If you’re facing a big tax bill, a personal loan may let you avoid costly IRS penalties and interest.
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Every year, about a third of all taxpayers wait until the last minute to file their federal income tax returns. If you were one of them and underestimated your 2023 tax obligation, you could soon owe money to the IRS.
If you made a mistake calculating your taxes or filed your return but didnt pay the full amount you owe, you could get a CP14 notice from the IRS — the service usually sends them out within 60 days of deciding your tax return misstated the amount you owe.
If you owe taxes that you can’t fully cover on your own, a personal loan could be an option.
Owing taxes to the IRS can be stressful. If you get hit with a large tax bill that you can’t afford to pay in full, taking out a loan is one option to cover what you owe. This allows you to pay off your tax debt and avoid ongoing penalties and interest charges from the IRS.
However, loans to pay taxes do come with risks and costs you’ll want to carefully consider In this comprehensive guide, we’ll explore when a tax debt loan may make sense, what financing options are available, and key factors to weigh before borrowing.
When Does a Loan for Owed Taxes Potentially Help?
There are a few key situations where borrowing funds to pay off taxes may be advantageous:
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You can’t afford the lump sum owed – Taking out a loan lets you spread repayment over months/years rather than paying everything at once if you don’t have sufficient savings.
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You owe significant penalties and interest – The IRS charges you 05% penalty per month on unpaid taxes plus interest, A loan can minimize these extra costs
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You need IRS relief fast – Getting a loan quickly can help halt IRS collection actions like wage garnishment.
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You have high-interest debt – Consolidating credit cards or other debt with a lower-rate tax debt loan can save on interest.
As long as you get an affordable loan term and the interest rate is lower than IRS penalties and interest, borrowing can make financial sense in many tax debt situations.
Loan Options for Paying Off Tax Debt
If you decide a loan is right for your situation, here are some of the specific types of financing to consider:
Personal Loans
A personal loan from a bank, credit union or online lender allows you to borrow a lump sum and repay it in fixed monthly installments over 1-7 years typically. Rates vary greatly based on your creditworthiness but are often lower than credit cards.
401(k) or IRA Loans
You may be able to borrow from your 401(k) retirement savings account through your employer at relatively low interest. This is generally repaid over 5 years through payroll deductions. IRA loans are also an option but less common.
Home Equity Loan/Line of Credit
Borrowing against the equity in your home is an option if you’re a homeowner. The interest is usually tax deductible but your home is collateral if you default.
Credit Cards
While credit card interest rates are higher, this can provide quick access to funds for taxpayers with available credit. Balance transfer cards offer 0% intro APR periods which defer interest for many months.
Tax Debt Consolidation Loan
Specialized lenders offer fixed-rate loans marketed specifically for consolidating IRS and state tax debt which may be easier to qualify for if you have tax liens, levies or poor credit.
P2P Lending
Peer-to-peer lending networks like Prosper, LendingClub and Upstart let you borrow directly from individual investors at competitive rates with customized loan terms. This expands borrowing options if your credit needs improvement.
Tax Settlement Loan
You may be able to qualify for a loan based on your expected tax settlement amount if you have an Offer in Compromise or other resolution pending with the IRS. The lender provides a lump sum upfront and is repaid from the settlement.
5 Key Factors to Consider With a Tax Debt Loan
Before taking out a loan to pay off the IRS, be sure to evaluate these important considerations:
1. Loan Amount Needed
Calculate precisely how much you need to borrow to cover your total unpaid tax bill, penalties and interest. Avoid borrowing more than required.
2. Interest Rates and Fees
Compare interest rates across multiple lender options, and watch out for origination or prepayment fees that add to your total repayment costs.
3. Repayment Term Length
The longer your repayment term, the lower your monthly payment – but the more total interest you pay over the life of the loan. Find the right balance for your budget.
4. Credit Score Impact
Opening a new loan account can temporarily ding your credit score but timely payments will boost it over time. Be prudent about taking on new debt while rebuilding credit.
5. Collateral Required
Some lenders may require tax liens to be filed, or collateral like your home or auto to secure the debt in case of default which adds risk.
By researching rates thoroughly, limiting your borrowing to what you owe, and selecting the right repayment term length, you can get an affordable loan to pay off the IRS and avoid further penalties.
Pros of Using a Loan to Pay the IRS
- Stops accruing penalties and interest costs
- Spreads repayment over months/years
- May allow faster IRS resolution
- Can help restore frozen assets or lift bank levies
- Potentially lower interest rate than IRS charges
- May be able to deduct interest on some loans
Cons of Using a Loan to Pay the IRS
- Adds new monthly payment obligation
- Interest, fees, and origination costs
- Credit score may drop initially when opened
- Collateral could be seized if defaulted
- Tax liens may still remain until paid
- Lump sum still has to be repaid eventually
What if You Can’t Get Approved for a Tax Debt Loan?
