QB Issue Resolution:

The Credit Memo item should not be a Payment Item but an Other Charge Item linked to the Other Current Asset account.

Then, the question is, where are your unpaid Payroll liabilities? They should be in a liability account, so that you can apply the Asset amounts to the Debt you owe.

Or, link the Credit Memo item to the same account as you tracked the IRS balance owed, to see it go down.

Resolution for Issue 'Handling customer payments taken by the IRS' available: Yes (Solved).
Source: Intuit Community forum.

Handling customer payments taken by the IRS: this issue or error code is a known issue in Quickbooks Online (QBO) and/or Quickbooks. Support for this issue is available either by self-service or paid support options. Experts are available to resolve your Quickbooks issue to ensure minimal downtime and continue running your business. First try to resolve the issue yourself by looking for a resolution described below. If it is a complex issue or you are unable to solve the issue, you may contact us by clicking here or by using other support options.

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