Application of Payment to Tax, Interest and Penalties

Taxpayer Directed Payments: 
The Appellate Tax Board ruled in the Molesworth case that the Department is obligated to follow a taxpayer's directions with regard to application of voluntary payments. A taxpayer who wishes to direct a voluntary payment to one or more specific assessments, tax types, or to tax, penalties or interest must give such directions on Form TDP-1 or in a signed and dated letter containing the name, address, and identification number of the taxpayer, along with a clear statement of the particular liabilities to which the taxpayer's payment should be applied.

Undirected Payments:
In the event that a taxpayer has liabilities in multiple tax types, an undirected payment will generally be applied first by tax type in the order below, second to the oldest liabilities first, and within any one tax type to tax, penalties, and interest in that order. The general payment application may be adjusted, in the discretion of the Department, when a particular liability is approaching the statute of limitations for collection:

  1. excise of domestic corporations;
  2. excise of foreign corporations;
  3. personal income tax (other than fiduciary income);
  4. tax on income received by fiduciaries;
  5. taxes withheld from wages;
  6. room occupancy excise;
  7. sales tax on meals;
  8. sales taxes (other than meals);
  9. estate tax.

Application of Payment Prior to January 1, 1993:
In November 1990, the Supreme Judicial Court ruled in favor of Jack Molesworth regarding:

  • The application of payments to outstanding tax liabilities, and
  • the "pyramiding" of interest and penalties on interest and penalties.

Mr. Molesworth argued that his partial payments should have been applied first against his underlying tax liability rather than against interest and penalties. This computation would have resulted in a lower balance than that computed by DOR. The Commissioner argued that payments should be applied against interest and penalty first and that additional interest and penalties were properly computed based on the underlying tax liability, which remained.

The Appellate Tax Board ruled that the Commissioner is not authorized by statute to apply partial payments contrary to the taxpayer's express directions. This decision was upheld by the SJC on appeal. The SJC also stated that there is no statutory authority for the imposition of penalties or interest on unpaid penalties and interest.

Repeal of Pay to Play Legislation

Taxes are due and payable at the time the tax return is due, determined without regard to any extension of time to file. Any amount of tax not paid before the statutory due date accrues interest and penalties.

Beginning on July 1, 1999, a taxpayer is not required to pay, and DOR may not involuntarily collect, certain taxes if the taxpayer is contesting the amount of tax due. Under the new law, disputed taxes are not required to be paid:

  • as long as a timely application for abatement has been filed with DOR; or
  • while a petition has been filed with the Appellate Tax Board (ATB) or with the probate court; or
  • any amount determined not to be due by the ATB or probate court while an appeal is pending from those courts.

These provisions apply only to an assessment or portion of assessment that is in dispute.

Involuntary collection includes liens, levies or the use of collection agencies.

The statute of limitations on collections is suspended during the period that collection of the tax is stayed.

Interest and all penalties except 33(c) penalties will continue to accrue on the unpaid disputed tax amount even though collection activity has been stayed. Taxpayers may avoid the accrual of interest and applicable penalties by voluntarily paying the amount in dispute. If the taxpayer ultimately prevails in the appeal process or in court, the voluntary payment will be refunded with statutory interest.

For Late File/Late Pay Penalties

If a taxpayer does not prevail and does not voluntarily pay, the amount of tax in dispute must be paid at the earliest of:

  • thirty days following a decision by the ATB or probate court in favor of the Department;
  • the date any petition before the ATB or probate court is withdrawn;
  • the date any right of appeal from a refusal by the Department to grant an abatement expires, if no appeal is filed; or
  • in the case of a deficiency assessment, but not a deemed assessment, ninety days after DOR gives notice of assessment if no abatement is filed.

If the tax in dispute is not paid by these dates, then the 33(c) penalties accrue.

Trustee Taxes Not Withheld or Collected:
In the case of trustee taxes which include but are not limited to sales and use, meals and withholding, taxpayers are not required to pay disputed taxes provided the taxes were not withheld or collected. Any taxes withheld from employees or collected from purchasers must be remitted to the Department, regardless of whether the amount is in dispute or not.

Posting of Security:
Taxpayers will be required by the Commissioner to post security if they wish to delay payment of tax for the following reasons:

  • when the collection of the tax will be jeopardized by delay;
  • when the history of the taxpayer raises doubt as to the collection of the tax if delayed;
  • when any application for abatement or petition is frivolous and has been filed to avoid prompt payment of the tax.

Massachusetts References:

Application of Payment to Tax, Interest and Penalties

Repeal of Pay to Play Legislation