Monday, May 19, 2008

How Borrowing Money To Pay Your Taxes Could Cost You Less Than An Installment Agreement

If you owe $10,000 in taxes and you are considering entering into an installment agreement for 36 months, your payments could be as high as $339 per month including interest at the rate of 5 percent and failure to pay penalty of up to 1 percent each month. Keep in mind that these interest rates are subject to change quarterly. Since these rates change periodically and may increase, the taxpayer could end up paying even more. In this situation, you could save $2,247 by paying all of the taxes now rather than entering into an installment agreement. An installment agreement would cost a total of $12,204 in payments.
In addition, effective January 1, 2007, the new installment agreement user fee is $105 and $52 for agreements where payments are deducted directly from your bank account. A Notice of Federal Tax Lien may also be filed against your property to secure the government’s interest against other creditors while the installment agreement is in effect. A more favorable solution to resolve the debt would be to obtain a loan from a bank or other financial institution, or pay taxes using a charge card. As demonstrated in the chart below, borrowing $10,000 over 36 months at various interest rates would result in less costly payment amounts as compared to an installment agreement:

Interest Rate Monthly Payments Months Savings To Taxpayer
7% $308.77 36 $1131.28
9% $318.00 36 $799.00
11% $327.39 36 $460.96
13% $336.94 36 $117.16