(a) A State will be subject to a financial penalty and the amounts otherwise payable to the State under title IV-A of the Act will be reduced in accordance with §305.66:

(1) If on the basis of:

(i) Data submitted by the State or the results of an audit conducted under §305.60 of this part, the State's program failed to achieve the paternity establishment percentages, as defined in section 452(g)(2) of the Act and §305.40 of this part, or to meet the support order establishment and current collections performance measures as set forth in §305.40 of this part; or

(ii) The results of an audit under §305.60 of this part, the State did not submit complete and reliable data, as defined in §305.1 of the part; or

(iii) The results of an audit under §305.60 of this part, the State failed to substantially comply with one or more of the requirements of the IV-D program, as defined in §305.63; and

(2) With respect to the immediately succeeding fiscal year, the State failed to take sufficient corrective action to achieve the appropriate performance levels or compliance or the data submitted by the State are still incomplete and unreliable.

(b) The reductions under paragraph (c) of this section will be made for quarters following the end of the corrective action year and will continue until the end of the first quarter throughout which the State, as appropriate:

(1) Has achieved the paternity establishment percentages, the order establishment or the current collections performance measures set forth in §305.40 of this part;

(2) Is in substantial compliance with IV-D requirements as defined in §305.63 of this part; or

(3) Has submitted data that are determined to be complete and reliable.

(c) The payments for a fiscal year under title IV-A of the Act will be reduced by the following percentages:

(1) One to two percent for the first finding under paragraph (a) of this section;

(2) Two to three percent for the second consecutive finding; and

(3) Not less than three percent and not more than 5 percent for the third or a subsequent consecutive finding.

(d) The reduction will be made in accordance with the provisions of 45 CFR 262.1(b)-(e) and 262.7.