What is benefit of 120-day payment option, and related questions

[Rapid Robert]

Since the forum isn't very busy right now, I'm going to ask a basic question here. Yes, I have done some research, but still looking for advice/comments. This is a new one for me, as my clients, even if they have balances due of tens of thousands, always seem to have the cash to make the payments.

Now, I have one client who even with an AGI of over $500K (almost all from wage income) still owes over $20K (expected) and is asking me about paying via credit card. I'm researching some of the options, and am wondering what exactly is the benefit of the 120-day payment extension? It seems all the same penalties and interest apply as if the taxpayer simply didn't pay on time, so what does it benefit you? Only avoiding a few pesky IRS notices for a few months?

I understand credit card payment will incur a "convenience fee", and taxpayer may get rewards points to partly offset that. Amount borrowed will impact credit report, and card interest rate will apply on unpaid balance.

An IRS installment agreement reduces the failure to pay penalty from 0.5%/month to 0.25%/month -- does it still max out at 25%? With current interest rates at 3%, it seems an installment agreement is going to cost about 6%/year? The application fee is pretty low if done online with direct debit payments. Missing an installment payment is a big problem, but if that happened, couldn't the remaining balance due then still be paid off by credit card if that was the only source of funds? It's no worse, again, than simply not paying on time, right?

[New York Enrolled Agent]

I think not getting those pesky IRS Notices is not a bad deal. In case you haven’t seen it - IRM 5.19.1.6.3

[Rapid Robert]

Thank you for the reply.

Still hoping someone can very briefly confirm the following two items, one of which I just thought of. Again, I only ask because I rarely serve taxpayers who pay late.

1) the 120-extension will begin on July 16 this year instead of April 16 (since it is based on administrative authority or whatever we call it, not statute)

2) the installment plan at current IRS interest rate totals 6% fee per year, including failure to pay (FTP) penalty. This seems so much cheaper than most credit cards, I wonder why anyone would chose CC instead of installment, assuming they have steady income to make the installment payments.

[ATSMAN]

I have advised the installment agreement over credit cards for a while now. If you do the math it is pretty clear which option is more cost effective. One client decided to make an large IRA withdrawal and redeposit within the 60 day time frame to cover a cash flow issue and it worked out perfectly.

[Dude]

Thank you for the reply.

Still hoping someone can very briefly confirm the following two items, one of which I just thought of. Again, I only ask because I rarely serve taxpayers who pay late.

1) the 120-extension will begin on July 16 this year instead of April 16 (since it is based on administrative authority or whatever we call it, not statute)

2) the installment plan at current IRS interest rate totals 6% fee per year, including failure to pay (FTP) penalty. This seems so much cheaper than most credit cards, I wonder why anyone would chose CC instead of installment, assuming they have steady income to make the installment payments.

I wonder why someone with a $500k AGI does not have $20k in cash to make their tax payment. Maybe because they still live paycheck to paycheck. They would more than likely be interested in the 120 day payment option not because of the interest they save but rather because their credit cards are more than likely maxed out. It seems that whether you are talking about individuals or small business, high profit margins usually equate to poor financial management. In other words, your wisdom will be lost on this client.

[New York Enrolled Agent]

Thank you for the reply.

Still hoping someone can very briefly confirm the following two items, one of which I just thought of. Again, I only ask because I rarely serve taxpayers who pay late.

1) the 120-extension will begin on July 16 this year instead of April 16 (since it is based on administrative authority or whatever we call it, not statute)

There is no "starting date" for the 120 day period. The period is not an extension based on the filing date.

The 120 day is a short-term payment plan. The IRS sends a notice to the taxpayer - you owe $x. Taxpayer can call up and say "I can pay this $x off in the short term within 120 days". Assuming this is approved, there should be none of those "pesky notices".

[ATSMAN]

I wonder why someone with a $500k AGI does not have $20k in cash to make their tax payment. Maybe because they still live paycheck to paycheck.

They probably live high off the hog! I have several high income clients that have trouble paying their balance due. They live in fancy homes, drive fancy cars but are always having problems with cash flow. Then I have old ladies living on small retirement income and social security and they have no problem paying their tax bill. They know how to manage their budget!

[Rapid Robert]

I suppose "living high off the hog" (or is that "high on the hog"?), or maxing out credit cards and living paycheck to paycheck, would be one possible conclusion, but I think there are others that are more likely.

The client has always been able to pay balance due before, and was contemplating putting the tax balance due on a the credit card, so I think it's safe to say they have not maxed out their credit card if they can put more than $20K on it. Further, once I showed them how things had changed from the prior year to account for the higher balance due, they did not start whining about having to pay the tax, or try to weasel out of paying their fair share like so many other taxpayers, including I'm sure the clients of some of the participants here.

Let's consider the following points, some of which have been discussed in this very forum.

1) withholding - under TCJA, the withholding tables were changed, so if a new W-4 has not been filed, it is quite possible that under-witholding happened, not through any deliberate act by the taxpayer. They were only short by 20% on their tax liability ($125K), after all.

2) cash flow vs. insolvency - this was something I learned in Accounting 101. Most companies that go bankrupt have positive net worth, but are simply illiquid and have cash flow problems. Suppose the taxpayer has a 15 year mortgage and is aggressively paying down the balance. Who is to say that paying off mortgage debt in exchange for tax debt is financially irresponsible? Suppose the taxpayer has invested $300K in a home remodel (which used to be considered the patriotic thing to do in this country - you know, invest in your own home and all that). Suppose the taxpayer has already sold some liquid investments in order to finance the remodel. Suppose the taxpayer has extra medical expenses for a child. So having a short term cash flow problem is surely not sufficient to conclude they are financially irresponsible. Or maybe you think all the firms needing government handouts in the form of PPP "loans" are also financially irresponsible.

3) TCJA ( again) - suppose 2019 was only the second year when what used to be a $60K SALT deduction is now limited to $10K, due to political targeting of blue states.[*] Suppose interest on $100K of equity mortgage debt is no longer deductible.

.[*] since most of the TCJA changes came directly from AMT, where SALT deduction is zero, and interest on equity mortgage debit is not allowed, you have to ask, how did they come up with $10K, instead of zero, or $50K? If you don't think some statistical analysis was done on where to set the limit, much the same as gerrymandering to allow the minority party to win elections, you are pretty naive.