Category: Tax Returns, Examinations & IRS Procedures
Subject: Payments
Title: Allocation of Payments to IRS
IRC Sections:
Filename: 1268.html
Date Produced: 09/95

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Absent a designation by the taxpayer, the IRS allocates a voluntary payment of assessed taxes first to tax, then to interest, and then to penalties for the oldest tax year in question. Any remaining payment is then allocated in the same order to the next oldest tax year in question, and so on in the same manner until the payment is exhausted. This procedure applies both to income taxes as well as employment taxes. Rev. Rul. 73-305, 1973-2 CB 43, and Rev. Rul. 79-284, 1979-2 CB 83.

Where there is a question of allocating as between trust fund taxes and non-trust fund taxes as in this case, it appears (although it is not 100% clear to me) that the IRS will honor the taxpayer's wishes with respect to the allocation as between the two categories. The U.S. Supreme Court has held that a bankruptcy court can order the IRS to allocate payments in a certain way if the allocation is essential to the success of the reorganization. See U.S. v. Energy Resources Co., Inc., 495 US 545, 110 SCt 2139, 90-1 USTC ¶50,281.

However, absent an allocation on the taxpayer's part, the IRS allocates the payment first to non-trust fund taxes in order to maximize collectibility. IRS Policy Statement P-5-60 (2/2/93). This policy has been upheld numerous times by the courts. U.S. v. Schroeder, 900 F.2d 1144 (7th Cir. 1990); Wood v. U.S., 808 F.2d 411 (5th Cir. 1987); Emshwiller v. U.S., 565 F.2d 1042 (8th Cir. 1977); Liddon v. U.S., 448 F.2d 509 (5th Cir. 1971), cert. denied, 406 U.S. 918 (1972); Williams v. U.S., 92-1 USTC Para.50,160 (N.D. Ala. 1992). See also U.S. v. DeBeradinis, 395 F. Supp. 944 (D. Conn. 1975), aff'd, 538 F.2d 315 (2d Cir. 1976) (IRS must allocate taxes in a way beneficial to the government or is guilty of shirking its responsibility to collect maximum of assessed taxes).

Given the foregoing, it seems clear that the taxpayer in this case has no ability to compel the IRS to reallocate payments after the fact in a more beneficial manner.