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 set-up
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 Web site.
Sally Herigstad writes about women and credit every week for CreditCards.com. Herigstad is a writer and finance consultant for MSN Money, a personal finance software product. She is also a member of the Washington Society of Certified Public Accountants and the American Institute of Certified Public Accountants. Her Web site is http://helpicantpaymybills.net. Sally Herigstad lives in Kent, Wash., with her husband Gary. They have two grown children, Valia and Grant.
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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