How Borrowing Money to Pay Your Taxes Could Cost You Less Than An Installment Agreement

If you owe $10,000 in taxes and you are considering entering into an installment agreement for 36 months, your payments could be as high as $339 per month including interest at the rate of 5 percent and failure to pay penalty of up to 1 percent each month. Keep in mind that these interest rates are subject to change quarterly. Since these rates change periodically and may increase, the taxpayer could end up paying even more. In this situation, you could save $2,247 by paying all of the taxes now rather than entering into an installment agreement. An installment agreement would cost a total of $12,204 in payments.

In addition, effective January 1, 2007, the new installment agreement user fee is $105 and $52 for agreements where payments are deducted directly from your bank account. Taxpayers with income at or below established levels, based on the Department of Health and Human Services poverty guidelines, can apply and be qualified to pay a reduced user fee of $43 for establishing new agreements, including agreements where payments are deducted directly from your bank account.

A Notice of Federal Tax Lien may also be filed against your property to secure the government’s interest against other creditors while the installment agreement is in effect. A more favorable solution to resolve the debt would be to obtain a loan from a bank or other financial institution, or pay taxes using a charge card. As demonstrated in the chart below, borrowing $10,000 over 36 months at various interest rates would result in less costly payment amounts as compared to an installment agreement:

InterestRate MonthlyPayment Months Total Paid to Lender Savings toTaxpayer
7% $308.77 36 $11,115.72 $1,131.28
9% $318.00 36 $11,448.00 $799.00
11% $327.39 36 $11,786.04 $460.96
13% $336.94 36 $12,129.84 $117.16

References/Related Topics
Filing Late and/or Paying Late
Why an Installment Agreement Will Cost You More

Why An Installment Agreement Can Cost You More

Are you aware that interest and penalties do not stop with an installment agreement/payment plan? You can save money by paying the full amount you owe, as quickly as possible; to minimize the interest and penalties you will be charged. Penalties and interest will continue to be charged on the unpaid portion of the debt throughout the duration of the installment agreement/payment plan.

Remember, the interest rate on a loan or credit card may be lower than the combination of penalties and interest imposed by the Internal Revenue Code. It is best that you pay as much as possible before entering into an agreement. See the example showing how borrowing money to pay your taxes could cost you less than an installment agreement.

A Notice of Federal Tax Lien would also be avoided, thereby maintaining your credit standing. Additionally, the installment agreement fee would not apply.

Paying your taxes in full, or partially paying your tax liabilities through liquidating or borrowing against real estate or personal property (bank accounts, stocks, bonds, 401(k) plans, or life insurance), would cost less than an installment agreement.

References/Related Topics

Filing Late and/or Paying Late
Frequently Asked Questions For Past Due Return Filers
How Full Payment of Taxes Saves You Money
Items That Can Help Reduce the Amount of Tax You Owe
Other Ways to Resolve Tax Debt
Payment Options
What Will Happen If You Don't File Your Past Due Return or Contact the IRS
When Do Penalties and Interest Apply

Tax Debt Help - Time Is of The Essence!

The IRS has three years to give you a refund, three years to audit your tax return, and ten years to collect any tax due. Together, these laws are called the statute of limitations. They put time limits on various tax-related actions that you and the IRS can take.

You have 3 years to claim a tax refund.This is measured from the original deadline of the tax return, plus three years. For example, your 2004 tax return was due on April 15th, 2005. 2005 plus 3 is 2008. You have until April 15th, 2008, to file your 2004 tax return and still get a tax refund. File your 2004 return after April 15th, 2008, and your refund "expires." It goes away forever. This is called the statute of limitations for claiming a refund.

The tax code says that you have three years from the original filing deadline to claim a refund.
zSB(3,3)

Please file your 2004 tax returns on or before April 15th, 2008, so that your refunds are not lost forever.

The IRS has 3 years to audit your tax return or to assess any additional tax liabilities.This is measured from the day you actually filed your tax return. If you filed your taxes before the deadline, the time is measured from the April 15th deadline. For example, you filed your 2006 tax return on February 15th, 2007. The 3-year time period for an audit begins ticking from April 16th, 2007, (the filing deadline) and will stop ticking on April 16th, 2010. On April 17th, 2010, the IRS cannot audit your 2006 tax return unless there is a suspicion of tax fraud.

The IRS has 10 years to collect outstanding tax liabilities.

