My client is on an installment agreement with the IRS. How is the monthly payment applied to the outstanding balance? Is it applied to interest, penalties and the principal balance? Furthermore, how is any excess on the monthly payment treated?
The short answer is that the IRS has full discretion on the allocation of payments made under an installment agreement. That being said, generally the payment will apply to the accrued penalty and interest first as noted in CCA 199905021. Please note that if the tax debt is very old, the IRS may apply all of the payment to the original tax bill, and apply future payments to the more recent interest and penalties. Thus, it really depends on the situation, but generally interest and penalties will be applied first.
References: CCA 199905021
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