When April rolls around, there’s a smell in the air: it’s fear.
Your taxes are due, and if you’re like 60 percent of millennials, you don’t have the cash for your tax bill.
There’s nothing worse than a tax surprise that you’re not prepared for.
However, all is not lost.
You don’t go from zero to tax jail over one missed payment.
If you can’t pay the taxes you owe, you may qualify for the IRS payment plan.
It allows you to negotiate your bill with the IRS to help repay without the stress of worrying when the agency will come for you.
Is the IRS payment plan worth it? Keep reading for the pros and cons.
IRS Payment Plans: The Pros of Paying Over Time
If you are honest with the IRS about your situation, you will always fare better.
And if it’s March and you already know you can’t pay your tax bill, then the IRS actually says, “Don’t panic.”
You should still file your return by the deadline and pay what you can, even if it’s not the whole bill.
Then, you should call the IRS to discuss your payment plan.
What are the benefits of going this route?
The IRS Might Give You an Extension
If you don’t owe much and you think you can pay soon, then the IRS may even give you a short-term extension to pay your taxes.
The extension can relieve the stress of paying by the April deadline and helps you avoid some of the penalties and interest.
It also allows you to avoid the issues that come with putting your taxes on a credit card or taking out a loan.
You can pay it back and be finished with the issue.
The IRS Might Wave the Penalties
In some cases, IRS agents can waive the late-fee penalties.
Waivers can save you serious money on your bill.
However, they won’t waive interest charges.
The IRS Tells You What You Owe and When
When you choose an IRS payment plan, you know what you owe and when.
The payments are easy to make, and you can sign up for direct debit.
As long as you budget for them, you can pay back the debt as you would any other.
The IRS Might Give You an Offer in Compromise
If you struggle to save for taxes because you are on a low income, then the IRS may even forgive some of your debt through an offer in compromise.
The offer in compromise allows you to lop off some of your debt.
It’s an option available to you if paying your tax bill creates a genuine financial hardship.
When you apply, the IRS looks at your income, expenses, assets, and ability to pay.
If you make a reasonable offer (the same amount they can expect to collect over time), they might agree to it.
However, the IRS generally expects you to try a payment plan first.
To see if you might be eligible, you can use the IRS’s official Offer in Compromise Pre-Qualifier tool.
Keep in mind that you’ll need to submit a $186 application fee and either provide a lump sum payment or provide periodic payments.
However, if you meet the new Low-Income Certification guidelines, then you don’t need to pay the fee or initial payment.
You can also stop paying any monthly payments while the IRS evaluates your offer.
What Are the Cons of the IRS Payment Plan?
The cons of the IRS payment plan and installment agreement tend to be the penalties and interest tacked onto the debt.
The penalties accumulate every month that you still owe a debt, which means you’ll pay more than you initially owed.
In other words, the most significant disadvantage is that IRS payment plans are expensive.
The IRS tacks on an interest rate of 8-10 percent, which means it’s lower than a credit card payment, but there are better alternatives, such as personal loans or borrowing against the equity on your home.
These can save you more over time, especially if you need to pay over the full 72 months of the loan.
Additionally, a payment plan doesn’t prevent a tax lien.
Missing a payment on your plan can still damage your credit.
Finally, you can only apply for an installment agreement on this year’s returns if you filed all your past returns.
So, if you missed a few returns or you owe taxes from previous years, the option isn’t available to you until you’re current.
In this case, you need to find a way to not only pay this year’s debt but get the previous years’ returns taken care of, too.
Should You Try a Payment Plan?
If you’re like millions of Americans and you can’t pay your outstanding tax bill, don’t panic.
And you certainly shouldn’t hide either.
As with any debt, you will be in a much better position if you are upfront about your situation rather than if you ignore it and hope it goes away.
Is an IRS payment plan the right choice for you?
It works best for people who are only behind on the current year’s taxes and who have no other way to pay within a month of the tax deadline.
It’s important to keep in mind that payment plans aren’t something you should rely on.
You will always pay more in tax as a result of penalties and interest than you would if you paid on time.
Are you worried about paying your tax bill for 2019?
We can help. Get in touch to learn more about how we help taxpayers just like you manage your tax bill