This is measured from the day a tax liability has been finalized. A tax liability can be finalized in a number of ways. It could be a balance due on a tax return, an assessment from an audit, or a proposed assessment that has become final. From that day, the IRS has ten years to collect the full amount, plus any penalties and interest. If the IRS doesn't collect the full amount in the 10-year period, then the remaining balance on the account disappears forever. The statute of limitations on collecting the tax has expired.

Example of the Statute of Limitations

Let's provide an example based on a real-life scenario. Mr. Smith wants to file 6 years of tax returns: 2001 through 2006. All years he has refunds. If he files by April 15th, 2007, Mr. Smith will receive refunds for his 2003, 2004, 2005, and 2006 tax returns. His refunds for 2001 and 2002, however, have expired.

Let's change the example slightly. Mr. Smith wants to file 6 years of tax returns: 2001 through 2006. In 2001 and 2002, he could have received a refund. In 2003, 2004, and 2005, he owes. Mr. Smith cannot apply his 2001 or 2002 refunds as an estimated tax payment towards his 2003 taxes. His refunds have expired. For the 2003 to 2006 tax returns, the IRS has ten years to collect the full tax, plus penalties and interest, from the date Mr. Smith actually files the returns. If Mr. Smith has a refund for 2006, that refund will be used to pay off his tax debts.
Action Plan ItemIt is in your best interest to file your tax returns at your earliest possible convenience. First, you can claim refunds. Second, it starts the clock ticking on the 3-year statute for audits and the 10-year statue for collections.

Tax Law References

Internal Revenue Code, Section 6501 (3-year audit statute),
Section 6502 (10-year debt collection statute), and
Section 6511 (3-year refund statute). For more information on how the IRS manages these statute of limitations, see Internal Revenue Manual, 25.6.1, Statute of Limitations.

Back Taxes Resources

Back Taxes EssentialsIRS AssessmentsIRS Penalties

Tax Debt Resources

Installment Agreements

Offer in Compromise

Partial Payment Agreements

Tax Debt Help - Reason to Pay on Time

If you file on time, but don't pay the entire balance you'll be charged a late payment penalty of 0.5%, up to 25%, of the unpaid tax.

You may be penalized up to 47.5% of your unpaid tax if you don't file your return on time.

If you request an installment payment plan for your taxes, and the IRS accepts it, you'll be charged a fee plus interest on all unpaid taxes.

It's best to file on time and pay as much of your balance due as possible. If you didn't do this by the tax deadline, you probably fit into 1 of 3 categories.

You filed on time but didn't pay all of your balance due.

You'll generally have to pay a late-payment penalty of 0.5% of the tax owed for each month, or part of a month that the tax remains unpaid after the due date, up to 25% of the tax due. The 0.5% rate increases to 1% if the tax remains unpaid after several notices have been sent to you, and the IRS issues a notice of intent to levy. The penalty will not be imposed if you can show reasonable cause for the failure to pay.

You haven't filed or paid your balance due.

If you did not file on time, and you owe tax, you may owe an additional late-filing penalty unless you can show reasonable cause. The combined penalty is 5% (4.5% late filing, 0.5% late payment) for each month, or part of a month, that your return is late. The late-filing penalty is generally imposed for a maximum of 5 months. However, after 5 months, if you still have not paid, the 0.5% late-payment penalty continues to run, up to 25%, until the tax is paid. So, the combined maximum penalty may be as high as 47.5% [(4.5% x 5 months) + 25%].

Note: If your return is more than 60 days late, the minimum late-filing penalty is the smaller of $100 or 100% of the tax required to be shown on the return.

You're paying taxes through an installment agreement.

If you or your tax professional filed Form 9465 requesting an installment payment plan, and the IRS accepted your installment payment plan, they will charge you an administrative fee plus interest on the unpaid tax. If you filed a timely return and are paying your tax due according to an installment agreement, the late-payment penalty is 0.25% (instead of 0.5%) for each month, or part of a month, that the tax remains unpaid.

Regardless of which category you fall into, you'll owe interest on any balance due from the due date of the return until the date of payment. The interest rate is adjusted every 3 months.

Tax Debt Help - Installment Agreement Automation

IRS Automates Installment Agreement User Fees

WASHINGTON —The Internal Revenue Service announced today that it has automated the user fee calculations for taxpayers entering into an installment agreement.

