To amend title 31, United States Code, to allow certain State and local tax debt to be collected through the reduction of Federal tax refunds.

Summary: Amends Federal law to direct the Secretary of the Treasury to reduce a Federal tax refund by the amount necessary to satisfy a past-due, legally enforceable tax obligation owed to either a State or local governmental entity which has given notice to the Secretary of such debt.

Requires such governmental entities to notify the person owing the tax obligation by first-class mail that the State or local government proposes to take such action.

Amends the Internal Revenue Code of 1986 with regard to Internal Revenue Service disclosures to State and local government agencies requesting refund offsets for such past-due tax obligations.

SECTION 1. EXPANSION OF TAX REFUND REDUCTION PROVISION TO INCLUDE 
              CERTAIN STATE AND LOCAL TAX DEBT.

    (a) Section 3720A of title 31, United States Code (relating to 
reduction of tax refund by amount of debt) is amended by adding at the 
end the following:
    ``(j) Collection of Past-Due Legally Enforceable State and Local 
Government Tax Obligations.--(1) Upon receiving notice from any State 
or local government that a named person owes a past-due, legally 
enforceable tax obligation to such government (other than an income tax 
debt to a State government), the Secretary of the Treasury shall, under 
such conditions as may be prescribed by the Secretary, determine 
whether any amounts, as refunds of Federal taxes paid, are payable to 
such person. If the Secretary of the Treasury finds that any such 
amount is payable, he shall--
            ``(A) reduce such refunds by an amount equal to the amount 
        of such debt;
            ``(B) pay the amount of such reduction to the State or 
        local government;
            ``(C) notify the State or local government of the person's 
        name, taxpayer identification number, address, and the amount 
        collected; and
            ``(D) notify the person due the refund that the refund has 
        been reduced by an amount necessary to satisfy a past-due, 
        legally enforceable tax obligation.
    ``(2) Priorities for offset.--(A) Any overpayment (as defined in 
section 6401 of the Internal Revenue Code of 1986) by a person shall be 
reduced pursuant to this subsection--
            ``(i) after such overpayment is reduced (I) with respect to 
        any liability for any internal revenue tax on the part of the 
        person who made the overpayment; (II) with respect to past-due 
        support (as defined in section 464(c) of the Social Security 
        Act); and (III) with respect to any past-due, legally 
        enforceable debt owed to a Federal agency; and
            ``(ii) before such overpayment is credited to the future 
        liability for any Federal internal revenue tax of such person.
    ``(B) If the Secretary receives notice from one or more agencies of 
State or local governments of more than one tax obligation subject to 
paragraph (1) that is owed by such person to any such agency, including 
any claim by a State for a past-due legally enforceable income tax 
obligation, any overpayment by such person shall be applied against 
such debts in the order in which such notices were filed.
    ``(3) Notice; consideration of evidence.--No State or local 
government may take action under this subsection until such State or 
local government--
            ``(A) notifies the person owing the past-due, legally 
        enforceable tax obligation by first-class mail at the 
        taxpayer's last known address that the State or local 
        government proposes to take action pursuant to this section;
            ``(B) gives such person at least 60 days to present 
        evidence that all or part of such liability is not past-due or 
        not legally enforceable;
            ``(C) considers any evidence presented by such person and 
        determines that an amount of such debt is past-due and legally 
        enforceable; and
            ``(D) satisfies such other conditions as the Secretary may 
        prescribe to ensure that the determination made under 
        subparagraph (C) is valid and that the State or local 
        government has made reasonable efforts to obtain payment of 
        such tax obligation.
    ``(4) Definition of past-due, legally enforceable tax obligation.--
In this subsection, the term `past-due, legally enforceable tax 
obligation' means a debt--
            ``(A)(i) which resulted from--
                    ``(I) a judgment rendered by a court of competent 
                jurisdiction which has determined an amount of tax to 
                be due; or
                    ``(II) a determination after an administrative 
                hearing which has determined an amount of tax to be 
                due; and
            ``(ii) which is no longer subject to judicial review; or
            ``(B) which resulted from a tax which has been assessed but 
        not collected, the time for redetermination of which has 
        expired, and which has not been delinquent for more than 10 
        years.
    ``(5) Regulations.--The Secretary shall issue regulations 
prescribing the time and manner in which States and local governments 
must submit notices of past-due, legally enforceable tax obligations 
and the necessary information that must be contained in or accompany 
such notices. The regulations shall specify the types of taxes and the 
minimum amount of debt to which the reduction procedure established by 
paragraph (1) may be applied. The regulations may require States and 
local governments to pay a fee to reimburse the Secretary for the cost 
of applying such procedure. Any fee paid to the Secretary pursuant to 
the preceding sentence shall be used to reimburse appropriations which 
bore all or part of the cost of applying such procedure.
    ``(6) Erroneous payment to state or local government.--Any State or 
local government receiving notice from the Secretary that an erroneous 
payment has been made to such State or local government under paragraph 
(1) shall pay promptly to the Secretary, in accordance with such 
regulations as the Secretary may prescribe, an amount equal to the 
amount of such erroneous payment (without regard to whether any other 
amounts payable to such State or local government under such paragraph 
have been paid to such State or local government).
    ``(k) Treatment of Payments Made to State and Local Governments.--
The Secretary may provide that, for the purposes of determining 
interest, the payment of any amount withheld under subsection (j) to a 
State or local government shall be treated as a payment to the person 
or persons making the overpayment.''.
    (b) Disclosure of Certain Information to Agencies of States and 
Local Governments Requesting Refund Offsets for Past-Due, Legally 
Enforceable Tax Obligations.--Paragraph (10) of section 6103(l) of the 
Internal Revenue Code of 1986 is amended--
            (1) in the paragraph heading, by inserting after ``6402'' 
        the following: ``or under subsection (j) of section 3720A of 
        title 31, united states code'';
            (2) in subparagraph (A), by inserting after ``6402'' the 
        following: `` or subsection (j) of section 3720A of title 31, 
        United States Code,''; and
            (3) in subparagraph (B)--
                    (A) by striking ``section 6402 is'' and inserting 
                ``section 6402 or under subsection (j) of section 3720A 
                of title 31, United States Code, is''; and
                    (B) by striking ``section 6402.'' and inserting 
                ``section 6402 or under subsection (j) of section 3720A 
                of title 31, United States Code.''.