Can’t Pay Your Taxes? Get the IRS Off Your Back With a Personal Loan

You did your taxes and line 22, “Amount You Owe,” is more than you can afford. Fortunately, there are Internal Revenue Service (IRS) payment options. The IRS should work with you if you contact them and there are several ways to solve this problem. Here’s what to do if you can’t pay your taxes in full and on time.

Find a personal loan to pay your tax bill

File on time, even if you can’t pay your taxes

Make sure that you file on time. Even if you don’t know how much you owe or can’t pay what you owe. And even if you’re very, very upset. Because not filing can be extremely expensive. The failure-to-file penalty is 5 percent of the unpaid balance per month until you file and pay what you owe.

If you owe $2,000, your balance owed can increase by $100 every month, up to 25 percent of your unpaid obligation. That’s $500 if you keep your head in the sand and don’t determine a way to pay your amount due.

The penalty for failing to pay is 0.5 percent per month on the unpaid balance. But the maximum total charge each month is 5 percent. So you can be charged 5 percent per month until you hit 25 percent of your outstanding balance. In this example, your balance could grow to $2,500. At that point, you accrue interest at .5 percent per month. And as your outstanding balance grows, so does your interest expense.

You have several options for paying your IRS tax bill. Each has advantages and drawbacks.

IRS installment payment plan

The IRS offers several repayment options, including full payment (with a credit or debit card), a short-term payment plan (120 days or fewer) or a long-term payment plan (installment agreement).

You may be able to apply online if:

  • You owe $50,000 or less in combined tax, penalties and interest, and filed all required returns (for long-term repayment)
  • You owe less than $100,000 in combined tax, penalties and interest (for short-term repayment)

Repayment plans require automatic debits from your checking account, or via a credit or debit card. Card payments are subject to additional fees. You can start a short-term plan for a $31 set-up fee (online), or a long-term plan for $149. Fees are higher if you set up your plan by phone.

what if you can't pay your tax bill?

What is your minimum monthly payment? Normally, the IRS divides your balance by 72 months. You’ll also pay interest throughout this period, so they encourage taxpayers to pay off their balance as quickly as possible. For a $2,000 balance, the monthly payment would be $33.15, and your total interest, assuming that the rate does not change, would be $387 over a 72-month repayment period.

Related: Personal Loans Beat Credit Cards for Large Purchases

Getting a personal loan to pay off the IRS

You may be able to get a personal loan to pay your taxes. If your credit is good, this can be cheaper than an IRS repayment plan. A personal loan with a 7 percent interest rate could clear your debt in five years, with a payment of $40 per month and total interest charges of $376. Or repay the personal loan in as little as one year with a payment of $173 per month and just $77 in total interest.

Personal loans have no prepayment penalties. This means no extra cost if you’re able to pay off your loan early and save on interest.

However, if your credit is poor, the IRS interest rate may be lower than your offers from personal loan providers.

Pay the IRS with a credit card and personal loan

Paying the IRS with a credit card can be convenient, and you may be able to gain rewards or take advantage of a zero-interest introductory period.

The catch to using a credit card is that the IRS charges you a processing or “convenience” fee. As of this writing, it’s 1.87 percent. That would be $37.40 for a $2,000 balance.

Another concern is that if you are unable to pay off the credit card balance quickly, you may have to pay higher interest than with a personal loan to pay off taxes. The expected time frame for paying off your credit card is a factor when deciding how to pay your IRS tax bill.

You can apply for a zero-interest credit card to pay off the IRS, potentially gaining up to 18 months interest-free. Then, if you aren’t able to pay off the credit card during the interest-free period, take out a personal loan to clear any remaining unpaid balance, because the personal loan interest rate is likely to be lower than that of the credit card.

Another strategy is to use a rewards card to get travel, cash back or merchandise, then use a personal loan to pay off the balance at a lower interest rate.

Related: Personal Loan Interest Rates: How to Pay Less

Use a home equity loan to pay tax bill

If you own your home, a home equity loan or line of credit can get you a low interest rate. The downside, though, is the setup cost, the risk of foreclosure if you can’t cover the payment, and the total interest charged if you don’t accelerate your repayment schedule.

For instance, if you get a 6 percent home equity loan for your $2,000 balance, and take 30 years to pay it off, your monthly payment is just $12. But your total interest would be $2,317 — more than your original tax bill.

Fees to set up up home equity financing can be minimal. If you have good credit and some equity in your home, you may be able to get a home equity line of credit (HELOC) at an affordable interest rate, perhaps around 6 percent. Fixed rate home equity loans are typically in the 9 percent range as of this writing.

What happens if you don’t pay your IRS tax debt?

Once you determine the best approach to borrowing for your tax bill, things should be a lot less scary. But ignoring your outstanding tax bill is a very bad idea. What can the IRS do if you don’t pay your taxes?

The IRS can place a lien on your property within ten days once it sends the first notice of taxes owed and demand for payment. If you don’t contact them and make arrangements to pay, the can IRS step up collection efforts.

It can even seize assets like wages, bank accounts, social security benefits and retirement income. The IRS may take your car, boat or real estate and sell it. It can also claim your future federal tax refunds or state income tax refunds.

The sooner you address your tax bill, the less painful and less expensive the payment process should be.

Take care of your tax bill now with a personal loan

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