What to Do if IRS Misapplied Payment

irs misapplied payment

If you sent a payment to the IRS and later realized the IRS misapplied the payment, take a look at the article below to learn how to resolve the issue.

In this article, we’re taking a closer look at what to do if IRS misapplied payment.

What to Do if IRS Misapplied Payment

The IRS is not infallible – far from it. As they’re tasked with sorting through and verifying over 140 million tax returns from the American people, it’s no surprise that mistakes are made.

Some of these are caught and rectified, leading to thousands of notices going out to taxpayers about outstanding tax liabilities. One of these potential notices is the IRS Notice CP60, which is used to notify taxpayers of misapplied payments, and a due balance.

So, what to do if IRS misapplied payment?

Learn more about Adjustments & Corrections.

What is an IRS Misapplied Payment?

When the IRS goes over a tax account for one reason or another, they might find discrepancies and errors made either by the taxpayer or, in some circumstances, by the IRS themselves.

Math errors are a common occurrence, for instance – when the IRS catches that someone made a mistake when calculating the amount of tax they owed, they send out a math error notice, which can either lead to additional tax costs, or a tax credit (if the taxpayer ended up overpaying). While at times confusing, this is one of the examples of how the IRS tackles errors and mistakes.

When the IRS themselves make a mistake, it’s often in the form of misapplied payments or credit. This means the IRS made a mistake in attributing a tax credit to your account.

They might have mistaken your account for someone else’s or thought you were eligible for a credit that you are not, in fact, eligible for. In turn, they’ve sent out an IRS Notice CP60 notifying you that they’ve rescinded that credit and added to your outstanding tax liability.

What does this mean for you? It means the IRS thought you owed less than you actually do, and they’ve caught and corrected that mistake. In cases where existing credit that you are entitled to doesn’t cover the mistaken payment, you now owe the IRS more money, and you until the specific date will be on the notice itself (typically a  total of 21 days) to respond, either by:

  • Disputing the taxes that you now owe,
  • Disputing penalties (if any),
  • Paying what you owe.

What If You Miss the Deadline for Addressing Your Balance?

If you miss the deadline for paying what you owe, normal IRS penalties and interest will apply.

Failure-to-pay penalties will cause your current tax liability to grow for as long as you do not pay or ask for an extension, at a rate of 0.5 percent of the tax owed for each month, up to 25 percent.

This rate is hiked up to 1 percent each month ten days after a Final Notice of Intent to Levy is filed and is reduced to 0.25 percent upon entering an installment payment plan with the IRS.

The interest rate for outstanding tax costs is a bit different. This compounds daily form the due date until you pay your balance in full and is determined by the federal short-term rate (which is set every three months), plus 3 percent. You can check the appropriate quarterly interest rates for any relevant three-month period through the IRS’s site search. Here are the interest rates for the last quarter of 2020.

Note that failure-to-pay penalties and fees differ from failure-to-file penalties, which are a separate issue.

Misapplied Payment to Account vs. Misapplied Payment to Tax Return

An IRS Notice CP60 is not to be confused with an IRS Notice CP260, which can be strikingly similar. The only real difference is that a CP60 refers to a misapplied payment to an account, while CP260 refers to a misapplied payment to a tax return.

Functionally, both notices have the same direct consequences – you owe the IRS money, and you have until the date mentioned in the notice to pay your due amount.

Can You Challenge an IRS Misapplied Payment Notice?

If you believe that the IRS made a mistake in rescinding the credit paid to your account or tax return, or if you for some other reason believe you do not owe the IRS money – and can prove it – you do have multiple options for recourse. The IRS’s own advice is to call them through their toll-free number (listed on the notice) or send a copy of the notice and your proof to them via mail.

Once you get a customer service representative on the line, tell them about the notice and say that you want to review your account. It can be difficult to deal with the IRS and get the results you need. A better alternative would be to contact a tax professional, and work through them to sort out your new tax problem.

If you find that the IRS is obstinate in its position, you can file an appeal, or even take them to court. However, if you have the necessary paperwork to prove that the payment to your account or return was not misapplied, and are working with a tax professional who knows how to deal with the IRS, you likely won’t encounter that much opposition.

What to Do When You Owe the IRS

If you do end up owing the IRS money, the only way to deal with the situation reasonably is to pay them what you owe. However, not everyone has the kind of cash-on-hand needed to resolve debt with the IRS within a few weeks. In this case, the IRS recommends paying what you can.

Making a partial payment to the IRS, alongside a plan for how you plan to divide the rest into payments over the next couple of weeks, can give you an extension on your payment deadline or greatly reduce incoming penalties.

Setting Up a Payment Plan

Payment plans have their own setup fees and considerations, depending on how much you owe, over what period you plan to pay, and how you plan to pay. You can apply for a payment plan online, which may be the simplest option in many cases.

You can also consult a tax professional to determine what your best option might be to reduce incoming costs and avoid a crippling bill. Some things to note:

  • You can pay the IRS via installments in a long-term payment plan (more than 120 days), so long as your total tax liability is $50,000 or less, and you’re up to date on all required tax returns.
  • You can pay the IRS through multiple payments in a short-term payment plan (120 days or less), so long as your total tax liability is $100,000 or less, and you’re up to date on all required tax returns.
  • For long-term payment plans, the online setup fee for automatic monthly withdrawals is $31 (waived for low-income taxpayers). If you don’t opt for automatic monthly withdrawals, the setup fee becomes $149 ($43 for low-income taxpayers). For short-term payment plans, the online setup fee is $0.

What If You Can’t Pay?

If your outstanding tax liability is too great to pay fully within the statute of limitations for tax debt, you may be able to opt for a lower total tax debt by working with a tax professional.

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