Get proper credit for tax payment by earmarking. That way, you can tell the IRS how to apply any payment you make voluntarily. Earmarking your check requires them to skip their rules and apply the payment to the tax you direct. Bravo for a small measure of taxpayer control.
The term “earmarking” traces to the cattle rancher’s method of identifying his cattle should they get mixed with a herd not his. The earmark was registered along with his brand. The rancher can cut his cattle out of his neighbor’s livestock. The image is my great great grandmother’s AZ earmark registration.
Earmarks allow you control
Why is the earmarking rule important? It allows you to direct the payment toward the kind of tax and the tax year of your choosing.
Without an earmark, the IRS applies your payment to the oldest taxes you owe. Often those taxes are so old that they can be discharged in bankruptcy. More recent taxes aren’t dischargeable in any form of bankruptcy. So you want to get credit for youe tax payment that gets you the most benefit.
In the bankruptcy context, it would allow you to pay down taxes that wouldn’t be discharged in bankruptcy. It allows corporate officers whose company owes trust fund payroll taxes to pay just the part of the tax for which they as individuals are liable. It assures that payments get properly credited when you are paying taxes that survived your bankruptcy discharge.
How to earmark your payment
Write your directions on your check. specifying how the payment is to be applied like this:
- Social security number
- Tax year
- Tax form
For an individual’s income tax return, the tax form in 1040.
For an individual’s payroll tax liability arising from a position of management responsibility, an example reads, Employer’s EIN; Trust Fund liability, 4th Quarter 2022, 941.
Send a cover letter with the check with the same instructions. Keep a copy of the letter and the cancelled check for your records. If paying electronically, preserve the available records in support of your instructions.
