Stay relaxed: Payment Options If You Owe Money to the IRS This Tax Season – Credit Sesame

If dealing with the IRS enables you to nervous, you are not at all alone. They've so much control of our financial lives. The government is even scarier when you understand that your debt them money.

A coworker of mine found out that he owed about $3,000 towards the IRS. He didn't have enough money to pay. Instead, he panicked and declared bankruptcy! This might have been completely unnecessary since other solutions exist.

What occurs when you owe the government money?

If you believe you'll owe money towards the IRS, the first priority should be to still file your tax return through the deadline (April 18th may be the deadline in 2021). No matter if you can't pay your taxes. Just get your return in promptly.

The IRS charges a high failure to file for penalty when you owe money and don't file a return. For each month that you're late with your return, they add an extra 5% for your unpaid balance up a to some maximum 25% penalty. This adds up fast so don't procrastinate on filing.

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If you file but don't pay your taxes, the IRS still charges failing to pay for penalty but it is much smaller; this penalty is only 0.5% monthly of the unpaid amount. Additionally they charge interest on the amount your debt. The speed the IRS charges is the federal short-term rate plus 3%. In April, 2021, the short-term rate is 0.70%.

In other words, when you don't pay your taxes towards the IRS it's like taking a short-term loan from them. Depending on circumstances, it could be a costly loan. The IRS states that many people are the best off borrowing money a different way to pay their taxes:

“The rate of interest and then any applicable fees charged by a bank or charge card company are usually lower than the combination of interest and penalties imposed by the Internal Revenue Code.”

Long-term consequences of failure to pay for taxes

If you decide to go too long without having to pay your taxes, the consequences tend to be more severe. The IRS can garnish your wages, meaning they try taking some of the paycheck prior to the money ever reaches you. They can also seize your assets as payment or place a lien against your properties, so you can't sell without having to pay the IRS back first.

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If installed a lien against your property, it'll show up on your credit history. A tax lien among the worst notes you can have in your credit report and will make it extremely difficult for you to be eligible for a credit products.

Overall, delinquent taxes amount to a really ugly situation that's easier to avoid. Instead, look at other available choices. We've outlined a few here.

Solution 1 – Remove an individual loan

If you'll need serious amounts of pay off your IRS debt, a short-term personal loan is one solution. You borrow money from the private lender and use that money to repay your tax debt. You will owe interest on the loan however the interest rate will probably be lower than the government rate of interest plus the penalty. The greater your credit score, the greater your odds of qualifying for a loan with a low interest rate.

In addition, with a personal loan you don't have to bother with the government eventually pursuing your income or forcing you to sell other assets, or filing a tax lien upon your property. You just need to make your monthly obligations on the loan.

Many personal loans come with no prepayment penalty, meaning there is no expense if you can to repay the loan early to save on interest.

Credit Sesame includes a number of unsecured loans with great rates, including those from Lending Club.

Solution 2 – Use your credit card

A charge card is yet another way to pay your taxes, especially if you will pay off balance quickly. The government accepts all major credit cards for payment. If you are using a rewards charge card, paying your back taxes will also help you earn rewards like cash back or travel bonuses.

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The downside: you'll pay a processing fee to use your card. The charge ranges from 1.87% to two.25%, depending on which company processes the payment. This fee usually negates the credit card rewards, and you are sure to emerge behind if you cannot spend the money for balance punctually.

If you can't pay off your credit card balance in full punctually, you'll pay interest that could be greater than the rate on the personal bank loan. You might be capable of giving yourself some time for those who have a card that offers zero percent interest on purchases throughout a current promotional period.

Don't forget that paying your taxes in your credit card will add to your outstanding balance and lift your financial troubles utilization ratio (what your credit card balance is, when compared with your overall charge card limits), which is an important part of your credit rating.

Most in our readers are aware of these consequences. Within our recent tax survey, from the respondents who use their charge cards to pay taxes, 86% said they'd pay within one billing cycle, the approach to take.

Solution 3 – IRS payment plan

The IRS offers payment plans that give qualifying taxpayers up to 120 extra days to pay for the entire balance.

You can also request a payment plan and make monthly obligations to the IRS. The cost of establishing an installment plan starts at $43.

If your tax burden will prevent you against meeting your basic living expenses, you may qualify for a delayed payment.

If you possess an old tax owed but you're otherwise current on filing and payment obligations, you can submit a deal in Compromise. The government might settle your financial troubles for less than your debts.

All of the IRS's payment choices are susceptible to fees and interest, as well as other limitations. Click here for additional information.

Owing money to the IRS is a tough situation only one you are able to resolve it with a few planning.