Yesterday I got a notice that I owe the IRS for a 2-year-old tax error. The amount is more than I have and I have only one option of paying it and that is to make payments. I called the IRS and they said that I could make payments for up to 60 months at 6 percent interest and there is a $105 dollar fee. The other option I have is to send them the entire amount owed with a check I received from a credit card I have. The fee for that is $75 and 5.9 percent interest. Just looking at the numbers it makes the most sense to put it on the credit card, however I am trying to get my credit score up. My question is: Does owing the IRS make your credit score decrease? If it does, then I might as well pay them with the credit card check since it would save me a few bucks. However, if the IRS doesn't make the FICO score decrease, I will just pay them and not use the credit line at all on the credit card.
To see my answer with information about convenience checks and unpaid income taxes just read more
A: First thing's first: I don't recommend using the convenience check that your credit card company gave to you. You start paying interest on convenience checks as soon as you use the check, and there's usually a fee that's a percentage of the check amount on top of the interest charged for using the checks. A 5.9 percent interest rate for a convenience check sounds quite low —be sure to read all the fine print and confirm your understanding of the rates with customer service.
While I'm not an expert on the inter-workings of the IRS and you may want to double check with a tax professional, my research tells me that an installment plan will appear in your credit history including the amount owed and the size of your monthly payments. The debt will be considered as part of your overall debt and would affect your FICO score. If you don't work out a payment plan or pay in full with your credit card, nonpayment may cause the IRS to file a Notice of Federal Tax Lien, which will stay on your credit report for at least seven years and therefore affect your credit score.
It's important to note that your work-in-progress taxes will affect your credit report using either option you mentioned. Charging your tax payment to your credit card will affect your score in the same way as paying via installment plan — your debt-to-credit ratio will increase and your credit score will be affected. You'll also be charged a convenience fee for paying your taxes with a credit card, and your credit card has control over the interest rates you're charged. At least the installment plan would give you a fixed rate with no surprises.
Whichever option you feel more comfortable with and end up choosing make sure you always pay on time to avoid any penalties or late fees. Try and pay the total amount off as quickly as possible so that your interest payments are limited.