SECTION 3.2. Offsets and Application of Credits and Payments to Liabilities; Unjust Enrichment

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Credit--An available balance for transfer or refund, including funds from another tax type.

(2) Offset--A period-by-period reduction in amounts owed by a taxpayer.

(3) Period--Filing period, such as month, quarter, or year.

(b) Offsets and application of credits and payments to liabilities.

(1) Requirements for offset requests.

(A) A taxpayer must file a written request to offset a liability before the determination, order, or decision establishing the liability becomes final. A separate request must be made for each credit a taxpayer proposes to apply to a liability. If a request is made to offset multiple liabilities, each of the liabilities must be listed in the order in which the taxpayer wants the credits applied.

(B) The written request for offset must include the following information for both the credits and liabilities:

(i) taxpayer number;

(ii) the audit or refund period, exam, or return period in which the credit and liability was created;

(iii) tax type; and

(iv) the tax amount.

(2) Rules for when offsets are and are not allowed.

(A) A credit that has already been refunded to the taxpayer or applied as a payment cannot be used to offset a liability.

(B) Offsets will only be allowed for liabilities owed by the same legal entity to which the credit is due.

(C) Any claim for refund filed on or after September 1, 2005 for a report period due on or after January 1, 2000 cannot be used to offset any liabilities due on a period-by-period basis and will be processed separately from any amounts found due in an audit. For more information about how to file a refund claim see §3.325 of this title (relating to Refunds and Payments Under Protest). This policy does not preclude auditors from making adjustments in the course of an audit that reflect overpayments of tax that have not already been separately identified in a refund claim such that any interest due from or owed to a taxpayer is computed on the final balance. The comptroller will apply the following policies to the following facts, but this does not control how the comptroller will handle other facts that may be presented.

(i) Audit in progress; refund items found by or presented to auditor during the audit. If an audit entrance conference is after September 1, 2005 and the auditor finds credits in the normal course of the audit, or the taxpayer brings credit items to the auditor's attention and they are not perfected in a separate claim for refund, the auditor will include the credits in the audit unless the taxpayer specifically requests that they be processed separately. If the credit items are processed within the audit, any offsets between deficiencies and credits will occur before the calculation of penalty and interest due as a result of the audit.

(ii) Audit completed; request for redetermination filed. If an audit is completed and a taxpayer timely files a request for redetermination that includes new refund items, or identifies refund items for additional consideration that were presented during the audit and not approved by the auditor, the refund items will be processed within the audit. Any offsets between deficiencies and credits will occur before the calculation of penalty and interest due as a result of the audit. If a taxpayer makes an additional claim for refund after the time in which a redetermination may be timely requested, those refund items will be treated as a separate, original claim for refund and they will not be processed as part of the request for redetermination.

(iii) Audit completed; claim for refund filed after notification of audit becomes final. If a taxpayer does not request redetermination and files a claim for refund after the audit becomes final, the refund claim and any interest due will be processed separately from the audit. Refunds due the taxpayer may be applied as a payment to any outstanding liability based on the date those funds are available for payment to the taxpayer.

(iv) Claim for refund filed; audit begins at a later date. If a taxpayer files a claim for refund after September 1, 2005 and an audit is started after the date the claim is filed, any refund amount granted will be processed separately from any amount found due based on the audit. Any refund due the taxpayer may be applied as a payment to any outstanding liability based on the date those funds are available for payment to the taxpayer, but the refund will not be processed as an offset.

(D) Amounts paid to settle a disputed obligation, including but not limited to settlements relating to litigation, are not credits and cannot be used to offset a tax liability or any resulting interest or penalty amounts.

(E) Amounts paid pursuant to a court judgment resulting from a claim for refund are not credits and cannot be used to offset a tax liability or any resulting interest or penalty amounts.

(F) An offset may be recalculated and billed if the credit used for the offset is subsequently reduced or eliminated.

(G) The comptroller will determine on a case-by-case basis whether an offset applies in any situation not specifically covered by this section, but will not approve an offset request for the following:

(i) property tax;

(ii) unclaimed property;

(iii) inheritance tax;

(iv) motor fuel tax refunds for fuel not used on Texas highways;

(v) franchise tax refunds resulting from an audit or adjustment made by the Internal Revenue Service;

(vi) enterprise zone projects;

(vii) refunds due by the Texas Workforce Commission;

(viii) bad debt credits; and

(ix) amounts governed under the Texas Insurance Code.

(3) Application of credits and payments.

(A) When credits are established in a period, they will automatically be netted against liabilities in the same period. If there are no liabilities to net against the credits, or the credits are greater than the liabilities in the same period, the credits will first be applied as payments to liabilities in prior periods.

(B) The application of credits will begin in the oldest liability period and apply within that period first to tax, next to penalty, and finally to interest. If credits remain, they will be applied to the next oldest period in the same manner, until all prior liabilities are paid or the credits are extinguished.

(C) If a credit remains after all preceding liabilities have been satisfied, and the taxpayer is current in all tax filings, applicable credit interest will be calculated for periods due on or after January 1, 2000, and a refund will be issued for the credit amount and interest.

(D) When a credit is applied to a tax liability in a prior period, the liability will continue to accrue interest under Tax Code, §111.060 through the due date of credit period. Unpaid tax balances after application of a credit will continue to accrue interest through the due date of the next applied credit or until midnight of the payment postmark date.

(E) When a credit is applied to a later liability period, any unpaid balance will continue to accrue applicable interest through the date of the next applied credit. Interest is accrued in accordance with Tax Code, §111.060.

(F) When a credit is applied to a later liability period, the credit will accrue applicable credit interest under Tax Code, §111.064 through the due date of the liability period in which the credit was applied. If there is a remaining credit balance, it will continue to accrue applicable credit interest until applied to another deficiency or refunded.

(G) Under circumstances where multiple type tax liabilities exist, such as city and state sales tax, payments will be divided proportionately between the taxes so that each tax shall share the payment on the basis of the amount due each tax.

(c) Unjust enrichment.

(1) If amounts are collected as tax in transactions on which tax is not due, the comptroller will require, under the doctrine of unjust enrichment, that these amounts be remitted to the state or be refunded to the customers from whom they were collected.

(2) In the case of refunded amounts, documentary evidence must be retained establishing the transaction, the amount collected, the party from whom collected, the amount refunded, and the party to whom refund is made.

Source Note: The provisions of this §3.2 adopted to be effective January 1, 1976; amended to be effective July 28, 2002, 27 TexReg 6537; amended to be effective December 4, 2003, 28 TexReg 10773; amended to be effective July 20, 2011, 36 TexReg 4568; amended to be effective February 21, 2016, 41 TexReg 1260