The IRS recently released informal, nonbinding email advice from 2019 (Chief Counsel Advice 202129007) that explains options for a taxpayer to designate a payment allocation for a quarterly federal tax deposit of payroll taxes (including federal income, Social Security and/or Medicare taxes).
The CCA provides that a taxpayer is permitted to designate a voluntary payment to specific tax liability, but for such designation to be proper, the request or designation must be specific, in writing, and made at the time of payment. The advice notes that a taxpayer has no right to designate payments resulting from enforced collection measures.
The CCA also explains that if a taxpayer does not designate the payment allocation, the payment will be applied in a manner serving the best interests of the government—which generally means the payment will be applied to satisfy the liability for successive periods in descending order of priority until the payment is absorbed and will be applied to non-trust fund taxes first. For this purpose, trust fund taxes generally include money withheld from an employee’s wages for federal income, Social Security and Medicare taxes. In the payroll tax context, non-trust fund taxes generally include the employer’s share of Social Security and Medicare taxes.
Trust fund taxes are subject to the 100% trust fund recovery penalty under Section 6672, which can be assessed personally against responsible persons involved in collecting and remitting payroll taxes, including executives and other employees. Non-trust fund taxes are not subject to that specific penalty.
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