Previously, taxpayers were required to submit a paper Form 13844 to request a reduced user fee. Now, eligibility for reduced fees is determined automatically by the IRS.

An installment agreement allows taxpayers to pay their full tax debt in smaller, more manageable amounts, though penalties and interest continue to accrue on the unpaid portion of that debt. Taxpayers are charged a one-time fee to set up an installment agreement with the IRS. A reduced fee is available for qualifying taxpayers.

Generally, user fees are $105 for non-direct debit agreements, $52 for direct debit agreements and $45 for reinstatements. However, the fee is only $43 for taxpayers with income at or below certain U.S. Department of Health and Human Services poverty guidelines.

All taxpayers entering into an installment agreement will automatically be considered for the reduced user fee using information the IRS already has on hand from the taxpayer’s current tax return. Those who qualify will be charged the reduced $43 fee for all installment agreements established through any method. These include the Online Payment Agreement application on the IRS Website at IRS.gov, telephone, face-to-face or mail.

“This new process will improve service for and reduce the paperwork burden on taxpayers applying for an installment agreement,” said acting IRS Commissioner Linda E. Stiff. “Now, taxpayers who are eligible for the reduced fee will automatically receive it without extra work on their part.”

In some instances, taxpayers may receive an installment agreement acceptance notice from the IRS but not a reduced user fee even though they believe they still should qualify for one. In that situation, taxpayers can request a reduced fee by completing Form 13844, Application for Reduced User Fee for Installment Agreements, and submit it to the IRS within 30 days of receipt of the installment agreement acceptance notice. The IRS will evaluate the application and respond to the taxpayer. Form 13844 is available on the IRS Web site at IRS.gov or may be ordered by calling toll-free 1-800-TAX-FORM (1-800-829-3676).

The IRS reminds the public that the Online Payment Agreement application launched in 2006 provides an easy way to resolve tax liabilities and allows eligible taxpayers or their authorized representatives to self-qualify, apply for and receive immediate notification of approval.

Taxpayers must have filed all required tax returns to use the online application. Agreements can be established on existing outstanding balances or on pre-assessed amounts from current year Form 1040 liabilities.

Three payment options are available when applying online:

Payment in full — Taxpayers pay within 10 days to avoid interest and penalties.

Short-term extension — Taxpayers receive a short-term extension of up to 120 days. No fee is charged, but additional penalties and interest will accrue.

Monthly payment plan — The appropriate user fee is added to the amount owed, and interest and penalty continues to accrue on the unpaid balance.
To access the online application, use the pull-down menu under “I need to...” on the front page of IRS.gov and select “Set Up a Payment Plan.” The application is available Monday through Friday from 6 a.m. to 12:30 a.m., Saturday from 6 a.m. to 10 p.m. and Sunday from 4 p.m. to midnight (all are Eastern Time).


Related Items:

IRS Announces Installment Agreement User Fee Increases for Some Taxpayers
Application Available for Reduced Installment Agreement User Fee
Online Payment Agreement (OPA) Application
Payment Plans, Installment Agreements

Tax bill too big? IRS offers payment options

If this year's tax filing deadline will be a "pay" day for you and you don't have the cash, the Internal Revenue Service gives you several payment options.

In this tax tip: • Paying with plastic • Installment plans • Let's make a deal

First, even if you can't pay your tax bill, go ahead and file your return on time. This way you'll avoid the IRS's failure-to-file penalty of 5 percent per month (up to a maximum of 25 percent) of your balance due. You'll still face the failure-to-pay penalty each month your bill is outstanding, but it's only 0.5 percent of the amount you owe.

Paying with plastic

Now take a look at what you owe.

Some taxpayers find they can pay part or all of their tax bill by putting it on a credit card. The IRS has awarded contracts to two companies to accept credit card charges: Official Payments and Link2Gov. Both accept payments from electronic as well as paper filers, either via phone or the Internet. They take American Express, Discover, MasterCard or VISA.

Credit card tax payment processors

Link2Gov Corp. (888) PAY1040 (888) 729-1040 Pay1040.com Official Payments Corp. (800) 2PAYTAX (800) 272-9829 Officialpayments.com

Remember, however, that while this may get you off the hook with Uncle Sam, it will cost you in other ways. Each company has its own fee schedule (generally 2.49 percent of your tax bill or a minimum $1) connected with charged payments.

