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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • Designating how payments are made to the IRS – When is it important? Hint…Statute of Limitations and Bankruptcy

    Designating how payments are made to the IRS

    If tax debt is owed to the IRS for more than one previous year or quarter, it is wise to tell the IRS how to apply the payment you are making to your tax bill. This is often called “designating” the payment.

    If you don’t tell them where to apply the payment, they will apply it however they want.

    Even more important, the payment will usually be applied to the oldest year or quarter that you owe money on.

    This is important for two reasons:

    a. The IRS is limited to 10 years to collect all the tax, penalty and interest.

    If they apply to the oldest tax, penalty and interest, and that debt is close to the 10 year mark, you may be just throwing the money away. In essence, it would be much better to let the 10 year limit kill the old debt and your payment kill the newer debt, letting the two “work toward” each other until the debt is wiped about. This way you will likely pay much less in tax debt overall.

    An Example:

    Lets assume you owe for tax years 00 in the amount of $20,000.00 and 09 in the amount of $20,000.00. 00 was assessed on Sept 30, 2001. On Sept. 15, 2011, you want to make a payment to reduce your tax debt.

    You send a check to the IRS for $20,000.00. The IRS applies the amount to the 00 tax year of course.

    What if you had designated the payment to the 09 tax year. The IRS would have applied it to 09 zeroing that out and just two weeks later the statute of limitations would have zeroed out the 00 debt saving you $20,000.00

    b. Bankruptcy

    If you are considering bankruptcy and have old income tax debt, some of it may be old enough to be wiped out in the bankruptcy. You wouldn’t want to have payments applied to debts that are going to be wiped away anyway.

    Making the designation

    When you make an income tax payment with a check or money order it is a good idea  to write your social security number, tax period and the year you are pyaing in the lower left hand corner. If it is a business related tax than use the taxpayer id number instead of course.

    Include with the check or money order a letter that states clearly what period and or year you want the payment to be applied to and reference the check or money order.

    Send the letter and payment by certified mail and keep copies of all the documents. If the IRS ignores your request you can then later send proof of your request and payments to get it corrected.

    Only the payments that are made voluntarily can be designated like this. If the IRS levies a wage or bank account or withholds the tax refund – no designation can be made.