Is paying my taxes in installments a bad idea?
April 10, 2012 10:38 AM   Subscribe

I have a bigger tax bill than I expected, and I'm wavering between putting it all on a credit card and using the IRS installment plan. Have you put your taxes on a credit card? Have you paid through an installment agreement?

I owe a fair amount in taxes this year (less than $1,000, bigger than a bread box) and I can't pay it without draining my savings. I'd consider doing that, but I work on a TV show that just wrapped for the season and money is going to be tight for a few months.

A lot of people have suggested putting it all on a credit card, but I'm already sliding into credit card debt and I'd like to buy a car in the next couple years and I don't want to wreck my credit before doing so. However, a lot of the verbiage on TurboTax about the IRS installment plan really freaked me out. (i.e., you must prove that you can't pay your taxes, etc., etc.)

On the plus side, it's not that much money, and I can pay it off in a few months.

Has anyone here payed their taxes through an installment agreement with the IRS?
posted by ablazingsaddle to Work & Money (21 answers total) 5 users marked this as a favorite
No, don't put it on a credit card. The IRS's interest and penalties are going to cost you less. I turned out to owe them an extra 1500 or so from 2010 and paid them in November and the penalty was less than $25.

Now I have no idea what your actual interest and penalties might be, and normally I would say ask your accountant, but I assume you can't pay one of them either. Hopefully you can just call someone at the IRS and find out how much it will cost you. But I'm certain it's going to be a better deal than the credit card companies will give you.
posted by jeffamaphone at 10:42 AM on April 10, 2012 [2 favorites]

Don't put it on a credit card. Call the IRS Taxpayer Advocate and see what they can do to help you. Right now you're freaking out because TurboTax gave you some vague advice that the IRS is going to want some documentation that you need some kind of hardship taken into consideration. So you find out what that documentation is and you decide whether it's something you can do.

If it's not, you can put it on a credit card, but I'd really recommend against that. From everything I've heard, the IRS is pretty reasonable about these sorts of things.

Also, sometimes churches and charitable organizations have emergency cash funds to help out people in your shoes. If you're connected to such an organization maybe look into it. If you do get some relief from an organization with a rainy day fund, please, please make sure that you pay them back.
posted by gauche at 10:42 AM on April 10, 2012

Saving is nearly pointless if you're sliding into debt- at least, any amount of 'saving' that this sum would impact greatly. Dig into that pool and pay off what you can ASAP. Debt snowballs
posted by MangyCarface at 10:44 AM on April 10, 2012 [1 favorite]

Response by poster: Saving is nearly pointless if you're sliding into debt- at least, any amount of 'saving' that this sum would impact greatly. Dig into that pool and pay off what you can ASAP. Debt snowballs

Sorry to threadsit, but in case it wasn't clear in my question, I'm about to be unemployed for at least a few months. If that wasn't the case, I'd definitely dip into my savings, but I'm going to need that to pay my rent and groceries etc. until my job starts again/I get another job.
posted by ablazingsaddle at 10:48 AM on April 10, 2012

If you need your savings for a potential financial emergency, do the installment plan. It is easy, the IRS interest rates are quite low, and then if something goes wrong you have your savings.

I think you were reading the wrong boxes on TurboTax (or maybe they had the wrong verbiage come up?) Here's the IRS statement.

It is routine for all installment plan requests to be granted unless the amount owed is over $25,000, or if the person has previously defaulted on an installment plan. Do not sweat it.
posted by Sidhedevil at 10:48 AM on April 10, 2012 [3 favorites]

I'm assuming these "savings" you're talking is actually the cash you have in the bank. I assume you don't want to use this money because you will need it for day-to-day costs over the next several months while you are not working. You should investigate/calculate whether paying off your debt(s) and then taking on upcoming expenses as new debt will cost you more or less than simply adding more debt now by starying a payment plan or charging it to the card.

