The interest rates on an IRS payment plan might be more favorable than those on a personal loan Trending Videos if you have bad credit.
It’s never pleasant to owe money to the Internal Revenue Service (IRS), but it can be particularly distressing if you don’t have enough money to pay it back. Thankfully, there are a few options available to you, such as obtaining a personal loan or arranging a payment plan with the IRS.
Managing tax debt can be difficult, particularly if you don’t have the money to pay it off right away. Fortunately, you have options: IRS payment plans and personal loans. Both have benefits and drawbacks, so let’s examine the specifics to assist you in selecting the course of action that is best for you.
IRS Payment Plan: A Flexible Option with Potential Drawbacks
The IRS understands that unexpected situations can prevent timely tax payments. That’s why they offer payment plans, allowing you to spread your debt over time. However, there are some key points to consider:
Pros:
- Potentially lower costs: IRS payment plans currently charge an 8% interest rate and a 0.25% monthly penalty (capped at 25%) on unpaid amounts. This could be lower than the interest rates and fees associated with a personal loan.
- Extended repayment period: You can choose a short-term plan (up to 180 days) or a long-term plan (up to 72 months) depending on your debt amount.
- No additional borrowing: You avoid taking on more debt, which can help you manage your overall financial health.
Cons:
- Plan limits: Long-term plans are generally available for individuals with tax debts under $50,000.
- Setup fees: Long-term plans incur setup fees ranging from $31 to $225, depending on application method and income.
- Potential for complexity: Dealing with government agencies can involve paperwork and waiting times.
Personal Loan: A Faster Solution with Potential Costs
Personal loans offer a quicker way to settle your tax debt You can apply online, receive funding within days, and pay off the IRS directly. However, there are some crucial factors to consider:
Pros:
- Quick access to funds: You can apply and receive loan approval within a short timeframe.
- Flexibility in terms: You can choose a loan with a repayment period and interest rate that suits your budget.
- Avoids IRS interaction: You can handle the entire process without involving the IRS.
Cons:
- Credit score requirements: You’ll likely need a good credit score (generally 670 or above) to qualify for a personal loan with favorable terms.
- Potentially higher costs: Personal loan interest rates and fees can be higher than IRS payment plan charges, potentially increasing your overall debt burden.
- Impact on credit score: Taking on a loan can affect your debt-to-income ratio, potentially impacting your ability to obtain future credit.
Other Options to Consider
Although personal loans and IRS payment plans are popular options, don’t ignore these substitutes:
- Credit card payment: The IRS allows tax payments via credit card, but beware of high upfront fees and potentially compounding interest charges.
- Offer in compromise: You can negotiate with the IRS to settle your debt for less than the full amount owed.
- 401(k) loan: If your employer allows, you can borrow from your retirement savings, but repayment terms and potential tax implications need careful consideration.
Does an IRS Payment Plan Affect My Credit Score?
No, IRS payment plans do not affect your credit score. The IRS does not report these plans to credit bureaus.
What’s the Minimum Monthly Payment for an IRS Installment Plan?
The minimum monthly payment depends on your debt amount. However, those owing $10,000 or less and agreeing to a three-year repayment plan have no specific minimum payment requirement.
What Happens if I Don’t Pay My Taxes?
The IRS has various methods to collect unpaid taxes, including:
- Wage garnishment: Seizing a portion of your wages.
- Bank account levy: Taking funds from your bank accounts.
- Property seizure: Taking possession of your assets, including vehicles and real estate.
- Tax refund offset: Applying future tax refunds to your outstanding debt.
If deliberate tax evasion is severe enough, the IRS may even use jail time.
The Bottom Line: Choose the Option That Fits Your Needs
Consider your debt load and financial status carefully before choosing between a personal loan and an IRS payment plan. Consider your credit score, budget, and comfort level with each option. Keep in mind that both options have costs, so pick the option that best fits your long-term financial objectives.
It’s crucial to address your tax debt promptly to avoid further penalties and complications. Whether you choose an IRS payment plan or a personal loan, taking action now can help you regain control of your finances and move forward with peace of mind.
Personal Loan Pros and Cons
If you’d like, you can pay off your debt with a personal loan rather than interacting with the IRS. In that scenario, you would arrange for a transfer to the IRS to settle your tax bill after having the loan funds deposited into your bank account.
Before you choose a personal loan to pay your taxes, consider the following:
Other Ways to Pay
There are a few options to think about if you’re undecided between paying your taxes with a personal loan or an IRS payment plan.
For instance, the IRS allows you to use a credit card to pay your tax bill in exchange for an upfront fee of one. 85% to 1. 98%, depending on the platform you use. However, using a credit card to pay off your tax debt can quickly become very expensive due to the interest rates on most of them.
Additionally, you may be able to work with the IRS to make an offer in compromise, which would allow you to settle the debt for less than what you owe in full.
Lastly, if your employer permits it and you have a 401(k) plan at work, you might also think about taking out a 401(k) loan. With this kind of loan, you can take out a loan against your retirement savings and return the funds to the account along with interest. But, you typically have five years to pay back your entire 401(k) loan, and you might have to do so right away if you quit your job.
IRS Installment Agreement Don’t Do This!
FAQ
Do IRS payment plans impact credit score?
Is an IRS payment plan a good idea?
Does owing the IRS lower your credit score?
Is it better to pay IRS with credit card or payment plan?
How does owing the IRS affect my credit score?
To understand how owing the IRS may affect your credit, you should first know how credit scores are calculated. According to MyFICO, there are five separate components that contribute to your overall FICO® score; if the IRS issues a federal tax lien, the tax owed will negatively impact your “Payment history” and “Amounts owed”.
Will paying taxes affect my credit score?
Paying your taxes usually won’t affect your credit scores one way or the other, and the IRS’ payment plans may be the best option if you can’t afford your tax bill by the filing deadline. But if you think a credit card or loan makes sense, your credit scores can affect your offers and the new accounts can affect your credit.
Will a tax installment plan affect my credit score?
No; agreeing to repay your tax bill on an installment plan will not affect your credit score because they are not reported to credit bureaus. Negotiating an installment agreement or an offer in compromise (OIC) with the IRS is one of the best ways to prevent tax liens, and it’s always better to start this process sooner rather than later.
Does a payment plan with the IRS trigger a credit report?
Taking the step of setting up a payment arrangement with the IRS does not trigger any reports to the credit bureaus. As mentioned above, the IRS is restricted from sharing your personally identifiable information. While a Notice of Federal Tax Lien could be discoverable by lenders, the payment plan itself would not.