, 226 F. App’x 15 [99 AFTR 2d 2007-3389] (1st Cir. 2007). Because the Secretary “is legally required” to make this offset, he cannot review the validity of an agency debt of which he has been properly notified. Wooten v. Commissioner, T.C. Memo. 2003-113, 85 T.C.M. (CCH) 1193, 1196. Section 6402(g) further provides that “[n]o court of the United States shall have jurisdiction *** to restrain or review a reduction authorized” by section 6402(d). To the extent petitioner has any claim for recovery, therefore, he must make that claim to the GSA. See sec. 6402(g) (noting that the bar against judicial review “does not preclude any *** action against the Federal agency *** to which the amount of such reduction was paid”); Wooten, 85 T.C.M. (CCH) at 1196.

Thus, the taxpayer would need to seek relief from the GSA (or by filing suit against the agency) for the $550—but he is required to currently pay the amount to the IRS.

In their discussion of the case, Thompson Reuter’s RIA Checkpoint service noted that the IRS has taken the position that the agency generally cannot seek to recover an overpayment from the other agency later if it is determined that overpayment is in error outside of a clear administrative error (SCA 200051042) and there’s no indication here that the IRS attempted such a recovery.