ASK THE EDD ATTORNEY – HOW TO MAKE SURE YOUR TAX PAYMENT GOES WHERE YOU WANT IT TO GO?
By Robert S. Schriebman
February 23, 2016
When it comes to paying our annual income taxes most of us simply write the check and wish we had the money for other things. However, there are many times when individuals and businesses owe a significant amount of payroll or income taxes and have a limited means by which to pay them. Still others have the funds to fully pay what they owe but want their payment to go to specific periods or specific portions of their tax liability. For example: a taxpayer may want to pay only the taxes that are owed but not the penalties. Things can get very complicated when it comes to paying taxes.
Occasionally the IRS misapplies the taxpayer’s payment. For example: Mr. Jones owes the IRS for the years 2012, 2013, and 2014. He sends a partial payment and requests that the monies be applied only to 2012 because it is the oldest year and carries the highest relative amount of penalties and interest. Unfortunately the IRS applies the money to 2014 instead. Is there anything Mr. Jones can do to force the IRS to payoff 2012, his original wish?
In this article we will discuss the rules of payment applications, how to make sure the IRS or the EDD follows your instructions, and what to do if your payment designation is not honored. In my next article we will discuss several examples illustrating the importance of payment designations.
The Basic Rules Of The Designated Payment Game
I have been designating client’s payments to the IRS, EDD and FTB for many years. Most of the time my designation request is honored. However, I recently had the IRS violate my instructions. I am happy to say when the error was called to the IRS’ attention they fixed the problem.
There are very important rules, developed over the past 40 or so years, that now constitute a body of law solely dedicated to having your money go where you want it to go. Here are the basic rules:
Payment Agreements Don’t Count
The designation rules depend upon whether or not you are in a formal written installment payment arrangement. If you are making payments to the IRS or EDD, subject to a written installment agreement, you cannot designate where your payment is going to go. Payments that are made pursuant to a written installment agreement are first applied to the oldest outstanding year or period. Not only that but the installment payment is first applied to the oldest penalties and interest before the first dollar is applied to the tax portion.
A designated payment falls into a technical category known as a “voluntary designation.” Payments made subject to a formal written installment payment agreement are not voluntary payments.
You Gotta Put It Writing
A payment designation must be in writing. This means that the designation must be on the check itself and not on a cover letter accompanying the payment. There have been many tax cases lost where a taxpayer sent in an undesignated check with a letter stating how the payment was to be applied. If the designation is not on the check itself, the chances are that the clerk at the IRS or the EDD will simply separate the two and throw the cover letter away. Here is a good first rule of thumb:
- Put your designation on both front and the back of the check. Take a yellow marker and highlight your designation – then take a red pen and circle your designation so it sticks out like a sore thumb. It may be messy, but if a judge ever has to rule on the matter the chances are good that you will win.
The Technical Rules
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.”
Here is a good second rule of thumb: when making a payment designation, in addition to telling the IRS, on the check, where you want the payment to go, you should also add the following words: “…This payment is designated pursuant to Revenue Rulings 73-305 & 79-284 as well as Revenue Procedure 84-58.”
The California Rule
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.”
Although Civil Code Section 1479 does not give any instructions to protect the debtor, I believe you should follow the same procedure when paying the EDD, FTB or SBE as you would if paying the IRS. Follow my first rule of thumb above – put it in writing, put it on the front and back of check, and highlight with yellow and circle with red. No creditor will then be able to say they didn’t get the message.
The above discussion is meant to be an overview. In my next article I will give you specific examples of the importance of proper payment designation.
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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