When the Federal Income Tax deadline draws near, there are some circumstances that can lead us to being underpaid or underwithheld by an amount that simply isn’t within our budget to hand over all at once. If you are in this situation, it is not necessarily time to panic or even expect some form of IRS harassment or audit. The IRS only seriously investigates flagrant attempts to commit W-2 fraud or hide income. An honest mistake on a form or forgetting to update a W-2 is simply penalized by the fact that there is an amount owed, plus applicable late fees and interest.
There are options for you to be able to tackle this financial hurdle from the IRS. If the amount owed is similar to what you could afford as a loan within your income level and you can not secure any low-interest credit, an installment agreement may be of help to you. This option has the following pros and cons:
- You Are Dealing Directly With the IRS Rather than Creditors. Your liability is tracked in detail with each payment. If you opt to use the Electronic Federal Tax Payer System (EFTPS), you can pay online and see exacly what you have outstanding in terms of principle and interest. The IRS tends to be willing to accomadate you – within reason – given your financial situation.
- The Amount Owed Per Month is Fixed. When the agreement is first made a fixed monthly payment will be set. This can be as high or as low as reasonable provided it will pay off the total amount owed within 120 days. It will not change under you without notice and the terms of the agreement will be well defined.
- You May Re-Negotiate the Agreement. If the payments do not fit within your budget, it is possible to reach a new installment agreement with the IRS. Though they are not guaranteed to approve your request, they will see to it that you reach a repayment option that is suitable for your economic circumstances.
- Penalties and Interest May Be Less that That of Consumer Credit. This of course depends on your credit score and access to financing, but compare %11 percent with penalties to the %22+ percent some creditors charge, plus late fees and hidden fees. Since the IRS is concerned more with you repaying than with you locked in a cycle of debt, this may be a better option. However, if your credit is good and you have the means a personal loan, line of credit, or credit card may turn out to be better. However, just consider this: if you receive a tax refund as a result of your return, you have essentially given the IRS an interest free loan. They owe you no interest if you pay to much, but you owe them interest if you pay too little. Do research on your financing options and see what works best for you.
- You Are Dealing Directly With the IRS Rather than Creditors. Yes, this was the first pro listed, but taken from another perspective it may be a con. If things do not go according to plan with your installment agreements you will have to speak and answer directly to the IRS – exposing you and your finances to their scrutiny. Though you may have nothing to hide, always take care when speaking to them.
- The Agreement has no Grace Period. If the installement agreement is even a day overdue it is considered delinquent. Though the IRS may give you some leeway, the monthly date of payment set forth in the agreement must be met or you will be considered in violation of the terms – and may potentially be liable for the total amount due all at once unless there is a reasonable explanation for the failure to pay by the agreed montly date.