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Taxpayer Options

By Jane Byrant Quinn
Washington Post Staff Writer
Tuesday, March 21, 2000

Can't pay your taxes — at least, not now? If you're feeling a pinch, your best bet may be an installment deal with the IRS.

Alternatively, you can put the tax on a credit card. But that's generally more expensive than doing a deal with the IRS, even with frequent-flier miles thrown in, says Steve Rhode, president of Debt Counselors of America (DCA).

For the majority of Americans, tax season is refund time. Last year, 72 percent of taxpayers got money back.

For those who owed money, however, the balances averaged about $3,000.

That's a lot of money to come up with all at once.

In general, IRS installment agreements are pretty easy to get, as long as you owe less than $25,000 and can pay within five years, says IRS spokesperson Don Roberts.

On a debt of less than $10,000, there isn't even much paperwork. Attach Form 9465 to your return, or a handwritten letter saying how large your monthly payments will be. You have to specify a payment date (no later than the 28th of each month).

If you owe more than $10,000, the IRS will probably ask to see your expenses, and will have a hand in deciding what you'll have to pay.

So you have two main choices: Finance your debt with the IRS or finance it on a credit card. American Express, Discover and MasterCard all participate (but not Visa). Here's how to decide:

(1) Interest rate. The IRS and most credit cards charge a floating rate. Here, the advantage often lies with the government.

Starting April 1, the IRS will be charging an annual rate of 12 percent (9 percent interest plus a late-payment penalty of 0.25 percent each month). The average credit card charges almost 16 percent.

A credit card might be cheaper, however, if you get a terrific deal in the mail. Promotional rates are running from zero to 5.9 percent for the first two months to six months, says Robert McKinley of Cardweb.com. They'll save you money, if the rates apply to new borrowing, and if you can pay off the IRS within that period of time.

(If you get a new credit card for this purpose, cancel an old one. The last thing you need is another card to flash around.)

(2) Set-up cost. The IRS charges $43. The credit cards cost around 2.5 percent to 3.5 percent, depending on the fee schedule.

Which is cheaper depends on the size of the debt. If you owe $1,400 or less, the credit card wins (forgetting the size of the interest rate). If you owe more, the IRS plan wins.

(3) Perks. You don't get frequent-flier miles or catalog-shopping credits with the IRS. But miles or credits generally aren't worth as much as you may think.

On most cards, you get the equivalent of about 2 cents a mile, Rhode says. A $5,000 tax bill charged to a card earns you 5,000 miles, worth $100. Your set-up charge will be $133, bringing your net cost to $33. The IRS costs $43, but may offer a lower interest rate.

The miles are sometimes worth much more, on international upgrades from coach class to business class, McKinley says. In that case, the credit-card option might pay. But you can't predict.

(4) Credit history. If you sign an installment agreement with the IRS, it doesn't show on your credit report. But a debt on your credit card does.

(5) Debt collection. If it turns out that you can't make all your payments, you'd rather owe the credit-card issuer than the government.

The bank can dun you, but it needs a court judgment to attach your pay or seize any assets you have. The government, by contrast, can attach your assets and paycheck right away.

(6) Serial debt. The IRS won't let you pay this year's taxes on the installment plan if you still owe money on a previous plan. Serial debtors have to borrow somewhere else. (For debt counseling, try DCA at getoutofdebt.org or 800-680-3328.)

In an early estimate, the IRS thinks that nearly 26 million taxpayers owed money last year. Of those who couldn't pay, 2.4 million financed their debt with the IRS. Just 53,309 paid by credit card.

Whatever you do, file your tax return on time. The IRS charges 5 percent per month of the taxes due, for every month your return is late.

© 2000 The Washington Post Company

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