If you've got an IRS letter on your desk right now, you have a decision to make, and the clock matters. I'm Darrin Mish. I've spent 32 years helping people with exactly this kind of situation. Here's what you should do.
You can choose where your IRS payment goes, but only if you send it in voluntarily. The IRS is going to apply your tax payment to the oldest balance due. So, if you owe taxes for 2015 and 2016, your payment will go to 2015.
Why do they apply it that way? The IRS uses a linear accounting system. That means any payments you make go to the oldest balance first. The problem is that this method of payment application maximizes the penalties and interest on the tax debt.
Plus, the IRS has a 10-year period in which to collect unpaid taxes. If they don’t recover the money owed during a given tax year, within that 10-year window, they cannot collect that money. That makes it more important for them to get the older taxes first, to prevent that 10-year collection period lapse.
Voluntary vs. Involuntary Payments
From the IRS perspective, a voluntary payment is one that you make completely on your own. That means it is not done by levy, lien or payment arrangement.
You can make voluntary payments in addition to the money being paid via a levy, lien or payment arrangement. But a voluntary payment does not replace an involuntary one.
Designating a Payment
How do you designate a payment for a particular tax year? The process is fairly simple.
Write a check for the payment you want to make. Make it out to the IRS. In the memo section of the check, you need to add two things. First, identify the tax form the payment relates to, such as “1040” or “1040E”. Second, identify the tax year you want the payment to go towards, such as “Tax Year 2015”.
Create a cover letter to go with the check. Include the same information within the cover letter. Keep a copy of the cover letter and a copy of the canceled check once it comes back.