Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006).
Dear To Her Credit,
Hello, so here is my situation. I already owe $3,000 on credit card debt alone. Now I've just received a letter from the IRS saying I owe them $3,000.
My credit score is not great, and I am trying to improve it. How will this IRS thing affect my credit score if I make installment payments to them?
Another option I have is that my sister offered to put my IRS bill on her credit card. I don't want to that if it will ruin her credit. Her card has a limit of $12,000, and a balance of $3,000. She has very good credit.
What's the best way to pay this off and do the least damage to both of our credit scores? -- Yolanda
Dear Yolanda,
First, make sure you actually owe $3,000! The Internal Revenue Service is not always right, believe it or not. It's worth getting a tax professional to look at it if you're not sure.
Assuming you do owe $3,000, your credit report will show the $3,000 debt whether you are paying it to the government or paying it through your own credit card. Andy Jolls, CEO of Videocreditscore.com, says, "Unpaid government debts will make it on to her credit report."
Moving the debt to your sister's card would keep it off your credit report. It probably wouldn't hurt hers significantly, assuming you make payments faithfully. With a credit limit of $12,000 and a balance of only $3,000, she could get a cash advance of another $3,000 to pay off your IRS debt and still only use 50 percent of her available credit.
I don't advise you to do that, however, for three reasons:
The transaction fee is too high. "The transaction fee the government applies is 2.49 percent, which is way higher than the 1 percent rewards bonus most people are chasing by paying with their cards. This is why wealthy people with large tax bills don't pay by credit card," says Jolls. "Wealthy people know it's going to cost more, and in general they are better at staying wealthy."
You'll probably pay more interest on a credit card. The IRS currently charges 6 percent interest. The rate varies, but it's almost always lower than most credit cards. (If you set up an installment plan with the IRS, you will have to pay a one-time fee of $105, or $52 if you set up an automatic payment with your bank. If you qualify as a low-income taxpayer, the setup fee is only $43.)
Relationships are important and irreplaceable. Your sister sounds very thoughtful and caring. She also sounds like she's been careful with her own money and credit. What if she pays your IRS bill with her card, and then you have trouble paying her back? Or what if you make payments faithfully, but not as quickly as she would like? If you only make the minimum payments on $3,000, you could be paying it off for what seems like forever. You're going to have to figure out how much of her balance is interest on your debt and pay her back for that. Another problem could come up if your sister needs to use her credit for something else. This could get complicated! You're better off keeping your debts separate and your relationships unfettered.
The best solution, of course, is to pay your IRS bill off yourself, as quickly as possible. Maybe you can raise money by selling something, working more, or cutting other things temporarily from your budget. If you've lent money to anyone, now would be a good time to let them know you need it back! And, of course, I have to hop on my favorite soap box and remind you to file a new Form W-4 with your employer if you usually get a tax refund. It would be terrible to pay interest to the government on one hand, while the government is holding your overwithheld taxes interest free on the other!
If you don't think you can pay your tax bill off quickly, set up a payment plan with the IRS. You can apply for an online payment agreement (OPA) on the IRS website.
Sally Herigstad answers questions about credit every week for CreditCards.com. Herigstad is a certified public accountant, author and speaker. She also writes regularly for MSN Money, Interest.com, Bankrate.com and RedPlum.com, and has been a guest on Martha Stewart radio and other programs. You can read more about personal finance and download free budgeting worksheets at her website: www.sallyherigstad.com
To Her Credit answers a question about a debt or credit issue from a CreditCards.com reader each week.
Send your question to Sally.
Published: May 8, 2009
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