How to Use the IRS as a Credit Card
Say your overall cash-flow situation is good, but you need to cover a short-term deficit over the next few months. In today’s still-strict credit environment, taking out a loan may not be much fun. It may not even be possible — unless you have access to an untapped home equity line of credit or a helpful relative. If that’s the case, great. If not, you may be able to turn to a surprising source for some help: the taxman.
If you’re self-employed, an investor or someone who lives off Social Security benefits, pension payments, retirement account withdrawals, and the like, you can apply for loan from the Internal Revenue Service. Better yet: To borrow from the IRS, you don’t have to fill out any annoying applications, prove your income or fence with a balky loan officer. While this may sound too good to be true, it is true. Read on for the details.
Increase Cash Flow by Temporarily Postponing Estimated Tax Payments
What you do is simply postpone some federal income tax payments that you would otherwise make to the IRS via estimated tax installments. You don’t need the government’s permission. You just do it and then make up the difference later. Of course, the IRS will charge interest on the difference between what you should have paid in for each installment and what you actually paid. However, the current interest rate on estimated tax underpayments is only 3%. While the rate can potentially change each quarter, it will probably remain at a reasonable level for a while.
The IRS calls the interest on estimated tax underpayments a “penalty.” But since the current interest rate is only 3%, it’s not really a penalty. In fact it’s actually a pretty good deal for someone with a short-term cash crisis. I’ve been there myself a few times, and I’ve done the borrow-from-the-IRS drill. (Please don’t tell my Mother!) More