The IRS Installment Agreement Interest Rate 2020: What You Need to Know
If you owe the Internal Revenue Service (IRS) money, it can be challenging to pay the entire amount upfront. Fortunately, the IRS offers an option for taxpayers to pay their taxes over time, known as an installment agreement. The installment agreement allows taxpayers to make payments on their outstanding tax balance over a period of time.
One factor that taxpayers should consider when entering into an installment agreement is the interest rate. The interest rate for installment agreements is determined by the IRS and is updated quarterly. In 2020, the IRS installment agreement interest rate is 5%.
It is important to note that the interest rate is not fixed. Instead, it is subject to change every quarter. The interest rate for installment agreements is calculated based on the federal short-term rate plus 3%. The federal short-term rate is established by the IRS and is typically lower than market rates.
While 5% might sound like a reasonable interest rate, it can add up over time. For example, if you owe $10,000 in taxes and enter into a five-year installment agreement with the IRS, you could end up paying a total of $12,800, including interest.
There are a few ways to potentially lower the overall interest rate of your installment agreement. One option is to pay off the balance as soon as possible. By making larger payments or paying off the balance early, you can minimize the amount of interest you pay.
Another option is to consider applying for an Offer in Compromise. An Offer in Compromise is a program offered by the IRS that allows taxpayers to settle their tax debt for less than the full amount they owe. While not everyone is eligible for this program, it could potentially save you a significant amount of money in interest and penalties.
If you are considering entering into an installment agreement with the IRS, it is important to understand the interest rate and how it can impact your overall balance. By making larger payments and exploring other programs, you may be able to minimize the amount of interest you pay and reduce your overall tax debt. As always, it’s best to consult with a tax professional to determine the best course of action for your specific situation.