Using an IRS payment plan: When does it make sense?

You owe taxes but you don’t have the money to pay them. What to do?

At this point, three days before the filing deadline, you’ve got two immediate challenges for this year’s taxes. One is avoiding the failure-to-file penalty. The other is avoiding the failure-to-pay penalty.

And you may also have tax debt from previous years.

Does it make sense to apply for a payment plan? In this post, we will address that question.

Filing an automatic six-month extension will enable you to avoid the failure-to-file penalty. But an extension does not protect you from the failure-to-pay penalty.

This means that if you owe taxes this year, you will have to pay them by April 18 or face a penalty.

One option is to put them on a credit card. But that is hardly ideal, given the kind of interest that credit card companies charge when you can’t pay off your balance in full every month.

Borrowing from a bank or a friend or relative may be an option for some people. But you may have a questionable credit rating or have already reached the limit of your borrowing power. And friends or relatives willing to lend you money may be hard to find.

Fortunately, it is possible to apply for a payment plan to make your payments to the IRS over a period of time. If you owe less than $50,000, you can pay your debt off for up to 72 months.

Of course, stretching out the payments that long means you’ll pay a lot of money in interest. There is also a cost to set up an installment agreement that goes past 120 days.

This cost can be lowered, however, if you set up a direct debt plan where money will go directly from your account to the IRS each month. And it is possible to apply online.

If you have tax debt from previous years, another option to consider is an officer in compromise (OIC). If the IRS accepts, an OIC allows you to resolve tax debt for less than the full amount you owe. A knowledgeable tax attorney can help you decide what is best for your particular situation.

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