Brush Up Your Forced Collections Skills with this Debt Setoff Primer

In FY ended June 30, 2010, more than $58 million in NC property taxes went uncollected. With counties and municipalities around North Carolina struggling to maintain a proper fund balance, now is the prime time to review your forced collections strategies.

One remedy that many NC counties have found useful is the NC Local Government Debt Setoff Clearinghouse. This program boasts debt setoff collections of more than $27 million in 2011 with 35 counties already reaching the $1 million mark in collected revenues since their date of joining the program. It basically allows your agency to intercept any payments (such as a state tax refund or lottery winnings) owed to the taxpayer.

Whether you are among the local governments who have already taken advantage of this delinquent tax collection remedy or whether you are just now considering it, the tips below will help you ensure that you follow the rules governing this method of collection.

As set forth in General Statute Chapter 105A, a local government agency may pursue the debt setoff remedy for any delinquent property taxes owed by a debtor, but there are some critical steps to follow to ensure that you don’t end up having to issue a refund out of your agency’s coffers.

• First, verify that the property tax owed is at least $50. The NC debt setoff program requires that each debt submitted to the program be a minimum of $50. 

• Second, unlike many other remedies, the delinquent property tax must have been delinquent for at least 60 days before you can submit it to the NC debt setoff program.

Once you have met these criteria, you must notify the delinquent taxpayer, in writing, that:

•  he or she owes the debt and what property incurred the debt;

• if he or she does not reply within 30 days of the mail date on the notice, your office may submit the debt to the North Carolina Local Government Debt Setoff Clearinghouse;

• if the debt goes to the debt setoff program, the taxpayer will owe an additional $15 collection fee;

• he or she may request a hearing with the governing body (or a person the governing body designates), but that the request must be filed within 30 days of the mail date on the notice and that the request must be made in writing and sent to an address specified in the notice.

If the taxpayer does not request a hearing within 30 days of the mail date on the notice, you may submit the delinquent property tax amount to the Department of Revenue, but you must first meet these criteria:

• Notify the Department of Revenue in writing that you intend to pursue the debt setoff remedy

• Include information that will identify the taxpayer to the Department of Revenue, such as a social security number

At this point, your work is done until an opportunity for setoff arises, for example, when the delinquent taxpayer is due for a refund.

Once such an opportunity arises, the Department of Revenue will send your agency a portion of the refund (or all of it if the refund does not cover the full amount of taxes owed). Your agency must then notify the taxpayer within 10 days that you have received the refund and that you will apply it to the debt they owe.

Again, the taxpayer may contest the debt setoff, so your letter must explain the process they must follow in order to contest the setoff.

Throughout this process, and perhaps before beginning this process, keep a couple of things in mind:

• Your agency could owe a refund, plus interest: If the taxpayer proves that the amount you claim he/she owes is incorrect, or you fail to follow the procedures of notification, your agency will have to refund the setoff amount plus an accrual of interest on the refund amount starting on the fifth day after the Department of Revenue mails the taxpayer the notice that the debt has been set off.

• Priority of payment: State governments take priority over local governments for any debt owed. That means that if the debtor owes the state, any lottery winnings or state tax refunds will be issued to the state until that debt is satisfied. Any remaining proceeds will then filter to local governments on a first come first served basis. So, it pays to submit delinquent property tax debts for setoff as early as legally allowed.

Need help crafting the Notice of Debt Setoff?  Try this FREE NC Debt Setoff Notice Template.  It includes all required information as set forth in NC GS 105A as well as collection best practices to ensure a prompt response.

For more information on the North Carolina Local Government Debt Setoff Clearinghouse, check out the clearinghouse website at www.ncsetoff.org or review the Department of State Treasurer Policy Manual for Local Governments, Section 50: Property Tax Assessment, Billing and Collection.

A special thanks to Ben Chavis, Guilford County Tax Director for his assistance with this article.