By Nicholas Eusanio, Esq., LL.M
The tax attorneys at Nardone Law Group in Columbus, Ohio routinely help individuals and businesses make use of the Internal Revenue Service’s (“IRS”) collection alternatives to repay federal tax liabilities. The IRS has significant power to collect delinquent tax debts from taxpayers by enforced collection actions, such as a levy against taxpayers’ assets or obtaining a judgment and order from a court directing the taxpayer to pay. Many times, taxpayers must repay tax liabilities by making partial payments of the amount owed to the IRS. Fortunately, the IRS offers certain collection alternatives that allow taxpayers to repay their federal tax liabilities to the IRS using partial payments. Please see our prior article for more information on the various collection alternatives.
But, the order of payment can be an important consideration for taxpayers trying to repay all of their federal tax liabilities. In many instances, a taxpayer making voluntary partial payments may direct the IRS as to how to apply those payments to the federal tax liabilities. Under certain circumstances, though, the IRS may apply a taxpayer’s voluntary or involuntary partial payments to the taxpayer’s federal tax liabilities in the manner which would most benefit the IRS. Accordingly, the tax lawyers at Nardone Law Group want to inform taxpayers about the difference between a voluntary payment and an involuntary payment to the IRS, and the effect that difference may have as to repaying federal tax liabilities to the IRS.
Voluntary Versus Involuntary Payments to the IRS: How Will My Payments Be Applied to My Federal Tax Debt?
Under IRS Revenue Procedure 2002-26, if a taxpayer provides written directions as to the application of a voluntary payment to the taxpayer’s outstanding federal tax liabilities, the IRS will apply the payment in accordance with the taxpayer’s directions. If, however, the taxpayer does not provide specific written directions to the IRS as to how to apply a voluntary payment, the IRS will apply the payment to the federal tax liabilities in a manner that will serve the IRS’ best interest. Moreover, where a taxpayer’s payment to the IRS is involuntary, the taxpayer has no right to direct a particular application of the payment and the IRS may allocate the payment in the IRS’ best interest.
An involuntary payment to the IRS results from enforced collection action by the IRS. Enforced collection action means either actual seizure of taxpayer funds through a levy, or the IRS’ obtaining the right to recover taxpayer funds through a court order directing the taxpayer to repay federal tax liabilities. As an example, the IRS may apply federal tax liability payments made by a taxpayer as a result of criminal restitution as the IRS sees fit. In this context, criminal restitution is repayment for loss resulting from a tax-related crime, based on a court order or plea agreement as part of a criminal case. Thus, because of their nature as court-ordered payments, criminal restitution payments are involuntary payments to the IRS.
As you can see, whether a payment to the IRS is voluntary or involuntary is an important distinction. That distinction can either cost, or save a taxpayer extra money and time in repaying federal tax liabilities to the IRS based on whether the taxpayer is able to direct allocation of the payments, or whether the IRS may apply the payments in its best interest. Accordingly, it is important for any taxpayer making payments to the IRS to consult experienced tax counsel to ensure those payments are applied in the taxpayer’s best interests where possible.
Nardone Law Group represents businesses and individuals in federal and state tax issues, including collection alternatives to resolve federal tax liabilities and avoid or remove federal tax liens and levies. If you are struggling with tax liabilities or received a Notice of Federal Tax Lien or IRS levy notice, you should contact an experienced tax attorney today. Nardone Law Group’s tax lawyers and professionals have vast experience representing clients before the IRS. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available, including the Fresh Start Initiative Offer in Compromise, installment agreement, currently not collectible, or discharge in bankruptcy options. Contact us today for a consultation to discuss your case.