If you have unusally high tax debt, credit issues, or other challenges getting approved for a private loan, you still have options to resolve what you owe the IRS:
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IRS installment agreement – The IRS offers payment plans directly based on what you can afford. There is a user fee and interest continues accruing.
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Delayed collection – The IRS may temporarily delay collection if you’re facing financial hardship until your circumstances improve. Penalties and interest keep adding up.
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Offer in Compromise – You may qualify to settle tax debts for less than the full amount based on inability to repay, doubt about the amount owed, or effective tax administration reasons. Strict eligibility criteria apply.
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Currently not collectible status – The IRS may deem you “currently not collectible” and pause collection activity in very limited circumstances such as pending bankruptcy or proven inability to repay. Interest and penalties still apply.
If a tax debt loan isn’t viable, be sure to pursue one of these alternatives so you don’t continue accumulating unnecessary IRS penalties and interest.
Talk to a Tax Professional
Determining if a loan is the right strategy for your tax situation versus other IRS relief options is complex. Speaking with a tax attorney, CPA or other tax pro can help you make the optimal choice.
They can walk through all the nuances of how different repayment plans impact your finances and credit, the risks involved, likelihood of IRS approval, and customized advice based on your personal tax circumstances.
The Bottom Line
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Borrowing to pay the IRS can make sense but also has risks. Weigh the pros and cons carefully based on your situation.
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Shop multiple lender options to get the lowest rates and customized terms that fit your budget and needs.
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Understand exactly how much you need to borrow to resolve your total tax debts. Don’t borrow more than required.
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Pairing a loan with other IRS relief like currently not collectible status or an Offer in Compromise may provide a long-term, affordable resolution.
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Consulting a tax expert can provide guidance on whether borrowing or other options are best for your unique tax scenario.
Consider a personal loan
If you’d rather deal with a personal loan lender instead of the IRS, you might consider paying off your taxes with a personal loan. In fact, the IRS says that often the cost of a loan is less than the penalties and interest the IRS charges under federal law.
Most personal loans are unsecured, which means you won’t have to worry about collateral such as your home or vehicle. These loans typically range from small loans of a few hundred dollars up to $100,000 or more, depending on the lender.
You’ll generally need good to excellent credit, usually meaning a FICO score of 670 or higher, as well as verifiable income to qualify for a personal loan. The time to fund for personal loans is generally within a week — and some lenders will fund approved loans as soon as the same or next business day.
Depending on the lender, you’ll typically have one to seven years to repay a personal loan, which could give you more time to pay off your debt compared to a payment plan.
However, keep in mind that you’ll pay more in interest on a long-term personal loan compared to a short-term loan.
The IRS says that often the cost of a loan may be is less than the penalties and interest the IRS charges under federal law.
If you decide to take out a personal loan for your tax debt, be sure to consider how much the loan will cost you over time. You can estimate how much you’ll pay for a loan using our personal loan calculator below.
Can you get a loan for tax debt?
Yes, you can use an unsecured personal loan to pay off tax debt. However, you should consider other options before choosing a personal loan. For example, you might be able to sign up for an IRS payment plan or hardship extension. A 0% APR credit card could also be an option if you can afford to pay the debt off within the promotional period.
I Owe the IRS $55,000 in Back Taxes
FAQ
Can you get a loan to pay back taxes?
Can I get a loan on my taxes?
Does the IRS have a hardship program?
Are IRS payment plans worth it?
What is a tax loan?
Essentially, a tax loan is a personal loan you take out in one lump sum to pay the government back when you owe money for taxes. Since it’s a personal loan, you have a fixed monthly payment for the duration of the loan term. Depending on the rate you qualify for, it may save you money on interest compared to what the IRS charges.
Should you use a personal loan to pay taxes?
2.**Benefits of Using a Personal Loan to Pay Taxes:** – **Borrow Enough**: Personal loans typically start at around $500 to $1,000, and the maximum amount can go up to $50,000 (or even $100,000 for
Should I get a tax loan?
Tax loans can help you better manage your payments and may cost you less over the long run. You should always consult a licensed tax professional for the most up-to-date information on tax laws. In the meantime, we’ll go over the basics of a tax loan so you can determine if one’s right for you. What Is a Tax Loan? How Does a Tax Loan Work?
How does a tax loan work?
Instead of paying the IRS in installments, you pay your lender for the agreed upon term. The monthly amount includes the principal amount, plus interest. Your interest rate depends on a number of factors, such as the loan amount, the loan term, and your income and credit report. Tax loans may be both secured and unsecured.