Court Says Levied Funds Properly Applied to Older Tax Year

Posted on August 08, 2019

Married taxpayers who owed money to the IRS for over 15 years had filed two Offers in Compromise, both of which were rejected. An Offer in Compromise is where you “cut a deal” with the IRS and pay less than what you owe. Because the taxpayers’ Offers had been rejected, the IRS began taking enforced collection action against the taxpayers, including levies on their bank accounts. When you make a voluntary payment to the IRS, such as presenting a check, you are able to designate where you would like the money to be applied. When you have an older tax liability, like the taxpayers in this case, you typically want to apply a voluntary payment to a later liability, not the earlier liability, because the collection statute of limitation on the earlier liability may expire in the near future, meaning that the IRS can no longer legally collect that liability. When the IRS takes money from you by force, such as a wage or bank levy, it is considered to be an involuntary payment, and the IRS can apply the funds in its “best interests,” usually meaning the oldest liability first. In this case, the taxpayers presented a check to the IRS and specifically applied the check to a later liability. However, the check bounced because the IRS had previously levied on their bank account and the bank sent the money to the IRS pursuant to the levy. The IRS applied the levied funds “in its best interest,” meaning the oldest liability first. In Court, the taxpayers argued that the funds that the IRS received pursuant to levy should be applied to the year that the taxpayers wanted, not to the earliest years, because the IRS levy caused their check to bounce. Unfortunately, the Court sided with the IRS because there was no prior agreement regarding the levy or the presentation of the check. Although IRS Trouble Solvers agrees with the conclusion in this case, it still feels that the result is very unfair to the taxpayers. What do you think?