And if you don't pay off your credit card in full, you'll start racking up interest charges on your account. In some cases, however, your credit card interest charges might come to less than IRS penalties and interest you'd owe if you don't pay on time. So before you decide to pay with plastic, run the numbers so that you don't pay anyone, neither Uncle Sam nor your credit card company, any more than necessary.

Installment plans

If your tax bill is too large for a credit card, the IRS is willing to take monthly payments. You even get to pick your monthly payment amount and the day it will be due.

In fact, if you've previously filed (and paid) taxes on time, your tax bill is less than $10,000 and you convince the IRS that you can't come up with that much all at once, the agency can't turn down your request. Your installment plan, however, must pay off the due tax in at least three years. To get the program going, attach Form 9465, Installment Agreement Request, to the front of your tax return.

Financially strapped taxpayers also have the option of using an installment plan to make partial payments of tax liability. The IRS had previously allowed partial installment payments but stopped the practice in 1998 when an IRS attorney raised questions about the IRS's authority to accept such payments without statutory authority. Congress officially granted the IRS the power to resume partial payment installment agreements as part of the American Jobs Creation Act of 2004.

While the IRS argued for legislative reinstatement of the partial-payment option, approval is not automatic. Taxpayers who request a partial-payment installment agreement must provide detailed financial information, including data on equity assets, that the IRS will verify. Plus, the IRS will review the arrangement every two years to determine whether the taxpayer's financial status has changed, and if it has improved, the amount of installment payments could increase or the agreement could be terminated.

Regardless of whether you pay your tax bill in full or partially via an installment agreement, keep in mind that paying over time, even to Uncle Sam, will cost you more. The IRS charges a one-time fee of $105 unless you make arrangements to have your installment payments made via direct debit from your bank account.

The fee drops to $52 for direct debit agreements. Some lower income taxpayers might be able to pay a reduced fee of $43, which was the previous user fee for all installment agreement applicants. The rate increase took effect in 2007.

You'll be billed for any fee with your first payment. Plus, penalties and interest continue to accrue to your unpaid tax bill. The IRS may also file a federal tax lien against you, which will be released when you pay off your installment loan.

If you want to apply for an installment arrangement, the IRS now accepts online applications.

Let's make a deal

What if you can't pay off your tax bill, in whole or part, in three years or five years or ...? Then it may be time to negotiate.

The IRS might be willing to accept an offer in compromise, or an OIC; a lump-sum payment you offer to make that is less than the total amount of tax you owe. In these cases, the agency hopes to get some taxpayer money sooner than it would after years of costly collection efforts.

The key here is that the amount must reasonably reflect your ability to pay. It's not merely haggling to get your tax bill reduced. In fact, the IRS is stepping up its efforts to weed out those taxpayers who use the offer-in-compromise route merely to delay paying their bills. Since Nov. 1, 2003, any taxpayer making a reduced payment offer has had to include a $150 application fee with the request. The agency hopes this means that it will hear only from folks who truly need the negotiated bill.

Once a tax lien has been assessed by the IRS, most taxpayers find that they are need of the services of a reputable tax resolution service to help them reduce their liability and possibly have the lien removed. Once you have entered into a payment arrangement with the IRS.....please, please make you payments timely therefore reducing the possibility incurring additional costs of hiring a firm for help.

The IRS will review your financial situation and future income potential to determine whether your offer is appropriate. Be warned, however. Uncle Sam says this program was designed only for extreme cases and very few filers will qualify for the program under the terms they would like. If you believe your situation does indeed meet the requirements, you need to file two forms: Form 656, Offer in Compromise, and Form 433-A, Collection Information Statement.

You must also submit the $150 application fee along with Form 656-A, Offer in Compromise Application Fee Instructions and Certification. (The fee is waived for filers who have little or no income. They can claim a poverty exception when they file Form 656-A.) If you don't send this form along with your fee, the IRS will return your offer application "without further consideration." If you submit everything as required, and the IRS determines you do not meet the qualifications and rejects your offer, you are out $150. But if the agency accepts your offer, your fee will go toward your new payment amount.

Then the IRS wants even more upfront. Your offer must include a 20 percent payment for lump sum cash payment offers or your first installment payment if you're seeking a periodic payment plan.Regardless of which tax bill-payment method you choose, make your decision now. Delay will only compound your financial and tax problems. And try to pay something. By sending in any amount when you file your return, at least you'll ultimately reduce your interest and penalty charges.

S. Raines, Sr. Financial Advisor/Tax Preparer