Can’t Pay Your Taxes? How About An IRS Installment Loan?

Every year thousands of individuals are left owing the IRS taxes they cannot pay when they complete their tax return.  There are all kinds of reasons why you might not be able to pay your taxes.  Maybe you lost your job because of the recession and received some debt forgiveness which is considered income for tax purposes, or maybe you received unemployment benefits and/or extensions which are only tax free for the first $2,400.  There is an unlimited number of reasons you just can’t come up with the money right now.

IRS Installment Loan

If you are facing financial hardship you have a few feasible options:

In order to make the best decision, you need to consider how quickly you can pay back the taxes and what the applicable interest rates are.  The solution will depend on your situation.  If you realize that borrowing the money or requesting a payment plan would leave you no cash leftover for monthly living expenses, you should look to settle for less with the IRS through the use of a Partial Payment Installment Agreement or an Offer In Compromise.  

While it may be tempting to simply not file, it will only make matters worse.  Fines and penalties get tough to deal with if not addressed early.  Filing an extension won’t help if you owe the IRS money.  The IRS will simply add the interest and penalty to what you already owe.  And it will just keep growing from there.  What ever the reason, if you are not prepared to pay it is important to address the problem rather than let it go.

If You Can Pay Within 120 Days

If you will have the money in 120 days, you have two viable options.

Understand that if you decide to pay the IRS in 120 days, you will incur a 4% interest rate (compounded daily), as well as .5% underpayment penalty (compounded monthly) on the unpaid amount.  If you put your taxes on a credit card, you will also most likely incur two fees.  One is a convenience fee of 1.95% to 3.89%, and the other is your APR or interest rate for carrying a balance. Therefore, in deciding which route is best here, you need to weigh the total cost of taking a 120 day loan with the IRS (the interest and penalty) versus your credit card company (convenience fee and any applicable interest rate for carrying a balance each month).

If You Need More Than a 120 Days to Pay Your Tax Bill

If you cannot pay back the IRS in a few months, and you cannot obtain a more favorable interest rate than roughly 7% from a financial institution then an IRS Installment Agreement may be favorable. However, there are a few other factors to consider here:

IRS Installment Agreement or a Bank Loan?

One option may be an installment loan from the IRS.  Many people don’t know that the IRS offers loans, but they do.  If you owe less than $25,000 you can usually arrange an installment plan to pay your taxes.  There is a one time fee for setting up the account and you will be charged interest.  The fee is small and the interest is usually much better than that charged on your credit card.

Make sure to include in your analysis the fact that the IRS charges a user fee for an IRS Installment Agreement and the IRS can issue a tax lien against you, which is stake or claim on your property by the IRS.  If you are looking to sell your house, finance a car or house, then you may want to consider borrowing because the negative effects of a tax lien on your credit can be substantial.

An IRS Installment Agreement allows you to pay taxes owed to the IRS over a series of monthly payments that can last from 3-5 years depending on the amount owed. If you owe more than $10,000, an IRS Installment Agreement can be usually as long as 60 months, otherwise, it is typically 36 months. It carries an interest rate (currently 4% compounded daily) as well as a penalty (.25% compounded monthly) for failing to pay in full. The total current nominal yearly interest rate in this case would be approximately 7%.

User Fees For IRS Installment Agreements

  • $105 dollars for non-direct debit payments
  • $52 dollars for direct debt payments
  • $43 for income levels below the Department of Health and Human Services poverty guidelines.

This fee should be compared to any upfront fees for a bank loan or for doing a cash-out mortgage refinance.

Payment Options when you set up an Installment Agreement with the IRS:

  • Online payment
  • Payment through the Electronic Federal Tax Payment System.
  • Credit card.
  • Payroll deduction via your employer.
  • Check or money order.
  • Direct debit.

If you choose the direct debit option it sets up automatic payments that you don’t have to worry about.  It reduces your fee for getting the loan in the first place because the IRS prefers this option.

Setting Up an IRS Installment Agreement

If you decide to setup an IRS Installment Agreement, here is how you can do it:

  • If you owe $25,000 or less to the IRS, use the Online Payment Agreement Application or use file out Form 9465 and attach it to your tax return.
  • If you are requesting an Installment Agreement above $25,000, fill out a Collection Information Statement (form 433-A) and include that with form 9465.
  • When calculating your minimum monthly payment, take the total amount you owe and divide it by 30 if you owe $10,000 or less, otherwise, divide by 50.
  • Be sure to include the appropriate user fee (discussed above) with your your first month’s payment
  • Contact the IRS and see what your options are. (1-800-829-1040)

In summary, if your total cost of financing your taxes through a bank loan is equal to your cost of financing your taxes through the use of an IRS Installment Agreement, it is recommended that you pursue a bank loan based on the simple fact that IRS interest rates are more likely to rise. Moreover, if you are going to be making some financial decision in the near future that requires your credit to remain strong, a bank loan is recommended, as a tax lien can severely hamper your credit report and score.

If you show a willingness to pay your tax obligation, and if you can demonstrate that you really aren’t able to pay, the IRS is usually willing to help you.  They really don’t want you in jail, they just want theiryour money.  Papa B.

If you have questions or need help with the paperwork it may be a good idea to consult a tax professional.

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