Paying Employment Taxes

The IRS Office of Chief Counsel remids taxpayers that they need to specifically designate how payments made to the IRS are to be applied — or else the IRS will decide how to apply taxpayer payments.

The IRS will, pursuant to Revenue Procedure 2002-26, apply voluntary taxpayer payments as the taxpayer designates when he or she makes the payment to the IRS. In cases where the payment is not voluntary (i.e., it occurs via an IRS wage levy) or the taxpayer fails to designate where the IRS is to apply the payment, the IRS will apply the payment “”in the order of priority that the Service determines will serve its best interest.”

With federal income taxes, this usually means that the IRS will apply the tax payment to the tax and tax period that has the shortest IRS tax collection statute (AKA CSED or collection statute expiration date). Where trust fund recovery penalties are involved, the IRS will generally apply the payments “first to the non-trust fund portion of tax, then to assessed lien fees and collection costs, then assessed penalties, then assessed interest, then accrued penalties and accrued interest, and then finally to the trust fund portion of the tax.”

In the later scenario, the IRS is able to maximize the trust fund recovery penalty because the penalty is imposed retroactively on the amount of tax that is outstanding at the time that the penalty is assessed. Thus, if the penalty is not assessed before the taxpayer pays off the older tax periods, then the IRS will have lost the penalty amounts and interest that would have accrued on the prior tax years.