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

Summary: Amends federal monetary law relating to reduction of a tax refund by the amount of a tax debt to establish a pilot program during 2009 and 2010 for the collection of past-due legally enforceable local government tax obligations.

Instructs the Secretary of the Treasury, upon receiving notice from any eligible state on behalf of a local government that a named person owes such local government a past-due, legally enforceable tax obligation, to: (1) reduce the federal tax refunds payable to such person by the amount of such debt; (2) pay the amount of such reduction to the state for payment to the affected local government; (3) notify the state of the person's name, taxpayer identification number, address, and the amount collected; and (4) notify the person due the refund that it has been reduced by an amount necessary to satisfy a past-due, legally enforceable tax obligation.

Requires the Secretary to select between three and five states to participate in the pilot program, including from among: (1) Illinois; (2) Iowa; (3) Louisiana; (4) New York; (5) Ohio; and (6) Virginia.

Amends the Internal Revenue Code to permit disclosure of taxpayer information to agencies of states requesting refund offsets for tax debts owed to local governments.

SECTION 1. PILOT PROGRAM FOR EXPANDING TAX REFUND REDUCTION PROVISION 
              TO INCLUDE CERTAIN LOCAL TAX DEBT.

    (a) Pilot Program.--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) Pilot Program for Collection of Past-Due Legally Enforceable 
Local Government Tax Obligations.--
            ``(1) In general.--Upon receiving notice during the pilot 
        program period from any eligible State on behalf of a local 
        government that a named person owes a past-due, legally 
        enforceable tax obligation to the local 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 
                for purposes of payment by the State to the local 
                government on behalf of which the State submitted the 
                notice;
                    ``(C) notify the State 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); (III) with respect to any 
                        past-due, legally enforceable debt owed to a 
                        Federal agency; and (IV) with respect to any 
                        past-due, legally enforceable State income tax 
                        obligation (as defined in section 6402(e) of 
                        the Internal Revenue Code of 1986); 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 States of more than one tax obligation subject to 
                paragraph (1) that is owed by such person to any local 
                government, 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 may take 
        action under this subsection on behalf of a local government 
        until the local government certifies to the State that the 
        local government--
                    ``(A) has notified the person owing the past-due, 
                legally enforceable tax obligation by certified mail 
                with return receipt that the State proposes to take 
                action pursuant to this section;
                    ``(B) has given 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) has considered any evidence presented by such 
                person and has determined that an amount of such debt 
                is past-due and legally enforceable; and
                    ``(D) has satisfied such other conditions as the 
                Secretary may prescribe to ensure that the 
                determination made under subparagraph (C) is valid and 
                that the 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 tax 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) Eligible state.--
                    ``(A) In this subsection, the term `eligible State' 
                means a State selected by the Secretary under 
                subparagraph (B).
                    ``(B) The Secretary shall select at least three, 
                and not more than five, States to participate in the 
                pilot program under this subsection. The Secretary may 
                consider a State for selection only if it participates 
                in the procedure applicable under section 6402(e) of 
                the Internal Revenue Code of 1986 (relating to 
                collection of past-due, legally enforceable State 
                income tax obligations).
                    ``(C) The Secretary should consider the following 
                States for selection under this paragraph:
                            ``(i) Illinois.
                            ``(ii) Iowa.
                            ``(iii) Louisiana.
                            ``(iv) New York.
                            ``(v) Ohio.
                            ``(vi) Virginia.
            ``(6) Regulations.--The Secretary shall issue regulations 
        prescribing the time and manner in which States 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 to pay a fee to reimburse the 
        Secretary for the cost of applying such procedure, and such fee 
        may be reimbursed by local governments to States in accordance 
        with applicable State law. 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.
            ``(7) Erroneous payment to state.--Any State receiving 
        notice from the Secretary that an erroneous payment has been 
        made to such State with respect to a notice by the State on 
        behalf of a 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 under such paragraph have been 
        paid to such State).
            ``(8) Pilot program.--
                    ``(A) Period of pilot program.--Subject to 
                subparagraph (B), this subsection shall apply only 
                during 2009 and 2010.
                    ``(B) Extension and expansion of pilot program.--
                            ``(i) This subsection applies after 2010 to 
                        any State described in clause (ii) unless, 
                        before December 31, 2010, the Secretary submits 
                        to Congress a report containing a determination 
                        that the pilot program has negatively affected 
                        Federal revenue or Federal revenue collection 
                        processes.
                            ``(ii) In applying this subsection after 
                        2010, the term `eligible State' means any State 
                        participating in the procedure applicable under 
                        section 6402(e) of the Internal Revenue Code of 
                        1986 (relating to collection of past-due, 
                        legally enforceable State income tax 
                        obligations).
    ``(k) Treatment of Payments Made to States.--The Secretary may 
provide that, for the purposes of determining interest, the payment of 
any amount withheld under subsection (j) to a State shall be treated as 
a payment to the person or persons making the overpayment.''.
    (b) Disclosure of Certain Information to Agencies of States 
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.''.