Owing money to the IRS can be very stressful, so you might just wish to forget about it or pay it off as quick as you can without actually weighing your options. Paying the debt becomes more difficult when the amount rises beyond $20,000. Many people turn to a second mortgage, private loan, or credit card when they find themselves in this situation. However, it might be better to look into an Installment Agreement with the IRS instead.

Pros and Cons of Paying with a Credit Card

The IRS accepts credit cards for paying off your tax. This can be an easy way to get the IRS off your back; however, it is best to know all the information before doing so. Remember that even though you pay the tax off with your credit cards, you still owe that money. Instead of being in debt to the IRS, you are now in debt to a credit card company. You have to pay a monthly payment, which can make an overwhelming debt much more manageable. However, this also comes with interest and other fees that means you might pay much more than your original tax liability. If you miss a payment, you also will face penalty fees. This debt also affects your credit score, especially if you for some reason miss payments or default on the loan.

Another factor to consider is that although the IRS technically accepts credit cards, it does so through approved third party services. This processing company might charge a fee for processing the card, which is based on the amount you owe and is usually a percentage of the tax that ranges from 1.87 to 2.25 percent. This might only be a few dollars, or it might end up adding a significant amount to your already high tax debt. For example, at the lower end of the percentage, if you owe $10,000 and pay with a credit card, you would be charged a processing fee of around $187.

What About Personal Loans or Other Lines of Credit

Another way that some people choose to pay off their tax debt is through taking out a personal loan, which might be a secured loan on a car or a second mortgage. This avenue has similar disadvantages to credit cards. You will have to pay interest and might face penalties and other additional fees. However, secured loans often have a much lower interest rate than credit cards or unsecured loans, especially if you have good credit. If you fault on a secured loan, you face losing that property. This loan will also be on your credit report, and will negatively affect your score if you miss payments or otherwise default.

Is an Installment Agreement Better?

Instead of taking out a loan to pay the debt, you also have the choice to negotiate an Installment Agreement, also known as a payment plan, with the IRS. After the Fresh Stat initiative, it is easier than ever to get an Installment Agreement accepted. You can determine an amount that you can afford to pay each month and pay it out over a period of time. Those who owe $50,000 or less can typically name their own terms (as long as it is reasonable), while it might take more negotiating if you owe more than that.

One important factor to remember when determining whether to choose an Installment Agreement is that you will have interest and penalties to pay that are often higher than paying with a personal loan or credit card from your bank. There is a one-time fee of $120, although this is lower if you choose direct deposit or qualify for a lower amount based on your income. You do get a bit of a break on the penalty fees, which will be 0.25 percent rather than 0.5 percent of your tax. There is also interest, which is based on the federal short-term rate, with an addition 3 percent added to it. Currently, it is around 3 percent. This could make the interest and penalty fees added to your initial tax liability more than that of personal loans or credit cards, depending on your lending institution and credit score.

The nice thing about an Installment Agreement is that it does not end up on your credit history. However, if you default on a payment just once, the IRS can take collective action, including a lien on your property that will negatively affect your credit. You also have to be compliant on all taxes moving forward, otherwise the IRS could revoke your plan and you will be right back where you started.

Other Ways to Pay

In some situations, you might also find other ways to pay your debt or at least reduce it. The IRS allows additional time to pay for certain circumstances. You might also be able to reduce the amount you owe if you qualify for an Offer in Compromise, Penalty Relief, Innocent Spouse Relief or one of the other tax relief settlement options from the IRS. You might also be able to significantly reduce your debt through submitting a tax return if you did not do so before. Many people find they end up not owing any tax at all after filing back taxes.

At Fidelity Tax Relief, our tax professionals are here to help you determine the best way to pay your tax debt. For some people, it might be best to simply pay it off by selling something or using a credit card or other line of credit. However, many of our clients find help by either reducing their tax liability through one of the tax relief programs or negotiating an Installment Agreement. Call us today at 877-372-2520 to discuss your situation and find out how you can get free of your tax debt.

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