South Carolina Tax Attorney

Question:

    I have set up an installment agreement with the IRS where I pay them $100 per month on my back taxes.  I owe them about $10,000 with penalties and interest.  Last month, I accidentally wrote the check out for $200.  What happens to that over payment.  Will I not have to make a payment next month?

Answer:

    Unfortunately, you will not be able to get a refund of the additional amount that you paid the IRS last month.  The good news is that it will be applied to your total tax liability.  The bad news is it will be applied in the best interest of the U. S. government.  What does that mean?  It means that they will apply the payment to your oldest liability.  The reason this is bad is because the IRS penalties and interest are charged according to your balance.  The newer, most recent taxes will have more penalties that can be assessed because the penalties eventually "max out" so whatever you can do to reduce the amount you owe on newer taxes that are still being assessed, you will save yourself a lot of money in penalties in the long run. 

    The second part of your question asked whether you did not have to pay next month because you hope they will apply that extra payment to your installment plan rather than you liability.  As we explored above, you will still need to make that $100 payment next month because they have applied that $100 to old taxes rather than your payment plan so you do not get a "credit" going forward. 

    The same principal holds true for those who file their tax returns and are due a refund.  Even through the government keeps your refund, which may be in the thousands of dollars, this will be applied to your oldest tax liability rather than your installment agreement payments or the new tax.  So even if the IRS keeps your $2,000 refund, it is applied to your liability, but you are still required to make your installment agreement payments as usual.