Suppose that in year 20X1, taxpayer owes a deficiency of $10,000, a penalty of $2,000 and interest of $100. For year 20X2, taxpayer owes a deficiency of $20,000, a penalty of $5,000 and interest of $500. If taxpayer makes a payment of $11,000, without designating the category to which it applies, the $11,000 will:

reduce the most recent deficiency, 20X2, to $9,000.

eliminate the penalty and interest for 20X2 and reduce the 20X2 deficiency to $14,500.

eliminate the 20X1 deficiency and reduce the 20X1 penalty from $2,000 to $1,000.

eliminate the penalty and interest for 20X2 and reduce the deficiency from $10,000 to $15,500.