Why an IRS Payment Plan is Not Always Best If You Owe Taxes
Filed under: Installment Agreements, Payment Plans | Comment (0)
The option to use an IRS Installment Agreement helps many people pay taxes they owe when they don’t have enough cash available to pay the owed taxes all at once. There are many disadvantages and advantages to using an installment agreement to pay the IRS
How an IRS Payment Plan Works
An IRS Installment Agreement or an IRS Payment Plan is a financial arrangement that allows taxpayers, who owe back taxes to the IRS, to pay off their taxes over a series of monthly payments. These payments can be over 3-5 years generally. IRS Installment agreements are best for taxpayers who owe $25k or less in Federal taxes. They can be obtained if taxpayers owe more than $25k, it is just more difficult. It is much more common to setup a payment plan with the IRS then to settle for less taxes than you owe.
Like most resolution methods, there are costs and benefits to setting up an IRS Installment Agreement with the IRS.
IRS Installment Agreement Benefits
Some benefits to an IRS Installment Agreement are as follows:
- The taxpayer who cannot pay off all the taxes at once has the ability to pay the taxes off over time
- The taxpayer gets a reduction in the Failure to Pay Penalty to .25% per month (normally .5%, with the maximum being 25%).
- The taxpayer can avoid severe hardship, and feel a lot better knowing the IRS will not pursue harsh collection actions like levies
IRS Installment Agreement Drawbacks
Of course, like anything else the IRS Installment Agreement has some drawbacks:
- The taxpayer will end up paying more taxes in the long run then if the taxes were paid off all at once because of interest and penalties
- The taxpayer may still incur a tax lien in order for the government to secure the IRS Installment Agreement (which impacts credit)
- Sometimes, with high debt amounts over $25k, the IRS may require taxpayers to sell assets in order to lower the payment plan principal balance or taxes owed
Do You Have Alternative Options?
While the installment agreement makes it possible to pay taxes you owe over time, it may not be your least expensive option. If you can obtain a personal loan from the bank at a lower interest rate, you’ll pay less than what the IRS charges for their loan to you. Home equity loans or borrowing from friends or family are also possible options to save you money for making payments on the taxes you owe over time.
In some cases, a credit card with a 0% introductory rate is a good option. If you are sure you can pay off your taxes within the period of the 0% introductory rate, this will cost you nothing more than what you owe on your taxes. If there is any chance that you can’t pay the entire amount before the 0% introductory rate promotion ends, however, you will pay high credit card interest which is likely to make this option for paying taxes more expensive than an IRS installment agreement.
If you are confused about what option would be best with you, it is a good idea to consult with a tax professional to analyze your tax and financial situation to guide you to the best method of payment or possibly even a tax settlement