For example, in simple terms, say right now you have a credit card balance of $5,000 and $2,000 in cash, and expect to have $1,000 in expenses over the next year. Carrying the $5,000 balance for the rest of the year, only making minimum payments and paying interest charges, will in most cases cost you more money than if you pay it down to ~$4000, and incur the $1,000 in expenses as credit card debt as it comes. Basically it comes down to you'll have less money on your card for longer periods of time, thus racking up less interest charges.
posted by Patbon at 10:50 AM on April 10, 2012

Here's another page. Apparently the level for routine "we'll grant your request" is $50,000 now.

"I'm about to be unemployed for at least a few months" is the exact kind of rationale on which the IRS makes installment agreements. Unless you have a fantastic credit card rate or points or whatever, you'll save money by dealing directly with the IRS.
posted by Sidhedevil at 10:51 AM on April 10, 2012

Since it's not the image most people have, it's worth saying: The IRS people you will speak to on the phone, or meet with in your local office, are some of the nicest, easiest to work with customer service people you will every interact with. Go talk to someone about your situation, and they'll help you get to a resolution that works for your situation.
posted by NotMyselfRightNow at 10:51 AM on April 10, 2012 [5 favorites]

Not to diminish your problem, but from the perspective of the IRS, a tax debt of less than $1,000 is pretty small. They'll grant you an installment plan without a problem.
posted by dfriedman at 11:01 AM on April 10, 2012

My friend had just this situation last year. She was unemployed at the time. She called the IRS and asked for an installment plan, which they granted on the spot. They gave her an option: pay x per month for y months (I do not remember the details), or pay the full amount by a specific date that was about 5 months in the future. She chose the latter because she had a contract job coming up that would pay her enough to pay it off by that date. I mention this because it is possible that they will give you that option and you can pay it when you are employed again in a few months.

Short version: don't use a credit card, and call the IRS. They are incredibly nice and helpful on the phone.
posted by bedhead at 11:09 AM on April 10, 2012 [1 favorite]

If it's the feds, go with the IRS installment plan. I paid off a several-tens-of-thousands-of-dollars debt with them through installments, and they were awesome with me.

If it's your local state tax bureau, I'd be more careful. They still like to (at least in my state) be total bastards about it.
posted by xingcat at 11:40 AM on April 10, 2012

Installment plan. Much cheaper rates than using a credit card. Also, I don't know what happened but the IRS people are some of the friendliest, most helpful people I have come across in awhile. Just give them a call.
posted by Vaike at 11:51 AM on April 10, 2012 [4 favorites]

And if you're afraid of talking to them like I was, know this:

They won't lecture you.

They won't even ask you questions.

They'll just set up the plan, with no hassle, and it will be all taken care of.
posted by mudpuppie at 12:59 PM on April 10, 2012 [4 favorites]

Thanks to fluctuating salaries and a dearth of deductions, we end up with a payment plan every other year or so. It's a phone call and a thing in the mail (or vice versa), probably takes 20 minutes of effort all told.

It's really, really unlikely that your credit card interest rate is as low as the IRS's. They do charge a stupid fee to pay your payment but it's still preferable to putting it on a credit card (among other things, your credit card company is going to notice if you're paying the IRS on it). It is just about as painless as processes get, and the IRS people on the phone are totally awesome.
posted by Lyn Never at 1:14 PM on April 10, 2012

Response by poster: I spoke to someone at the IRS, and it seems that I've waited too long for an installment agreement to be a viable option, or at least cheaper than a credit card. It takes them roughly three weeks to process a return, and if I don't pay 90% of my balance by April 17th, I'll end up with penalties and a higher interest rate. So, I'm just going to put it on my credit card and not procrastinate out of fear so much next year.

