An IRS installment agreement gives you more time to pay your federal taxes – but it comes at a price.
If you have unpaid tax debt, the IRS offers options to help taxpayers settle for less than the tax owed. If you don’t have the money now but have the means to make monthly payments, you can pay the full amount of your tax bill over time.
However, the convenience of IRS payment plans comes at a price. You’ll pay penalties and interest on those taxes.
Also, if you fail to adhere to the terms of your IRS payment plan, the federal government can institute a tax lien on your property, levy your assets, or garnish your wages.
It’s often best to find another way to pay your tax debt, but not everyone has that option. If you have to file for a payment plan, it’s good to know what you are getting into in terms of added costs.
Keep in mind that depending on the type of payment plan, the paperwork to apply can be complicated. Alleviate Tax professionals can help you file for a partial pay installment agreement or other payment plan.
How the IRS Calculates Interest on Past Due Taxes
Just like other lenders, including banks and credit card companies, the IRS charges interest on payment plans. Essentially, you are borrowing more time to pay your taxes.
And, just like other lenders, the interest rates charged are based on the Federal short-term funds rate. The Federal Reserve meets eight times per year, during the Federal Open Market Committee (FOMC) meeting. At that time, they determine the interest rate until the next meeting.
The federal funds rate for the second and third quarters of 2024 is 5.25% to 5.50%. Due to persistent inflation, the FOMC decided not to lower interest rates at the most recent meeting.
Payment Plan Interest Rates for Individuals
The IRS calculates the interest rate for past-due taxes and underpayments of taxes by adding 3% to the federal funds rate, rounded off.
Based on these calculations, the IRS currently charges 8% interest on payment plans for individuals through the third quarter of 2024. This rate may change in the fourth quarter if the Federal Reserve votes to change the prime interest rate during the next meeting. Some experts are predicting the Fed may begin to drop interest rates in November, but other analysts are saying this may not happen until March 2025.
How to Calculate Interest on Your Payment Plan
You can use a loan calculator to find out how much interest you’ll pay with an IRS payment plan. If you apply for a payment plan for $10,000 in tax debt and take the maximum amount of time to pay, 72 months, your monthly payments will be $175.46. If the interest rate remains at 8%, compounded daily, you’ll pay the IRS a total of $12,633.02. That includes $2,633.02 in interest payments, more than 1/5 of your total tax debt.
Let’s cut the term of your installment agreement down to three years instead of six. That cuts your interest payments by more than half, while increasing your monthly payment by just $138. You’ll pay $313.48 per month for three years, paying the IRS a total of $11,285.38, including $1,285.38 in interest.
Now let’s assume you are expecting some money in the near future. Instead of an installment agreement, you apply for a short-term payment plan, gaining an extra 180 days to secure the funds you need to pay your taxes.
You’ll pay just $408.06 in interest, for a total payment of $10,408.06. Keep in mind, these calculations don’t include 0.5% in penalties, up to 25% of the taxes owed. But you may be able to apply for first-time penalty abatement to waive those added costs.
Make sure to keep up to date on your tax filings to avoid failure-to-file penalties and to qualify for an IRS payment plan.
Loan, Credit Card or IRS Installment Agreement: Which Is Better?
When you’re facing tax debt, it might be tempting to pay it off as quickly as possible, so you won’t stress about owing the IRS. Rather than choosing to apply for an IRS payment plan, you can:
- Take out a personal loan
- Put your taxes on a credit card
- Borrow against your home with a home equity loan or home equity line of credit
- Borrow money from family or friends
Unless you have friends or family members willing to lend you a substantial amount of money, these options could cost more money than the interest on an IRS installment agreement. Let’s explore these choices.
Personal Loan
If you have good-to-excellent credit, you may qualify for a personal loan. You can use the cash to pay off your tax debt and then pay off the loan based on terms of one year up to 10 years or even longer.
Bankrate reports that the average personal loan in May 2024 offers an interest rate of more than 12%. Even if you have excellent credit, the lowest rate you are likely to find is just over 10%. No matter your credit score, the IRS offers a lower interest rate right now.
Credit Card
If putting your taxes on a credit card feels like your only option, you’ll definitely want to look at an IRS payment plan, instead. A new credit card today carries an average interest rate of 24.71%, the highest it has been since at least 2019, according to LendingTree.com.
There are many pros and cons to putting your taxes on a credit card, and every taxpayer may have a different financial situation. But consider reaching out to Alleviate Tax to find better ways to handle your past-due tax debt.
Home Equity Loan
For many people, a home equity loan provides a way to tap into your home’s value for unexpected expenses, including that tax bill. Bankrate lists the average home equity loan rate at 8.61% right now, which is just slightly higher than the IRS payment plan interest rate. And you’ll be locked in so that even if the Fed raises the short-term funds rate, your interest rate won’t go up. But you might have to pay upfront closing costs that would be equal to, or more than, your tax bill.
Borrow Money from Family or Friends
Ideally, you’ll have friends or family with deep pockets willing to help you out in a pinch. But owing money can strain relationships and put a lot of pressure on you. It’s not an option that’s available to everyone.
Bottom Line
An IRS payment plan offers a low-cost way to pay your back taxes over time compared to other borrowing options. Alleviate Tax can help you find the installment agreement or other tax resolution program that’s best for you.
FAQs
How much is interest on IRS payment plan?
The IRS charges interest on payment plans and late taxes that is equal to the federal short-term funds rate plus 3%. This amount may change quarterly based on Federal Reserve interest rate hikes or cuts. For the second and third quarters of 2024, the IRS payment plan interest charge is 8% of taxes owed, compounded daily.
Should you apply for an installment agreement?
An IRS installment agreement provides a relatively low-interest way to pay off your tax debt over time, regardless of your credit history. If you owe $50,000 or less, are current on all tax filings, and not in an open bankruptcy proceeding, you may qualify for an installment agreement or payment plan.
