The IRS Is Happy As Long As Payments Are Made, Right?

You may think that the IRS is happy as long as you are sending them money.  But that isn’t true.  A payment is not just a payment to the IRS.  When you owe back taxes, there’s a pecking order to the payments you make.  They absolutely must be made in a specific order and applied correctly. 

Compliance for all current tax is the #1 priority.  If you have an Installment Agreement to pay a back-tax liability, it should be paid next.  If you have extra money to send the IRS after your current tax obligations are met, a Voluntary Payment can be very beneficial.  But, it’s important to designate your payments in your best interest.  To do this you’ve got to tell the IRS where to apply your payment. 

Do Not just send a check without specifically telling the IRS where (tax form, year/period, portion of liability) you want it applied.  When the IRS receives a payment that is not properly designated, it will be applied in the best interest of the government.  That’s not necessarily what you want.

What is a Voluntary Payment to the IRS?

It’s simple, a Voluntary Payment to the IRS is one that is not required and not forced.  For example:
  • A Federal Tax Deposit to pay 941 payroll tax is required and therefore not a Voluntary Payment.
  • A payment taken by the IRS through enforced collection action such as a Levy is not a Voluntary Payment.
  • A formal Installment Agreement payment is part of an agreement with the IRS to pay back taxes and is not considered a Voluntary Payment.
  • A payment designated toward the Trust Fund portion of a payroll tax liability by the owner of the delinquent business is an example of a Voluntary Payment.

Why Send a Voluntary Payment to the IRS?

If all your current tax obligations are met and you can afford it, a Voluntary Payment can work for you in a lot of different ways.

First, it shows good faith on your part.  If you’re dealing with a Revenue Officer, Voluntary Payments let her know that you’re serious about getting this issue resolved.  It can show the Revenue Officer that you need less attention than her other cases.  Believe me, less attention is typically better than more attention when dealing with an aggressive RO.

Voluntary Payments while attempting to negotiate a monthly Installment Agreement also help you develop a track record of reliability.  When you owe back taxes, especially payroll taxes, the IRS not only looking at you and your business as a collection target, but also determining whether your business can afford to keep the doors open.  Remember, the IRS values current tax compliance over just about everything else in this situation.  They won’t let your business continue to accrue back taxes.  Let the IRS know that you are serious about resolving your back taxes. 

When you owe 941 payroll taxes, a Voluntary Payment can be especially beneficial.  Designating your Voluntary Payment(s) toward the Trust Fund will not only reduce your total business tax liability.  It will also reduce your personal exposure to the business taxes

How Do I Make a Voluntary Payment Toward 941 Payroll Tax Liabilities?

Make sure your current tax obligations are paid and if applicable, make sure your monthly Installment Agreement payment is made.  Once those two obligations are met, we recommend sending a hard check to the IRS as a Voluntary Payment.

Make your check payable to “United States Treasury”.  Write your business EIN and “Apply to Trust Fund Portion Only” in the memo portion of the payment.  We also advise to write a short letter to accompany the payment advising the IRS to apply it toward the Trust Fund.

Writing “Apply to Trust Fund Portion Only” in the memo portion does the following:
  • Reduces total tax portion of business liability
  • Reduces personal exposure to payroll tax liabilities, not just for business owner, but all responsible individuals
  • Reduces accrual of penalties and interest
If your business owes multiple years’ employment tax, it may be beneficial to also designate your Voluntary Payment to the most recent periods.  This is due to the 10-year IRS Collection Statute Expiration Date or CSED and the 3-year Assessment Statute Expiration Date or ASED.

Once the 10 year CSED passes, the IRS no longer has the legal right to actively collect the tax.  Similarly, once the 3 year ASED passes, the IRS no longer has the legal right to assess the tax to the Responsible Person(s).  The more recent the tax period, the later the CSED/ ASED and the later the IRS can collect the tax and the later it can assess it from the business to an individual.

Designating your Voluntary Payment toward the most recent year/period will help chip away at the furthest CSED and ASED dates.

If you’ve already paid the Trust Fund, designating your Voluntary Payment to the most recent tax liability year/period may still be beneficial.  The less time the IRS has to collect, the better.

 Be sure to keep a copy of the check and accompanying letter.  It’s also a good idea to print a copy of the processed check from your online bank account.  Keep these in a file for later, in case you need to prove that you properly designated the payment(s).

Where Do I Send My Voluntary Payment?

If you have a Revenue Officer, send your Voluntary Payment directly to her.  If not, find your most recent IRS notice regarding your past due 941 employment tax.  Send your payment to the address on the notice along with a copy of the included payment voucher.  You may also want to keep a copy of the voucher for future payments.

 If you don’t have a RO and don’t have a recent IRS Collection notice, send your Voluntary Payment to the IRS address for your 941 tax return.

How Much Should I Send the IRS?

This is such a subjective question.  Pay as much as you can afford.  It should save you money and frustration down the road.

If you hope to negotiate a formal Installment Agreement, it’s a good idea to start sending Voluntary Payments in the amount you want as a monthly payment.