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Deciding on a Tax Debt Repayment Strategy: Credit Card Cash Advance vs. IRS Payment Plan

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Question: I owe the IRS $8,000 in tax for my 2022 return. I don’t have the cash to pay for it. Would it be better to get a 180-day payment plan with the IRS or use a credit card cash advance with a 0% APR through June 2024? (I have excellent credit, fortunately, and often get these offers). The cash advance fee is 3%.

Shane W. in Elko, NV

Answer: Each option has its benefits and potential risks, let’s examine it closer.

 

Hello Shane,

Great question, and thanks for reaching out. Please note that we are not CPAs and do not provide tax advice. The following analysis highlights the advantages and disadvantages of each option in terms of interest rates, fees, and potential credit risks. We strongly recommend consulting with a financial professional or tax advisor for personalized guidance tailored to your specific situation before making any decisions.

Each option has its benefits and potential risks.

The credit card cash advance has a great 0% promotional interest offer. Qualifying is not guaranteed, but if you have excellent credit, it should not be an issue. One downside to the credit card option includes the 3% fee, which equates to about $240. If you take longer than the promotional period to pay off the debt, the average credit card interest rate is in the 18% range. That’s four to five times higher than the IRS would charge you.

With the IRS, you would have greater flexibility to choose the length of your repayment terms.  An IRS payment does not end up on your credit report, so it neither helps nor hurts your credit score.

Let’s compare 6-month repayment periods then 12-month repayment periods.

For a 6-month repayment period through your credit card, assuming the 0% APR promotional period is 6 months, you could pay it off interest-free with $1,333 monthly payments. With the transfer fee, your total would be $8,240.

At the typical IRS interest rate (calculated by adding 3 percentage points to the federal short-term rate, which is currently around 1.5%), you would likely pay a 4.5% APR through the IRS. Assuming you paid it off in 6 months, your monthly payments would be $1,367, and your total repayment around $8,200. That’s just slightly less than the credit card option.

For a 12-month repayment period with the credit card offer, again assuming a 6-month 0% APR promotional period then followed by 6 months at 18%, your repayment would equate roughly to $8,200 plus the $240 transfer fee, for a total of $8,440.

Through the IRS, your monthly payment might fall somewhere around $683, totaling $8,435 after 12 months. Over a 12-month period, there seems to be very little difference between the two options, finally.

Any repayment beyond 12 months, though, would highly favor the IRS repayment plan because the credit card interest rate is so much higher after the promotional period ends.

Overall, both options for paying off the tax debt in a year or less have their pros and cons. While some consumers may prefer to pay off their debt using a credit card cash advance, others may feel more comfortable setting up a payment plan with the IRS. Regardless of the option you choose, it’s important to stay on top of your payments and make them on time to avoid any negative consequences. By carefully weighing the benefits and risks of each option, you can make an informed decision and successfully pay off your tax debt in a way that works best for you.

Sincerely,

Todd Christensen

Education Manager and Facilitator of the Money Fit Academy

About the Author

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Todd Christensen

As the education manager for Money Fit, author, speaker, and financial educator, Todd Christensen develops financial education programs and provides credit and debt counseling for individuals and groups around the country. In 2014, Todd published his first 5-star-rated book, Everyday Money for Everyday People based on stories and ideas he had heard in nearly 1,000 workshops he facilitated on budgeting, credit, debt reduction, saving, and identity protection.
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Debt Reduction Services, Inc. and its financial education arm, Money Fit by DRS, offer the following housing counseling and educational services related to housing, personal finance, and bankruptcy certificates to consumers:
  • Housing Education Courses: DRS offers many online self-guided education programs classified as Financial, Budgeting, and Credit Workshops (FBC), Fair Housing Pre-Purchase Education Workshops (FHW), Homelessness Prevention Workshops (HMW), Non-Delinquency Post Purchase Workshops (NDW), Predatory Lending Education Workshops (PLW), Pre-purchase Homebuyer Education Workshops (PPW), and Rental Housing Workshops (RHW). These courses help participants increase their knowledge of and skills in personal finance, including home affordability, budgeting, and understanding the use of credit, as well as predatory lending, loan scams, and other fraud prevention topics, fair housing, rental topics, pre-purchase homebuyer education, non-delinquency post-purchase topics including home maintenance and/or financial management for homeowners, homeless prevention workshop, and other workshops not listed above relating to personal finance and housing. Course details are found below under “Housing Workshops.”
  • Home Equity Conversation Mortgage (HECM) Counseling (RMC): Via telephone and virtual platforms, we offer the required HECM counseling nationwide in addition to in-person counseling in Boise, Idaho. We also offer in-home counseling options in thirty counties across southern Idaho for an additional fee to cover our travel and additional staff time costs.
  • Home Maintenance and Financial Management for Homeowners (Non-Delinquency Post-Purchase) (FBC): Clients receive counseling and materials on the proper maintenance of their home and mortgage refinancing. Clients can find help and resources by phone, in our Boise office, or virtually on all topics related to stabilizing their long-term homeownership.
  • Services for Homeless Counseling (HMC): Clients receive phone, virtual, or in-person (Boise) counseling to evaluate their current housing needs, identify barriers to and goals for housing stability, establish a path to self-sufficiency, and connect with emergency shelters, income-appropriate housing, and/or other community resources (e.g. mental healthcare, job training, transportation, etc.).
  • Pre-Purchase Counseling (PPC): Clients receive counseling through the entire homebuying process. Assistance may involve creating a sustainable household budget, understanding mortgage options, building their credit rating, and putting together a realistic action plan to set and achieve homeownership goals.  Additionally, clients will receive materials and resources about home inspections and other homeownership topics relevant to successfully maintaining a home.
  • Rental Housing Counseling (RHC): Via phone, in-person appointments (Boise, ID), or virtual platforms, clients receive housing counseling relevant to renting, including rent subsidies from HUD or other government and assistance programs. Topics can also address issues and concerns having to do with fair housing, landlord and tenant laws, lease terms, rent delinquency, household budgeting, and finding alternate housing.
DRS also offers the following services:
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  • The Budget Briefing and Debtor Education Certificates that are required during the Bankruptcy filing process;
  • A Student Loan Repayment Plan Counseling and application service.

