Vault’s Perspective on IRS Installment Agreements Compared to Personal Loans
- An installment agreement with the IRS enables you to settle your tax debt gradually; however, these arrangements typically come with additional fees, penalties, and interest charges.
- Many individuals opt for obtaining a personal loan to settle their tax liabilities, particularly when the interest rate on this loan is more favorable compared to what the IRS would impose.
- Although both IRS installment agreements and personal loans have their advantages and disadvantages, opting for an agreement with the IRS might be preferable—notably because it doesn’t involve taking on additional debt to settle your tax obligations.
What Is an IRS Payment Plan?
An IRS payment plan gives you the opportunity to pay the taxes you owe in installments. Not everybody can pay the tax they owe in a lump sum, so the IRS offers payment plans to help you pay off your tax bill over time. Signing up for an IRS payment plan can be viewed as an indication of financial responsibility, and following the payment plan allows you to avoid the negative consequences that come with unpaid taxes, such as IRS tax liens or levies.
Types of IRS Payment Plans
There are two types of IRS payment plans. Short-term IRS payment plans are for tax obligations that can be paid off in 180 days or less and do not require minimum monthly payments as long as the amount is paid in full within 180 days.
Think of a short-term IRS payment plan as a temporary extension on your tax bill. These short-term plans do not charge setup fees, but taxpayers can be charged penalties and interest on unpaid taxes.
Long-term IRS payment plans, also known as IRS installment agreements, allow taxpayers to pay off the amount they owe in monthly installments. These installment agreements include setup fees, as well as penalties and interest on unpaid taxes—making them potentially more expensive than short-term IRS payment plans. But a long-term IRS payment plan is still better than defaulting on your tax obligations.
When you apply for a long-term IRS payment plan, you have two options. You can sign up for a direct debit installment agreement (DDIA), which automatically deducts your monthly payments from your checking account . You can also sign up for a long-term installment plan that allows you to make monthly payments via direct debit, mailed check, online or over the phone.
Selecting a DDIA plan might cost you less due to reduced initial setup charges. However, certain individuals favor having the flexibility to decide their monthly payments and opt for an extended installment option that provides greater choices.
IRS Payment Plan Costs and Fees
Here’s a quick roundup of the costs and fees associated with IRS payment plans:
IRS Payment Plan vs. Personal Loan
Some people choose to take out a personal loan instead of signing up for an IRS payment plan. If you have good or excellent credit, for example, you may be able to get one of today’s best personal loans for less interest than you might owe on an IRS payment plan. Since the IRS charges 8% per year (compounded daily) on unpaid taxes, a personal loan with an APR of 6.99% or 7.99% could end up saving you money—especially if the total cost of the loan is less than the total cost (including penalties and setup fees) associated with IRS payment plans.
That said, keep in mind that applying for a personal loan is the equivalent of taking out new debt to pay off old debt. Once you use your personal loan to pay off the IRS, you’ll still need to figure out a way to pay off your personal loan—and if it takes you longer to pay off the loan than it might have taken to pay off your tax bill, you may end up paying more in interest than you would have paid if you’d signed up for an IRS payment plan (even when you add up the additional penalties and fees).
IRS Payment Plan Pros and Cons
Pros:
- Helps you steer clear of severe repercussions from unfulfilled tax obligations.
- Allows you to pay off your taxes in installments
- Fairly budget-friendly, particularly because you're charged an 8% interest rate.
Cons:
- Introduces an additional recurring cost to your monthly expenses.
- Comes with setup fees and penalty charges
- May require you to cut back on other expenses until your tax bill is paid in full
Pros and Cons of Personal Loans
Pros:
- Lets you avoid the serious negative consequences of unpaid taxes
- Enables you to settle your tax dues with one full payment
- Could be even more affordable than an IRS payment plan, especially if your loan APR is less than 8%
Cons:
- Adds another monthly bill to your budget
- It might turn out to be costlier than you think, particularly if you fail to repay your loan as swiftly as intended.
- Might necessitate reducing other expenditures until your personal loan is completely repaid.
Options Other Than an IRS Installment Agreement or a Personal Loan
Individuals owing taxes have several methods beyond personal loans and IRS installment agreements to settle their debts. Here are some alternative approaches you might consider:
- Some people pay their taxes with a credit card . Although you’ll pay a small fee in the process, putting your unpaid taxes on a 0% intro APR card And settling the balance prior to when the introductory APR ends might also resolve your issue.
- Should your tax liability be minimal, you could consider asking a relative for an interest-free loan.
- Taking on an additional job Could assist you in settling your tax dues without needing to establish an IRS payment arrangement, particularly if early in the year you realize you may struggle with making the payments come April.
- If you need extra cash quickly, you might even be able to hold a yard sale or sell items online .
Frequently Asked Questions
How Much Will the IRS Accept for Payment Plans?
The IRS does not state a limit on how much it will accept for a payment plan. But people who apply for IRS payment plans online must have less than $100,000 in unpaid taxes (including penalties and interest) for a short-term plan and less than $50,000 for a long-term plan. If you have more than $100,000 in unpaid taxes and want to set up an IRS payment plan, you will need to contact the IRS directly.
Does an IRS Payment Plan Hurt Your Credit?
Taking out an IRS payment plan does not appear on your credit report, which means it will not hurt your credit score. But defaulting on your IRS payment plan could prompt the IRS to take out a tax lien against you. Tax liens do not affect your credit score However, these are public documents that might adversely affect your chances of securing employment, leasing an apartment, or obtaining a loan.
Is It Preferable to Owe Money to the Bank or to the IRS?
Often, establishing an IRS installment agreement proves preferable to charging your tax debt onto a credit card or taking out a personal loan. The IRS payment plan aims at being user-friendly and budget-friendly, with additional provisions tailored specifically for those with lower incomes, potentially making this arrangement even more manageable.
Even though certain individuals with high credit scores may secure a reduced interest rate through a personal loan compared to what the IRS offers, many people often find themselves paying higher interest rates when opting for a credit card or loan to cover their tax payments. Moreover, if these borrowers require more time than expected to settle this debt, the accumulated interest costs can significantly increase.
The post IRS Installment Agreement versus Personal Loan: Which Is Better for Settling Your Tax Debt? first appeared on Pawonation.comVault .
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