The IRS Applied Your Payment to the Wrong Tax Year. Now what?

September 12, 2022 by Glynis Miller, CPA, MST
Woman looking at paperwork

It is understandable no one gets excited about paying taxes, but there is likely a sense of relief knowing the taxes owed are paid in full for any given tax year. Thus, it is easy to imagine the frustration and confusion one might feel if the IRS indicates there is still a balance for a tax year that you believed to be paid in full. So what happens in the case where the IRS has applied your payment to the wrong tax year? What can you do about it? Simply stated, if the IRS applies your payment to the wrong tax year, they will generally fix the issue once they know the problem. However, understanding the U.S. Tax System is designed as a pay-as-you-go system may help avoid this problem in the first place.

A large portion of taxes are paid by withholdings and estimated tax payments made throughout the year. However, even with this system, some taxpayers will still have a balance due upon filing a tax return. Or they may have other payments to make because of audits and other tax adjustments.
 

Payment Methods Available

As noted, the IRS receives a large portion of payments through withholdings at the taxable earnings/income source, so there is generally no issue regarding the application of withholdings to a specific tax year. However, if other payments arrangements need to be made, taxpayers can pay online or via bank transfer, by check or money order by mail, with cash at a retail partner of the IRS, or through an electronic fund withdrawal used with e-filing. We will discuss how to navigate some of these options below.

Keep in mind that, if you choose to pay at the time of e-filing, applying your payment to the correct tax year is not generally an issue. However, if you are not paying at the time of e-filing or if other payments that may need to be made, such as an estimated payment or balance due payment, there is a chance they may be posted to the wrong tax year. This generally happens when the IRS staff selects the wrong tax year when posting the payments manually into the IRS system.
 

Online Payments

Online payments can be made by visiting the IRS website at irs.gov/payments to begin the process. Taxpayers are encouraged to set up an account when making an online payment, though it is not necessary. Individual taxpayers can make payments from a bank account with no additional fees. They may also use a credit card, debit card, or digital wallet; however, processing fees may apply when using these other payment methods. These payments are made using the IRS “Direct Pay” system. Individual taxpayers as well as businesses and tax professionals may also make payments by enrolling in the Electronic Federal Tax Payment System (EFTPS).

When making an online payment, you must inform the IRS how and why you are making the payment. Payments can be made toward an estimated payment for any year, a balance due on a tax return or other tax assessment, or toward a balance from an IRS bill. The IRS allows various payment types to be made via these online options, and taxpayers must properly identify how the payment will be applied. No matter which of the online payment systems is used, a taxpayer should receive a transaction confirmation. Any confirmations should be retained in your records to verify the payment type, date, and tax year if anything is questioned.
 

By Mail (Check or Money Order)

When a taxpayer pays by mail, certain information should be included on the actual check to identify the purpose of the payment. The information noted on the check should include any tax form information such as “Form 1040,” the tax year such as “TY 2020” or “TY 2021,” and the tax identification number, such as the social security number of the primary taxpayer on a joint tax return or the federal employer identification number (FEIN) of a business. The IRS will use this information to post the payment to the proper tax account. It is important to note that just including a payment voucher or copy of the IRS bill in the envelope is insufficient. All too often, the check is separated from the payment voucher, resulting in the payment being applied completely at the discretion of the IRS agent that is posting the payment to the IRS system. Retaining copies of the check or money order for your records is important if the IRS makes a mistake in posting the payments to your account. Many banks no longer return the checks with a statement; some will make small copies included with the statement. If individuals use online banking, the copies are available online, but generally for a limited time. Thus, downloading a copy of any important check is a good practice.

So, once you have gathered the relevant verification of your payments, the next step is to communicate that information to the IRS. Many payment issues can be resolved with a phone call from the taxpayer to the IRS on the general phone line (800-829-1040 for Individuals and 800-829-4933 for Businesses). Another option is for the taxpayer to call the IRS at the number noted on any correspondence received, noting the specific balance due. In most cases, the agent on the phone can adjust the information in the IRS system and move the amounts from the incorrect tax year to the correct tax year. Once this change is completed, the IRS retains the date received in the system, and penalties and interest calculations are adjusted accordingly. This action can often resolve the full balance noted in the IRS correspondence or substantially reduce any penalties or interest payments requested.

While phone calls can resolve most cases, written correspondence may be necessary for rare situations. In those instances, copies of the records should be sent to the address noted on the notice requesting the IRS correct its records. Always keep a copy of any correspondence sent to the IRS for reference in case it is not immediately resolved and never send any original documents. The IRS generally will not send back any original documentation.

If you are unsure if you owe the debt in question, TaxAudit may be able to assist you in determining if the notice is correct – click here to contact us and we would be happy to assist you.

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Glynis Miller, CPA, MST
Tax Content Developer

 

Glynis began her career with TaxAudit in February 2006 as a Seasonal Tax Return Reviewer. In December of 2008, she joined the permanent staff as an Audit Representative. Glynis has been an instructor for both continuing education tax classes and various staff training classes since 2009. Glynis holds a Bachelor of Science Degree in Accounting and a Master’s Degree in Taxation. Prior to joining TaxAudit, Glynis worked in private and public sectors of accounting. She has worked at regional accounting firms preparing tax returns, financial statements, and audit services. Her professional career has spanned over a wide variety of industries from advertising, construction, commercial real estate, farming, manufacturing and more. In 2017, Glynis joined the Learning and Development Department as a Tax Content Developer. She is providing a wealth of accounting and tax knowledge, writing skills, current job awareness, and a very cross-functional skillset to the team. 


 

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