When you have both a tax debt and credit cards that need to be paid, it can create a significant problem. The IRS feels they should get paid first, which will destroy your credit and maybe your business. You need to plan ahead to resolve both tax debt and credit cards in need of money.
The IRS considers itself as a preferred or secured creditor. That means it takes precedence over any unsecured creditors, such as your credit card company. So, when you go to negotiate an installment agreement or Offer in Compromise, the Service leaves you nothing to make your monthly credit card payments.
In other words, when you complete your financial statement on Form 433-A, you might as well list zero as the amount you will pay to your credit cards each month. If you owe taxes, the government expects you to default on your credit cards and pay them.
This is especially difficult for someone operating a business and using their personal credit cards to carry or float that business until their customers pay up. If you can’t make your credit card payments, you may just be out of business… and the IRS, in their infinite wisdom, could care less.
The only solution to tax debt and credit cards is to pay off your cards before contacting the IRS to negotiate an installment agreement. So long as you plan ahead, maybe months in advance, and can pay off your cards before the IRS catches up with you, all will be OK. The IRS will not begrudge you paying off your credit cards, so long as you do so before beginning to negotiate an installment agreement of Offer in Compromise.
Considering the time it may take to clean up your credit cards, you should also take steps to protect your assets and income from the IRS. This might mean forming a corporation, moving your accounts to another bank, and slow playing the process of completing the financial forms.
If you have a tax debt and credit cards, the key is being proactive.