You will be surprised to know that a debt consolidation loan may even help you to pay your tax debt as well. Therefore, if you have fallen behind your tax dues, there is no reason you should incur more penalties. Consider a debt consolidation to get matters sorted out.
All you have to do is choose an Installment Agreements which is ideally your tax payment plan. You will then be able to pay off your tax debt in monthly payments just like you do for most of your other bills.
When you cannot pay your taxes back in one lump sum due to your financial hardship that you can prove, the IRS is kind enough and have different other options that will help you to make the payments in a far easier way.
However, you will have to bear the penalties that will be charged on you ultimately and you may even find it costing you more than you expected. This is the price that you pay for your delay which is much similar to your credit card debt penalties or any other type of secured and unsecured loans.
With this IA or payment plan you can easily get out of the tight spot and therefore it is a worthy option after all.
Types of installment agreements
To start with, you must know about the installment agreements that you will have with the Internal Revenue System or IRS. There are different types of installment agreements that you can have.
- If you owe $50,000 or less in tax debt and at the same time have the capability to repay the entire amount then there is no need for providing any extensive information to the IRs on your income and assets. In such a situation you can simply pay the amount in fixed monthly installments. You can make this payment through direct debit and you will get time up to six years.
- However, there is one thing that you must know in this regard. According to the set rules of the IRS, the penalty for not filing your taxes on time is actually ten times more that the penalty charged from you for not paying your taxes on time. Therefore, you should never procrastinate filing your taxes just for the reason that you do not have enough resource to foot the bill right at this moment.
Assuming that you owe more than $50,000, you will need to provide a declaration along with a financial statement to the IRS to prove that you can make the monthly payments without any default within the stipulated amount of time.
Partial payment installment agreement
Supposing that you are willing to go under the scanner, you may even apply for a Partial Payment Installment Agreement or PPIA. This agreement with the IRS will enable you to pay back only a portion of your tax debt. The amount of monthly payment will be calculated based on your ability to pay only.
- To find out how much you are able to pay back, the IRS will review your financial situation thoroughly under a microscope, so to speak. Once they are okay with it and the amount of installments is determined, you will need to pay it all within the statute of limitations of the debt.
- After the time runs out you will not have to make any more payments even if you have not paid the total tax debt. However, this may take 10 years or even more.
Therefore, it is required by you to make sure that you will be able to meet with all the requirements of the plan by the IRS before applying for an installment agreement just like you would do before applying for a debt consolidation loan.
Penalties and interest
There is a specific set of rules followed by the IRS when it comes to charging penalties and interest in case of default.
- The IRS may charge your heavy fine if you are defaulting
- It also has the power to even force you to negotiate for a new agreement and
- Apart from that, it can ask for a proper explanation from you as to when you must apply for reinstatement.
- When you use the Installment Agreement for the payment of tax debt to the IRS it means that you are legally obligated to pay all the penalties interest imposed on you by the IRS on your tax debt.
- Usually, the IRS will charge a penalty of 0.5% of the total debt amount every month. In addition to that The IRS may, however, charge a supplementary penalty on the taxes due that you may not have filed yet.
- Typically, this amount will be about 5% of the total amount of unpaid taxes and charged every month. The IRS reserves the right to charge a maximum of 25% as a penalty on any unpaid or unfiled taxes.
Even if you make the monthly payments on time to the IRS according to the Installment Agreement for your fulfillment of tax debt, interest and penalties will be still charged on the remaining amount of the tax debt in your name. It is, therefore, prudent to pay as much as possible upfront so that you can save a lot of money avoiding such higher penalties and interest.
This is where a debt consolidation loan may prove to be very handy and more productive in saving money due to the difference in the rates of interests.
Applying for an Installment Agreement
It all depends on how much you owe as your tax debt and whether you should take a debt consolidation loan or apply for an Installment Agreement with the IRS. If your debt is less than $10,000 then you may be able to pay it up provided you are given a little bit more time. In such a case you will need to set up a simple installment agreement on the IRS website.
However, for higher debts, a complicated financial disclosure is required which is tricky and requires professional help of a tax debt resolution service.