IRS installments vs credit card debt

February 26, 2008 12:30 PM

Paying US back-taxes: should I go for an installment plan or pay it all now, and pay off the credit card companies instead?

I owe I think around $8,000 in backtaxes, and I'm going to owe more by April. I know I can set up an installment plan with the IRS, but I can't tell what the rules are governing the interest rate, or how they compare with credit card interest rates. My hunch is that the IRS is better on interest rates, but harsher on upfront fees to sort this out. I can probably plot all this out on a spreadsheet, but I just can't find all the info I need. Heyulp!

posted by anonymous to work & money (8 comments total)

This has been discussed on Metachat- this exact situation. The general consensus from those who have been there was to use a credit card.
posted by ThePinkSuperhero at 12:22 PM on February 26, 2008 [1 favorite has favorites]

The IRS may offer its own payment plan; at least they did to me many years ago. Their interest rate was considerably lower than any credit card.
posted by davidaugust111 at 12:39 PM on February 26, 2008

One possible angle... your FICO score ought to remain higher with an IRS installment plan, which the credit bureaus don't know about, as opposed to a credit card, where the high balance is a liability. Might be worth considering if you're buying a house later on.
posted by crapmatic at 1:01 PM on February 26, 2008

Not only is the IRS interest rate significantly lower, it is simple interest only, not compound interest like the credit card companies use. The IRS posts payments to the principal balance first, then penalties if any, and lastly interest. Once the principle and penalties are paid off no more interest accrues. Also many, but not all, IRS employees can be quite reasonable. (Been there, done that, gave the shirt of my back).

So definitely pay the credit cards first. Good luck!
posted by swarkentien at 1:13 PM on February 26, 2008

I don't see the IRS, as much as one may dislike them, strangling you with a more usurious interest rate than a credit card company would.
posted by matteo at 1:15 PM on February 26, 2008

i'm faced with this decision right now. the irs's advice is to use a credit card. the primary reasons are because the irs will charge you a processing fee (one time), a late payment fee (varies on how fast you pay it off) and of course interest (which may or may not be higher than your credit card interest).
posted by misanthropicsarah at 2:22 PM on February 26, 2008

The IRS is, of course, going to urge you to pay it all off now because that means they get their money and don't have to manage/keep track of your debt.

If I were you, I'd break out the calculator and compare which below option will lose you the least money in the long run. Figure out how much you owe and how long you realistically think it will take for you to earn enough to pay this off.

As mentioned in the above comments, the IRS will charge you simple interest at a low rate (Usually less than 2%) and a penalty. Depending on the parameters, your options are:

1.) Paying it all off with a credit card. High interest rates and a small bump in your credit score if you make everything on time.

2.) Going on an installment plan with the IRS. This will result in slightly lower interest as payments accumulate.

3.) Socking away the money you owe in a high interest savings account (or equivalent) until you can pay off the entire sum at once. This allows the interest you'll owe to grow, but the interest you make on your savings can help offset your IRS interest. (Although the tax owed on the interest you accrue through savings might cancel out your gains.)

Again, it all depends on how your own debt shakes out. I chose the third option with my own tax debts from a couple years back and came out very happy. When I had the money, all I had to do was walk into the IRS office, write out a check, and I was in the clear. The process was very easy.
posted by greenland at 7:09 PM on February 26, 2008

A CPA told me one other thing that hasn't been mentioned, yet:

Unlike banks or credit card companies, the IRS has the ability to garnish your wages or repossess your possessions, should you default on the loan.

So, if you go with the IRS, which I think I'm also about to do, just don't be late on any payments, ever.
posted by bryanjbusch at 6:56 AM on February 27, 2008