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WHEN PAYING IRS, LEAVE NO ROOM FOR DOUBT

July 18, 2007

A reader sent the following:

You have stressed the importance of using certified mail because you never know when the IRS will open its mail. You may also want to stress writing the tax year on a check - even if the check is in the same envelope as the tax return.

Fred A. Windover included a check and his return in the same envelope. The amount of the check was the exact amount due on his return. The IRS applied some of the check to Windover's other past-due amounts and then later assessed penalities for not paying his taxes in full. The Tax Court ruled if a check doesn't specify the tax year, the IRS can apply the funds "in the order of priority that the Service determines will serve its best interest."

That does seem like an astounding result, but the reader is correct - the Tax Court says that if you send a check for the balance due with your year 2 return, but you still owe for year 1, they can apply the check to year 1 and hit you with late payment penalties for year 2, unless you specify on the check the year to which the payment is to apply.

The moral? If you owe taxes, write the tax year and form on your check. Better yet, e-file and have the balance due direct-debited from your bank account. That leaves no room for the IRS to lose your check or put it where it doesn't belong.

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