FYI, I'm twenty-four and this is the first time I've owed money. I made less than $30,000 this year, but I had enough independent contractor 1099-MISC's to get screwed.
posted by ablazingsaddle at 1:35 PM on April 10, 2012

A bank loan is probably an even better idea. Put the tax bill on the credit card, sure, but get a bank loan to pay off the credit card before interest start accruing. A small short-term bank loan should be easy to get, and have a low interest rate.
posted by mad bomber what bombs at midnight at 2:47 PM on April 10, 2012

If you are in California, do NOT put your state taxes on an installment plan. I sent mine in with my return and did everything by the book. They lost my paperwork, then took months again with the resubmitted paperwork, and despite the problem being on their end, they charged me penalties for paying late to the tune of (iirc) 8-10%.
posted by salvia at 2:54 PM on April 10, 2012

I can't imagine, even with penalties and interest, how anything the IRS charges you is going to be the same cost as what the credit card company is going to charge you. Credit cards generally are charging 1-2% a MONTH for debt. Hold that debt for a year and it costs you 12-24%. Two years and its 24-48%. And so on.

I would suggest reconsidering using your savings. (If you can't get a small personal loan from a bank.) Lets just say it's $1000, and you have $2000 in savings that needs to last three months. So, you roughly spend $600 a month in living expenses. If you put the bill on the credit card, you have $1000 in debt that costs you ~$30 a month to maintain. Now, if you use your savings, you can live for 1.5 months debt free, and then you can judiciously put living expenses on your credit card. You might have one bill for $500, and then by the time you get the next bill, you will be employed again. You'll barely pay any interest.
posted by gjc at 6:32 PM on April 10, 2012

The IRS is way more friendly to you than a credit card company. I have done a payment plan and it was fine. Initially they asked me to pay an amount per month, say it was $100, which I didn't think I could afford. I simply was pretty adamant in saying "there's no way I can pay that. I can pay you $60 a month." Only had to repeat that two times or so. They charged me, I think, 3% interest, which is obviously far superior to almost all credit card rates. Far better in the end.
posted by Miko at 7:52 PM on April 10, 2012

I don't even do a payment plan. I pay half my bill at tax time and they send me a bill for the balance plus a small fee (<$100). My federal bill is about $8000.
posted by PSB at 9:04 PM on April 10, 2012 [1 favorite]

Best answer: Whoa, halt, halt, OP. That call to the IRS either provided you with incorrect information or you may be confusing things in your head (it's complicated!)

That whole "you must pay 90% of your tax" is for something called the Estimated Tax Penalty. But here's the thing: that penalty doesn't apply if you owe less than $1,000. So take that thought out of your head.

I'm a little biased (current IRS employee, not speaking in an official capacity) but I think from what you've said you're better off with a payment arrangement. The IRS is charging a 3% annual interest rate now. Annual, not monthly. If you have a crazy great rate on your card, OK, that might be worth it. But 3% a year is hard to beat.

There's something called a Failure to Pay penalty that'll be assessed once a month. They take the current tax due and multiply it by .005 (lowered to .0025 if you're in a monthly installment agreement). Small potatoes, my friend, especially when you owe under $1,000.

As bedhead mentioned earlier, you can also set up a less structured plan if you can pay the full bill within 120 days. No monthly due dates or minimum payments, just make sure it's taken care of by the end of the 120 days. It's also nice because we don't charge a user fee to set it up. Monthly plans require a one-time fee of $105 ($52 if you let us withdraw it from your bank each month, or $43 if you meet certain low income criteria).

I also wanted to correct what may have been some misinformation during your phone call. You don't have to wait until your tax form is processed to set up a monthly plan. As long as you know the total balance due, you can set up what's called a "pre-assessed" installment agreement or a pre-assessed 120 day extension. It's also worth noting that any amount you can pay before April 17 will not have any penalty or interest assessed on it.

Moral of the story: I'd encourage you to take a good hard look at the credit card's interest rate before you assume an IRS payment arrangement is a lost cause.

PS - Here's another bonus: your bill isn't going to be reported to a credit bureau unless we file a tax lien in open court. So setting up an arrangement has zero impact on your credit rating. On the other hand, if you carry a balance on your credit card, that's going to affect your credit score right away.
posted by texano at 10:38 PM on April 10, 2012 [5 favorites]

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