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Illustration for article titled How to Choose a Payment Plan When You Owe the IRS

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Maybe you forgot that your unemployment benefits were taxed, or that you had stocks which paid out taxable dividends tucked away somewhere in your portfolio—either way, a tax bill can surprise you, and sometimes when you can least afford it. If you won’t be able to pay your tax bill right on May 17, consider the following IRS payment plans to avoid the worst of the IRS’ penalties.

What are the IRS’ repayment options?

The IRS (and most state tax agencies) offer payment plans directly through their sites, or as an option when e-filing your tax return. Fortunately, there are a few options for paying in installments based on how quickly you can pay off the balance, as well as the total amount owed.

However, a caveat: with repayment plans, you will still be on the hook for setup fees and ongoing interest, although the interest rate you pay does drop from 0.5% to 0.25% per month (for more on IRS penalties, click here). Plus, a repayment plan will help you avoid wage garnishment or the IRS making claims on your property. Otherwise, the only way to avoid paying extra is to pay your tax bill on time. Here’s a look at the plans:

  • Short-term payment plan: The payment period is 120 days or less and the total amount owed is less than $100,000 in combined taxes, penalties, and interest. There is no setup fee for this plan, and interest is accrued until the balance is paid in full. The penalty for non-payment is a maximum of 25% of the unpaid tax amount until balance is paid in full.
  • Long-term payment plan: If the payment period is longer than 120 days, it can be paid back in monthly payments for as long as six years, provided that the amount owed is less than $50,000 in combined taxes, penalties, and interest (again, there’s a maximum non-payment penalty of 25% until balance is paid in full). You can set up either monthly automatic withdrawals directly from your checking account (the setup fee is $31), or go with non-automated (the setup fee is $149 setup fee—or $43, if you qualify as low income earners).

To sign up, click on the blue button labelled “Apply/Revise as Individualhere.

Can you use a 0% APR credit card to pay your taxes?

You could pay your tax bill with a credit card that has an introductory 0% interest offer for the first 12-18 month, although that’s a risky move. In that case, you’re just transferring low-interest debt over to a credit card, which will likely have interest rates in the 10%-25% range after the introductory offer expires. In other words, you’d only be buying yourself extra time, so you’d want to be 100% certain that you could clear that balance off the credit card when the balance is owed. Otherwise, you’re just risking even more debt later.

 



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