IRS Payment Plan versus Borrowing Money
If you owe taxes to the IRS it is important to remember that you are not alone and that each year thousands of people are left in debt after finishing their tax return. Regardless of the severity of your current financial situation you have several viable choices, most notably the following:
- Pay taxes using a credit card
- Request an IRS Payment Plan
- Receive a loan from an outside financial institution or contact (e.g. bank or family member)
There are a number of factors that must be taken into consideration when deciding which payment option is best for your unique circumstances. It is important to consider how fast you can feasibly pay back the taxes owed, making sure to take living expenses into account. The applicable interest rate for each option is another significant factor. When making your decision be sure to keep in mind varying interest rates and the long term consequences of your decision. Ultimately, if borrowing money or requesting a payment plan would severely hurt your current financial state and leave you without enough money left over for living essentials (e.g. food, shelter), entering into a payment plan with the IRS such as a Partial Payment Installment Agreement or an Offer in Compromise may be best for you.
Long-Term Payment Options for the IRS
If you are unable to pay your taxes within the near future (120 days) your primary options are obtaining a bank loan or requesting an IRS Installment Agreement.
An Installment Agreement is one of the main payment options issued by the IRS that allows you to pay the taxes that you owe in monthly payments. The length of time of an Installment Agreement can fluctuate depending on the amount that you owe. While it is generally set up over a period of 36 months, if you owe more than $10,000 to the IRS the payment plan can be scheduled to last up to 60 months. However, the IRS does not agree to this without implementing additional costs and added fees. An interest rate accounts for a large portion of these added costs and is compounded daily. It is important to note that this interest rate is reassessed quarterly and is determined by the current Federal Short term rate for individual taxpayers plus 3%. While the interest rate is currently 4%, this number is likely to rise throughout the span of your Installment Agreement. The IRS also includes a Failure to Pay Penalty of .25% (compounded monthly) for being unable to pay in full. When comparing the fees that you would incur from an Installment Agreement versus those issued by another financial institution such as a bank, you must also consider the user charges that each option demands. For example, if your income falls below the poverty guidelines as dictated by the Department of Health and Human Services the set up fee is $43, for those with non-direct debit payments it is $105 and for direct debt payments it is $52.
Perhaps the most important factor to consider in you comparison is the potential for the IRS to issue a tax lien against you. The IRS uses a tax lien to secure the rights to your assets and ensure payment. A tax lien can have severe negative consequences on your credit, making it difficult for you to finance a house or car or anything that requires good credit.
How to Set-Up an Installment Agreement
If you decide that an Installment Agreement is the best option for your financial situation you can follow the steps below:
- If you are filling for an agreement for less than $25,000: Complete the Online Payment Agreement Application or Form 9465 and include it with your tax return.
- To request an Installment Agreement for an amount greater than $25,000: Complete Form 433-A, the Collection Information Statement, and attach it with Form 9465.
- You may determine your minimum payment for each month by dividing the total amount owed by 30 if it is less than $10,000 or by 50 if the amount is greater. Also, when submitting your first payment remember to include the corresponding user fee as previously mentioned.
Ultimately, in order to make the best decision you must compare the varying interest rates and additional fees that you would incur from an IRS payment plan versus a bank loan. If your analysis reveals that the costs would be equal to one another or show only a slight difference, it is suggested that you work with a bank or other institution as IRS interest rates are not only likely to increase but also to avoid the harmful effects of a tax lien.
This guest post was provided by Matt Robinson of TaxDebtHelp.com, a site that provides help with irs debt through informational articles and guides for taxpayers facing major tax debt problems. Find more self-help information on IRS payment plans or Installment Agreements by visiting their site today.