Don’t Panic: IRS Offers Some Ways to Help You Pay
You’ve finished your tax return and now you’ve got that sinking feeling--the one that comes when you find out shortly before the tax-filing deadline that you owe the IRS money and you don’t have the cash to pay it.
There’s no easy way out, but there are fewer reasons to panic than in the past. Largely because the IRS realized that some otherwise honest taxpayers were dropping out of the system when they couldn’t afford to pay, the agency has launched programs over the last few years to make paying income taxes easier, even when you’re broke.
“We have done a great deal to encourage people to file returns even when they can’t pay,” said Don Roberts, an IRS spokesman in Washington. “Taxpayers should know that when they file.”
What are the options?
Installment Plan
The IRS has streamlined its installment agreement program, which allows individuals to make monthly payments on their past-due income tax bills.
Those who owe less than $25,000 and are able to pay it off in less than five years can participate in the agency’s streamlined approval process. Simply attach a Form 9465 to the front of your completed tax return, listing the proposed monthly payment amount.
The IRS will review the request and respond within a few months. Those who need the installment agreement form, and a good idea of whether their payment plan will be accepted, can find an interactive work sheet and printable forms on the IRS Web site at www.irs.gov.
If the debt and payment plan meet the streamlined approval requirements, the IRS generally will accept the deal without looking at whether the taxpayer could borrow money elsewhere or sell assets to pay the bill, Roberts said.
If the taxpayer owes more than $25,000 or is unable to pay within five years, approval is not assured, but the taxpayer may apply for installment agreements.
IRS acceptance of an installment agreement means the agency won’t seize or place liens on a taxpayer’s assets and income to pay off back taxes.
An installment agreement is like any other loan, however. There’s a $43 fee to set it up, which will be taken out of the first payment, Roberts said.
The IRS also charges interest, currently 6% a year. The interest rate is reset every three months, though, so if market interest rates rise, so will the cost of holding outstanding tax debts.
A late-payment penalty is assessed each month that the debt remains outstanding. Normally, that late payment fee would be 0.5% of the balance due. However, those who filed their return on time and did not receive a levy notice before asking for an installment agreement get a reduced penalty amounting to 0.25% a month.
Charge It
The IRS accepts major credit cards, including Visa, MasterCard, American Express and Discover.
The upside of charging tax payments is that some credit card issuers have rewards programs that can generate free airline tickets, discounts on cars or other perks.
The downside is that there’s a “convenience fee” of 2.5% of the payment amount. If you charge a $1,000 tax bill, your credit card will show a $1,025 purchase. If the tax charge is $5,000, you pay $5,125.
That fee goes to the card issuer--not to the IRS--and often cancels out any economic benefit that you can gain from the reward cards, said Robert McKinley, publisher of an online credit card newsletter called CardWeb.com.
McKinley estimates that each frequent flier air mile you receive is worth about 2.5 cents. If you pay 2.5% on each tax dollar charged, the transaction is a wash.
There are a few exceptions, McKinley says. General Motors Corp.’s MasterCard offers a 5% reward. So someone who charged $10,000 on a GM card would pay a $250 convenience fee but earn a $500 rebate toward the purchase of a new car. That would put this taxpayer $250 ahead.
With airline cards, there can be some benefits to charging for miles if you use your miles just right, McKinley said. He uses miles to upgrade airline tickets to business or first-class seats. Though a coach ticket might run $600, a first-class fare often is thousands more.
However, the modest benefit consumers receive from these reward cards is quickly eaten away if they maintain a balance on the card for any length of time.
“Credit card rates are averaging 14.5%, so a 6% IRS installment plan is better,” McKinley said.
Some consumers may be more comfortable dealing with a credit card company than the IRS if there’s a chance they won’t be able to make all the payments, he said.
However, falling behind on your credit card payments also can be expensive, with interest rates on the unpaid monthly balance spiking to 25% or more.
*
Times staff writer Kathy M. Kristof, author of “Investing 101” (Bloomberg Press, 2000), welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For past Personal Finance columns, visit The Times’ Web site at www.latimes.com /perfin.
