Paying the IRS on time is not everyone’s cup of tea. It is estimated that more than half of the millennials are struggling with their tax liability in recent years. The economy is crushing everyone’s financial health. But rest be assured, there is no way to get out of this unless you make good on your tax payment.
The good news, however, is that the IRS provides a few options to those with legitimate financial hardships. While the Offer-in-Compromise may seem the most suitable option, it is not easy to get it.
A better alternative would be to get the IRS on an installment plan. Hence, you may be able to settle your tax debt in the form of installments. Like most other things in life, an installment agreement has its own positives and negatives.
Pros of IRS Installment Agreement:
It is obvious that such a plan may have certain benefits. These pros are discussed below.
The most obvious pro is that the immediate fear of tax liability is greatly reduced. You get to pay your liability over a period of several years. In the meanwhile, you can work towards improving your financial health.
Normally, you get the opportunity to choose your own payment plan. The maximum period allowed by the IRS is 72 months, however. You can choose a time period that is most suitable for you.
If, in the near future, your financial circumstances improve, you may pay the outstanding amount in full. Hence, you get the time to improve your income and pay the remaining amount in lump sum once it is feasible. Hence, you get to save additional penalties and interest.
In some cases, the IRS may also waiver off the penalties. Hence, you get big financial relief while you continue to play monthly.
While choosing the installment option, you get the clarity regarding how much you owe. You also get a specific timeline over which you need to make these payments. It helps in financial planning for the future.
Cons of IRS Installment Agreement:
While it provides the above benefits, there are certain drawbacks of an installment agreement that you must consider. The cons of the IRS installment agreement option are discussed below.
The major drawback of such an agreement related to penalties and interest. Until you settle your debt in full, penalties and interest continue to accumulate. This means that you end up paying substantially a higher amount than originally owed.
The rate of interest on your installment plan may be up to 8 – 10 percent. This is obviously higher than credit card or personal loan. So, you might want to consider other options before going for an installment plan.
While opting for an installment plan, you need to pay a certain enrollment fee. The fee ranges from $43 to $225, depending upon the nature of your case and total outstanding amount.
While you are on a payment plan, there may still be a danger of tax lien.
If, god forbid, you miss on an installment, you may end up hurting your credit rating. This can be a serious drawback for someone looking to take future loans.
Overall, it can be said that the IRS installment agreement is not a perfect option. It has its own pros and cons. So, it is recommended to weigh your option and conduct a cost-benefit analysis of this option. Making a more informed and well-calculated decision may help you save some bucks.
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Zee Maq is a content writer who specializes in writing business and finance content. She has nine years of experience and loves to provide problem-solving content to help people tackle challenges in their everyday lives.