IRS hammered on treatment of misapplied tax payment
Once the IRS sinks its teeth into you, it rarely lets go. One taxpayer found this out the hard way, when the IRS came after him at least three times for payroll taxes he had already paid. The IRS backed off only after the Tax Court ruled that it kept the liability open by misapplying this taxpayer’s payments. (Fagan v. Commissioner, No. 28982-15S, U.S. Tax Court, 2017)
’Round and ’round they went. The IRS and the taxpayer had a complex relationship going back to at least the mid-1990s, which encompassed his personal income taxes, as well as payroll taxes related to his law practice. He thought he and the IRS had squared away everything with an installment agreement, which he honored in full.
Yet the IRS wouldn’t let go of the payroll tax liabilities, even after being informed that they had been paid. Between 2008 and 2013, it sent him numerous bills for taxes, penalties and interest totaling around $18,000. When presented with proof of payment, the IRS backed off that assessment. However, in the course of resolving that issue, the taxpayer discovered two misapplied tax payments, which led the IRS to assess him again for payroll taxes that he previously proved were paid.
Abuse of discretion. The tax code gives the IRS almost unfettered discretion to apply tax overpayments any way it wants. It can, for example, offset a tax overpayment to satisfy another outstanding tax debt. The IRS tried to convince the Tax Court that it could use misapplied payments in the same way.
But the court didn’t buy it. Tax Court: These were misapplied payments, not overpayments. The taxpayer proved that he satisfied all of his debts, yet the IRS kept dunning him. The IRS, therefore, abused its discretion when it continued to try to collect this money from the taxpayer, the court concluded.
TENACITY PAYS: This taxpayer’s perseverance was impressive. Exercise a similar level of vigilance over your company’s taxes by regularly requesting a copy of your tax transcript from the IRS.
How to read a transcript: Tax modules are coded by year, the last month of a calendar quarter and the tax type—941 for payroll taxes, 1120 for corporate taxes, etc. What you’re looking for: that all modules balance and that you haven’t fallen into the offset program, where the IRS offsets a payroll tax overpayment against underpaid corporate taxes, or vice versa. If you find an offset, remind finance that payroll taxes aren’t a cushion on which they can rely if they’re short in their quarterly estimated tax payments.