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Through such services, DRS has established financial relationships with hundreds of banks, credit unions, and creditors such as American Express, Bank of America, Barclays, Capital One, Chase, Citibank, Credit One, Discover, Synchrony, US Bank, USAA, Wells Fargo, and others.

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The client is not obligated to receive, purchase or utilize any other services offered by DRS or its exclusive partners to receive financial education or housing counseling services. Alternatives: As a condition of our counseling services, in alignment with meeting our client services goals, and in compliance with HUD’s Housing Counseling Program requirements, we may provide information on alternative services, programs, and products available to you, if applicable and known by our staff. Alternative DMP services include negotiating better repayment terms directly with your individual creditors, paying your debts as agreed, or, in extreme cases, filing for personal bankruptcy. Alternative credit and education services can be found through MyMoney.gov or the Jump$tart Clearinghouse of online financial education resources. Housing counseling alternatives can be found through HUD at www.hud.gov/findacounselor.
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Housing Counseling and Education Fee Schedule

 

Online Education Program Fees*

Homebuyer Education Course: $59 per participant

  • Self-paced course available here, our online housing counseling and education center. Certificates will be automatically generated upon completion of the course (approximately 6-8 hours)

Rental, Fair Housing, Predatory Lending / HOEPA, Post-Purchase (Non-delinquency post-purchase workshop, including home maintenance and/or financial management for homeowners) Online Workshops: $49 per participant

  • Approximately 1 hour each

Other Self-Guided Financial Literacy Webinars (e.g. credit, budgeting, homeless prevention, debt prevention): $0

One-on-one Counseling Fees*

Pre-purchase Homebuying Counseling, Rental Counseling, Post-purchase Ownership Maintenance and Financial Management: $75

  • Session by the hour

Reverse Mortgage/HECM Counseling with Required Certificate:

  • $200†

Credit Report Fee: Paid Directly by Client

*Fees for all but our online education courses and workshops can be paid online by debit card, credit card, or PayPal or in person by cash, check or money order to: “Debt Reduction Services, Inc.” Registration fees are non-refundable 24 hours or less before the start of an in-person course or workshop. Certificates are non-transferable

*Fees may be waived for households with income of 150% or less of that identified on the US Department of Health and Human Services Poverty Guidelines Page

†Home visit counseling is available in 30 southern Idaho counties for potential HECM borrowers at additional costs to cover our travel (IRS reimbursement rates apply) and staff time ($50 per hour or fraction there).

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Housing Counseling and Education Fee Schedule

 

Online Education Program Fees*

Homebuyer Education Course: $59 per participant

  • Self-paced course available here, our online housing counseling and education center. Certificates will be automatically generated upon completion of the course (approximately 6-8 hours)

Rental, Fair Housing, Predatory Lending / HOEPA, Post-Purchase (Non-delinquency post-purchase workshop, including home maintenance and/or financial management for homeowners) Online Workshops: $49 per participant

  • Approximately 1 hour each

Other Self-Guided Financial Literacy Webinars (e.g. credit, budgeting, homeless prevention, debt prevention): $0

One-on-one Counseling Fees*

Pre-purchase Homebuying Counseling, Rental Counseling, Post-purchase Ownership Maintenance and Financial Management: $75

  • Session by the hour

Reverse Mortgage/HECM Counseling with Required Certificate:

  • $200†

Credit Report Fee: Paid Directly by Client

*Fees for all but our online education courses and workshops can be paid online by debit card, credit card, or PayPal or in person by cash, check or money order to: “Debt Reduction Services, Inc.” Registration fees are non-refundable 24 hours or less before the start of an in-person course or workshop. Certificates are non-transferable

*Fees may be waived for households with income of 150% or less of that identified on the US Department of Health and Human Services Poverty Guidelines Page

†Home visit counseling is available in 30 southern Idaho counties for potential HECM borrowers at additional costs to cover our travel (IRS reimbursement rates apply) and staff time ($50 per hour or fraction there).