Background

The IRS must decide where to apply each taxpayer payment when multiple years or types of liabilities exist. If you don’t tell the IRS how to apply a payment, it follows established allocation procedures to reduce the oldest assessed balance first. This can leave recent-year tax or estimated payments unpaid unless you direct otherwise. (Source: IRS.gov)

How allocation actually works — the priority rule

  • Oldest assessed liability first: The IRS applies an undesignated payment to the oldest assessed balance on your account (the earliest tax period with an assessed amount).
  • Within an assessed liability: Payments are applied to penalties first, then interest, and finally the tax principal.

Why that order matters

Because penalties and interest accumulate, a small payment can be eaten by those charges and make little progress reducing the underlying tax. In practice that means a taxpayer who intends to lower the current-year tax may find most of a lump-sum payment applied to prior-year penalties and interest.

Example

Suppose you owe for 2019 (including penalties and interest), 2020 (tax only), and 2021 (tax only). You send $2,000 with no instructions. The IRS will apply that $2,000 to the 2019 assessed liability first — covering penalties, then interest, then any remaining tax for 2019 — before moving to 2020.

How to control how your payment is applied

  • Designate the tax year and form number: When you pay by check, write the tax year and form (for example, “2024 Form 1040”) on the check or payment voucher. When using IRS Direct Pay, EFTPS, or a payment voucher, choose the correct tax period and payment type.
  • Use written instructions: Include a short written statement directing the allocation and keep a copy of the document and your payment proof.
  • Confirm via account transcript: After payment posts, check your IRS online account or request a tax account transcript to confirm how funds were applied. (Source: IRS.gov — Payments & Account Tools)

What to do if a payment posts the wrong way

  • Contact the IRS immediately: Call the number on the notice or the general IRS help line. If the payment was a mistake and still within a short window, the IRS may be able to correct the application.
  • Request a refund or abatement where appropriate: In some cases you can request refund or abatement of interest/penalties (see IRS guidance and Form 843 for certain abatement requests).
  • Consider the Taxpayer Advocate: If the IRS won’t correct an error and you face significant hardship, the Taxpayer Advocate Service can help. (Source: TaxpayerAdvocate.irs.gov)

Common mistakes and misconceptions

  • Assuming payments go to the most recent tax year — many taxpayers expect payments to reduce the current year first; IRS rules favor the oldest assessed liability unless you direct otherwise.
  • Not checking posting details — people assume an online payment automatically applied to the intended year; always verify with your account transcript.
  • Failing to designate payment type when using third‑party processors — third-party vendors may require extra fields to capture the year or form.

Who is affected

Any taxpayer with multiple assessments, unpaid penalties/interest, an installment agreement, or pending offsets is affected. Small businesses, self-employed taxpayers (with employment tax liabilities), and those who receive IRS notices are especially likely to be impacted.

Professional tips

  1. When paying multiple items, make separate payments for each tax year and type when possible — this is the clearest way to control allocation.2. If you’re in an installment agreement, discuss allocation strategy with your tax pro so payments don’t just erase fees and interest while leaving principal unpaid.3. Keep records: save canceled checks, EFTPS confirmations, Direct Pay receipts, and screenshots of payment confirmation pages.

Related resources on FinHelp

When to get professional help

If you have multiple years of liability, large penalties or interest, or an unexpected posting, consult a CPA, enrolled agent, or tax attorney. In my practice I’ve seen straightforward direction on a voucher or separate payments prevent hours of correspondence and repeated notices.

Authority and sources

This entry summarizes IRS payment and account procedures; see IRS.gov for official rules on payment options, account transcripts, and offset/abatement procedures. For help protecting refunds and details on offsets see the Treasury Offset Program guidance and Taxpayer Advocate Service resources.

Disclaimer

This article is educational and does not constitute tax advice. For guidance tailored to your situation, consult a licensed tax professional.