It has been a rough few years and many people have been having cash flow problems. In light of this, many have faced major tax problems based on the simple fact they don’t have the money that is due. One option in such a situation is an installment agreement, but you need to enter it with your eyes wide open.
The 1990s saw the IRS change tactics when it came to rounding up late tax payments. The agency became more practical when it came to smaller tax debts. If you owed less than $25,000 in back taxes, the agency more or less decided to automatically agree to let you enter into a payment plan. This payment plan is known as an “installment agreement.”
Many view the installment agreement as a savior when they are facing a tax payment on their 1040 that they can’t pay. While it definitely provides short term relief, you must be aware of what you are getting into. The payment plans tend to be structured in such a way that you can end up paying back the debt for five years. Instead of paying down the debt, you end up paying a huge amount of money over time just servicing it.
The installment agreement is a real potential trap for many Americans because it emphasizes something we are not very good at. The best strategy for using these agreements is to get the payment deal set up and then view it as an extension of time. Instead of just making payment after payment, you should be putting together a collection of money that you can use to pay off the tax debt in one big payment as soon as possible.
I am not suggesting that you shouldn’t enter into an installment agreement if you find yourself short on cash when taxes come due. It is a good maneuver, but just make sure you save up money and pay it off as soon as possible.
Thomas Ajava writes for
TraverseCityTaxAuditAttorneys.com - your online resource for tax information and Traverse City tax audit attorneys.
