Sunday, March 4, 2012

Tax Expert Explains Ways to Pay IRS Debt | IRS Tax Relief Blog

I was recently quoted in an article for CreditCards.com entitled Pros and Cons of Paying the IRS with a Credit Card where I encourage taxpayers to compare the costs of using their credit cards to pay their taxes versus a negotiated IRS installment agreement if they don?t have the case on hand. I enjoy lending my expertise to this conversation because all too often, I see very smart people rush to get the IRS off their backs and ?self-finance? their back tax debt. But in some cases that may not be the best choice. Once these same people are shown their financing options, are surprised that sometimes settling their tax debt directly with the IRS, just makes better sense.

If you are deciding which payment method is best to pay down your IRS tax debt, below are the key points I recommend you consider:

Using a Credit Card ? and the Costs Associated with the Convenience.

  • Credit cards use third-party services who charge a convenience fee that range from approximately 2 percent and 3 percent of the balance owed. Example: Using a credit card to pay a $4,000 tax debt, would cost between $80 and $120 in fees. One unique benefit is that you would be able to deduct this fee on next year?s tax return.
  • The entire IRS tax debt placed on your credit card could have you paying much more in interest than you bargained for. With average credit card interest rates hovering around 14 ? percent, the total amount you end up paying could be significant.
  • Using credit cards to gain airline miles or points could be a false economy with taxpayers paying more to the third party services than they would get back for redeeming points.
  • Promotional credit card rates of 0, 1 or 2 percent are often a better deal than the IRS agreement but be beware of the following factors:
    • You will need to pay the entire amount before the promotional rate expires.
    • If you are late on a payment, the ?low? interest rate could skyrocket.

Cash Advance Check: Taxpayers can avoid credit card services and fees and pay by cash advance check that taps their line of credit. ?However, high transaction charges and higher interest rates associated with cash advances should be considered.

Installment agreement ? and Costs Associated with It.

The IRS Installment agreement allows taxpayers five years to pay off tax debt, and the ability to set their own monthly payment amount as long as the balance is paid off in 60 months.

Note the following important points:

  • You are still required to pay interest and late penalties.
  • Interest is compounded daily and should be factored in. Interest rate = equals the federal short-term rate plus 3 percent, is set quarterly. First Quarter 2012 shows the rate at 3%. An interest rate increase to 4 % or 5 % could means your total amount increases considerably.
  • If you do not file on time, the IRS charges 5 percent of the amount owed for each month that your return is late for up to five months.
  • After filing, you still have to pay one-half of 1 percent of the amount owed for each month that the payment is late.
  • Once you set up an installment agreement, the late penalty drops to one-quarter of a percent per month.
  • The IRS charges a one-time set up fee of $105, or $52 if payments are automatically deducted from your bank account. $43 for Low-income taxpayers who qualify.
  • If an Installment agreement is arranged, any and all future tax refunds will go towards paying down the tax debt.

Taxpayers may also want to consider other financing options such as borrowing from a retirement account, a home equity line of credit or seeking out a bank loan. ?Hiring the services of a certified tax professional can help you make an informed decision for the best way to pay.

For other back tax success stories with the IRS, read this post: More tax help news and tips and success stories are posted on the Tax Resolution University blog.

More Tax Help, IRS News and Tax Relief Tips:

  1. Ask the Certified Tax Specialist ? Small Business Back Taxes
  2. Finding Tax Help for IRS Tax Debt
  3. Delinquent and Unfiled Tax Returns? 8 Steps to Resolving Them
  4. IRS Guidelines Help More Innocent Spouses
  5. Treasury Proposes Multilateral Agreement for Offshore Compliance

Tags: certified tax professional, credit cards, income tax relief, IRS debt, IRS installment agreement, IRS payment plan, IRS penalties, IRS tax debt, tax advice, tax attorney, tax debt, tax expert, tax help, tax professional, tax settlement, Tax Tips

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on Friday, March 2nd, 2012 at 11:14 am and is filed under 365 Ways to Keep the IRS at Bay, Ask the Expert, Back Taxes, Expert Help From Tax Attorney, General Business, IRS payment plan, Seeking Professional Tax Help, Tax Relief News, Tax news and tips, income tax relief, tax help, tax resolution.
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