Writing “paid in full” on the bottom of a check won’t relieve you of debts any more than kissing frogs will un-jinx a royal suitor. The first fairy tale stems in part from section 3-31 of the Uniform Commercial Code, a standard set of laws that governs US financial contracts.
Tax protesters routinely attempt to get the IRS to accept a smaller payment with this trick. What’s overlooked is the fine print—including the fact that there has to be a dispute, and both parties have to agree.
In the case of Kalil (T.C. Summary Opinion 2013-29), the taxpayer submitted a check for $552 for payment in full of tax obligations of more than $26,000. The IRS cashed the check—but that didn’t end the matter.
The court cited a case from 1929 (Botany Worsted Mills v. United States, 278 U.S. 282), which states “the statutes which authorize conclusive agreements and settlements to be made in particular ways and with the approval of designated officers raise the inference that adjustments or settlements made in other ways are not binding.”
In the Internal Revenue Code, sections 7121 and 7122 prescribe the exclusive means for effecting a settlement or compromise binding on both the taxpayer and the IRS commissioner—and neither of them mention a check notated “paid in full.”
If you’re wondering, those sections don’t mention kissing frogs either.
Taxing Lesson: If it sounds too good to be true, it’s probably not part of tax law.