The Benefits of Paying Taxes In Full
Paying tax liabilities in full simply means that you pay your tax balance with a single payment. If you can afford to do this, it is the best option. If you have the funds, the IRS will require you to take this route whether you want to or not.
Even if you don’t have the money on hand, you may want to consider taking out a bank loan or borrowing from friends or family. Paying taxes in full offers numerous benefits. If none of the options work for you below and you cannot pay in full, there are more options for those that can't pay taxes.
Avoid Interest and Fees
The main benefit of paying overdue taxes in full is that you avoid interest and penalties. That can save a lot of money. The failure to pay penalty is 0.5% of your balance every month. That equates to more than 6% interest per year. That penalty also increases to 1% per month if the IRS issues an immediate demand for payment due to a jeopardy assessment or 10 days after a notice of intent to levy notice.
In addition, unpaid taxes accrue interest on a daily basis. The interest rate is 3% plus the current short-term federal funds rate.
If you take out a low-interest loan to pay your tax bill in full, you will save money. Of course, if you can obtain an interest-free loan from your friends or family, you will save even more money.
If you can only pay the taxes in full by using a credit card, you may want to avoid that unless you are sure you can pay off the balance quickly. To decide, compare the interest rate on the card to the fees and interest you face from the IRS. For example, if your credit card interest rate is only 4%, slap the taxes owed on plastic. On the other hand, if your rate is 19%, it makes sense to explore other options.
Sidestep Installment Plan Fees
Entering into an installment plan or a payment plan also involves extra fees, and if you pay late taxes in full, you avoid those fees. As of 2017, fees for new installment agreements are between $31 and $225. Plus, while you make the payments, interest and penalties continue to accrue on the taxes owed.
No-Risk of Defaulting on Agreement
If you decide to enter an installment agreement, the IRS is not flexible about late payments. If your check doesn’t make it on time or if the check bounces, the IRS terminates your agreement, and you have to pay anywhere from $43 (low income) to an $83 reinstatement fee to get back on the plan.
A lot of people use direct debit for their installment payments, but that approach can also be problematic. The IRS doesn’t send out monthly reminders, and if you forget to have the money in your account and the payment doesn’t go through, your installment plan goes into default.
When you pay taxes in full, you avoid the risk and expenses associated with defaulting on a payment agreement. In most cases, if you’re paying a lender or a family member instead, you get a bit more flexibility on your payment schedule.
Prevent a Lien
If you owe over $10,000 or if your tax bill is seriously delinquent, the IRS puts a lien on your assets. This is called a Notice of Federal Tax Lien, and it has a very negative effect on your ability to obtain credit. Even though they no longer show on your credit report, lenders still have ways to find out if the IRS has placed a lien on your assets. To put it into perspective, it’s as bad as repossessions or judgments.
With a tax lien filed against you, it’s very hard to obtain car loans, mortgages, credit cards, and other types of financing. If you can find a lender to approve a loan, you will be classed as high risk and subject to a high-interest rate.
If you pay in full, you don't have to worry about a lien being filed. In addition, if there’s already a tax lien filed, the IRS removes it within 30 days of receiving your payment. You can also get liens removed with payment plans, but there are a few more hoops to jump through.
It’s significantly easier to pay in full than to deal with any other arrangement. There is no paperwork or website forms to worry about. You just make the payment, and it’s done.
Future Access to Installment Plans
Paying off your taxes in full also opens the door to being approved for an installment plan in the future.
Generally, if you owe less than $10,000 and you apply for an installment plan, the IRS automatically approves the request. However, if you have a history of filing late returns or if you have used an installment plan in the last five years, your request will not automatically be approved.
Even if you don’t plan to pay future taxes late, you may want to pay in full now to be on the safe side. That way, you can save your “free chance” for an installment plan for another year.
Access to Refunds
Finally, having taxes owed prevents you from receiving refunds. If you become eligible for a refund, the IRS just keeps the money and applies it to your outstanding taxes.
If you can get the funds, paying your taxes in full is your best option. That said, most people aren’t that lucky. If you’re dealing with taxes owed, look at the top professionals in our network that help with unpaid taxes (and apply a filter for a state issue if you have one as well).