Everyone runs into financial problems from time to time. If this translates into tax problems, you need to know the how to best use installment plans.

Financial difficulties are a part of life. It is the rare individual that goes through life and never finds themselves short for period of time. Issues that can arise can include health problems, losing a job and so many more. In such a situation, you can come up short when it is time to pay your taxes.

If you cannot meet your tax obligations, the IRS has some good news. Instead of auditing you and seizing your property, the agency will let you enter into an installment plan. An installment plan is basically a three year agreement whereby you make monthly payments until your tax obligation is satisfied. In practical terms, this represents a pretty nice way out of a mess.

If you enter into an installment agreement with the IRS, you need to realize something. The agreement is a bad deal for you. Yes, it keeps the IRS off your back, but the terms are horrific. You can expect to pay five to six percent interest on the debt, which is not all that bad. What most people do not realize, however, is that they are also required to pay a one percent penalty on the total amount due PER MONTH! Yikes!

For the purposes of an example, assume you owe $10,000 to the IRS. A typical installment agreement would require repayment over three years. The monthly payment would be around $335. With the interest rate and monthly penalty, you are going to end up paying $2,249 dollars more than the actual tax you owe. The interesting thing is the IRS does not try to hide this fact. If you read their information, the agency clearly outlines you would be better off paying the bill in full or as quickly as possible.

If you are in financial straights, it makes sense to enter an installment agreement with the IRS. The agreement, however, should not be viewed as a solution to your tax problem. It should only be viewed as buying you time until you can pay off the amount you owe.