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ASK THE EDD LAWYER – THE IMPORTANCE AND IMPACT OF DESIGNATED TAX PAYMENTS

By Robert S. Schriebman
February 24, 2016

Introduction

Both IRS administrative rulings as well as the California Civil Code allow the taxpayer to place a partial payment to a designated tax period or a portion of the overall tax liability. What is the advantage of doing this? Why are designations important? This article will give you a general overview of payment designations and will provide several examples that will show you the importance of payment designations.

Payment Designation Overview

In Article 205 I went into more detail about the rules governing your ability to place your tax payment where you want it to go. I suggest you read Article 205 in conjunction with this article.

In the 1970s the IRS published two Revenue Rules, 73-305 and 79-284. These rulings permitted taxpayers to designate where a payment is to go and to have the IRS honor that designation. In 1984 the IRS published Revenue Procedure 84-58 to further strengthen and clarify taxpayer's rights.

On February 16, 2016 the IRS published Fact Sheet FS-2016-11. This Fact Sheet explained several new provisions of the Taxpayer's Bill of Rights (TBOR). One of the provisions dealt with taxpayer's designations as follows, "Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly."

Taxpayers are allowed by California law to designate the application of tax payments whether made to FTB, EDD or SBE. The key law is contained in Civil Code Section 1479. Not a lot of people know about this little rule. This section is entitled Act of performance applicable to two or more obligations; application to specific obligation. Part one of section 1479 states the following: "If, at the time of performance, the intention or the desire of the debtor that such performance should be applied to the extinction of any particular obligation, be manifested to the creditor, it must be so applied."

Examples

  1. 1. Mr. Jones owes the IRS unpaid individual income taxes for the years 2012, 2013 and 2014. He is getting threatening letters from the IRS to pay 2013 and 2014 or risk IRS levies and seizures. He has not heard from the IRS about 2012, which is larger than 2013 and 2014 combined. Mr. Jones has arranged to borrow money from a relative to get the IRS off his back for 2013 and 2014. If Mr. Jones simply sent the IRS his check without designating 2013 and 2014 the IRS will apply the money only to the year 2012 and nothing to 2013 or 2014. Mr. Jones will effectively be back to square-one still owing the IRS for 2013 and 2014. Mr. Jones will still be at risk for IRS enforced collection. Mr. Jones was advised by his accountant to write the following designation on the front and back of his tax payment:

    • "SSN: 123-45-6789; apply this payment as follows: 1040:12/31/2013 and 12/31/2014, per Revenue Rules 73-305 & 79-284."

    If the IRS ignores Mr. Jones' designation and applies the payment to the year 2012, Mr. Jones has the right to contact the IRS Tax Payer Advocate to demand the IRS properly apply his payment to the years 2013 and 2014.

  2. Mr. Smith filed his 2014 individual income tax return late due to a severe and debilitating illness. The IRS assessed late filing and late payment penalties together with daily compounding interest. Mr. Smith wants these penalties and interest on the penalties removed due to reasonable cause. (See IRS Manual Chapter 20 for the rules relating to penalty abatements.) Mr. Smith wants to pay his taxes and the interest on his taxes but does not want any part of his payment applied to penalties. By using the payment designation rules he can force the IRS to apply his payment exactly where he wants it to go by making the following designation on the front and back of his tax payment check:

    • "SSN: 123-45-6789; apply this payment as follows: 1040:12/31/2014, apply to tax portion, and interest on tax portion only per Revenue Rules 73-305 & 79-284."

    Mr. Smith will then be free to request that the IRS abate his delinquency penalties. This procedure will require a whole new article.

  3. In December 2015 Abel Corporation learned that its internal bookkeeper had embezzled a fortune failing to pay payroll taxes to the EDD for the first 3 quarters of 2015. Abel Corp. informed local law enforcement and obtained a police report that it will use to attempt to remove late payment penalties. (Obtaining a police report is a must!) The bill from the EDD was substantial and included late payment penalties, and interest thereon.

    The EDD collector is now demanding full payment of all that is owed. Abel Corp. was advised by its tax attorney to only pay the tax portion and to seek removal of the penalties from the EDD. By using the California Civil Code, Abel Corp. can force the EDD to apply its payment exactly where Abel wants it to go by making the following designation on the front and back of his tax payment check:

    • "EDD Acct. No. 123-4567-8, apply payment to the tax portion and interest on the tax portion for the periods: 01/2015, 02/2015, and 03/2015 pursuant to Civil Code Section 1479."

    After Abel has made its tax payment, the EDD collector is able to entertain Abel's argument to abate delinquency penalties due to reasonable cause. Penalty abatements from the EDD are not given too often, but it's worth a try.

Conclusion

Payment designations can be a powerful tool to help a taxpayer manage tax debts and exposure both at the personal level and corporate level. Taxpayers who are uninformed of these valuable procedures can pay unnecessary taxes, penalties and interest only to be left with expensive and time consuming refund procedures.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure", both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

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