The most common way to settle an Internal Revenue Service tax liability is to pay the debt off through monthly installment payments. But, is that the best idea? It really depends on how much you owe and how much you are paying back each month. Remember, that penalties and interest continue to accrue even while you are on the payment agreement. Currently (as of April 1, 1999), the interest rate on taxes owed to the IRS is 8%. That amount fluctuates with general interest rates.

The only penalty that you'll be hit with after a payment agreement is in place is the Failure to Pay penalty. It ranges from .5% to 1% per month to a maximum of 25% of the tax due. Starting on January 1, 2000, the penalty will be cut in half *if* the return was filed on time and certain other conditions are met. However, even under the best circumstances, the rate of penalties and interest will be a combined 12% per year.

If you owe $10,000 and can afford to pay $150 per month, it will take 110 months (over 9 years) to get the taxes paid in full! While the $150 might seem like a large monthly payment, it barely touches the principal, resulting in that dreadfully long period to get the taxes paid off. Under new rules which just went into effect a few weeks ago, it is much easier to get a payment agreement approved. But, if it takes so long to get the taxes paid, an Offer in Compromise is often the better choice.