Just the three letters — IRS — together makes some people break out into a cold sweat. If dealing with the tax arm of the federal government makes you nervous, you’re not alone.
If you don’t have the funds available to pay right away, the IRS isn’t very forgiving. You do have some options, however, which includes getting a loan to pay your taxes.
When you owe the IRS money
When you owe money to the IRS, the worst thing you can do is ignore it or not file a tax return. Even if you can’t pay the taxes due, you still need to send your return in on time.
Failure to file a return when you owe money carries a steep penalty. This means an extra 5% added each month up to a maximum 25% penalty.
The long-term consequences of not paying your taxes can be severe. The IRS has the authority to garnish your wages and put a lien on your property. It can even seize some of your assets to pay that debt. A tax lien is the government’s legal claim against your property and can be devastating to your personal credit.
Your first order of business should be to file your return. Then you can worry about how you’re going to pay your tax bill.
If you owe a lot of money to the IRS, it can help to have a tax relief company on your side. The best tax relief firms have tax lawyers and enrolled agents on staff, provide a money-back guarantee and charge competitive rates. Check out which tax relief company is the best fit for you.
Getting a loan to pay taxes
Having delinquent taxes is not something you want hanging over your head. In most cases, you have three options to pay off this debt if you don’t have the cash on hand.
- An agreement directly with the IRS
- Paying taxes with credit cards
- Using a personal loan to pay taxes
Paying your taxes with an IRS arrangement
Taxpayers who don’t owe that much and have a steady source of income can set up a payment plan with the IRS.
If the tax burden keeps you from paying your monthly expenses (rent, food, gas), you might even be able to get those payments delayed for a short period.
The procedure to get an installment agreement in place varies depending on your circumstances. For example, if you’ve filed and paid your tax bills up until now, and your current bill is $10,000 or less, the IRS will often grant an installment plan even if you have the money on hand to pay.
What is the interest rate on an IRS installment agreement?
Entering into an installment agreement with the IRS can a valid solution to your tax problems. But it isn’t always the cheapest. The cost of an installment agreement varies depending on what penalty fees the IRS charges you.
If you owe $50,000 or less, no matter what your past tax situation was, you simply need to request an installment agreement online and pay the applicable fee. Tax payments to the IRS are subject to fees and interest, so if you choose this option, consider the penalties and interest that will be added to your tax bill. All things considered, expect to pay an 8% to 10% APR when you opt for an installment agreement.
The penalties and interest added to your tax bill with these agreements can be more expensive than getting a loan. And, even with one of these installment agreements in place, the IRS still has the option to file tax liens against you until your payment terms are complete.
The IRS actually says the following in its tax payment options advice page:
You should consider financing the full payment of your tax liability through loans, such as a home equity loan from a financial institution or a credit card. The interest rate and any applicable fees charged by a bank or credit card company may be lower than the combination of interest and penalties set by the Internal Revenue Code (IRS Tax payment options – Topic 202.)
That doesn’t mean a loan is always a good way to pay off your tax debt. Often, the IRS offers much better rates and terms than private lenders. That’s why it’s essential you check your options and calculate which one is the best deal for your household. Here are some options you can consider.
Using credit cards to pay your taxes
In most cases, paying your tax debt with a credit card is a bad idea. The interest rates on most credit cards are much higher than what the IRS charges. However, if you have access to a credit card with a 0% annual percentage rate (APR) introductory rate, you could save money by financing the debt with the credit card. The key is to pay off the credit card debt before the 0% APR intro rate ends. Otherwise, you could be on the hook for an interest rate that ranges from 15% to 29% depending on the card.
Another benefit to using a credit card is that you can sometimes earn rewards from. However, the rewards are typically offset by the IRS credit card processing fee (1.87% to 2.25%). Adding a large balance to your credit cards can also negatively affect your credit.
Home equity loans vs. IRS installment agreements
If you own a home and have good credit, you may qualify for a home equity loan or a home equity line of credit (HELOC) that has lower interest rates than what the IRS charges in interest and penalty fees. Of course, this is only an option for people who have substantial equity in their home. In other words, the market value of your home has to be higher the balance on your mortgage to qualify for a home equity loan or line of credit.
Although financing your tax debt with a home equity loan has its advantages, it’s not something you should rush into. Remember your home is on the line as collateral. If you default on the loan, the lender could foreclose on your home to cover the debt.
Paying your taxes with a personal loan
Another option is to pay off your IRS tax debt with a personal loan. Typically, borrowing money from a private lender to pay off your tax debt only makes sense if you qualify for a rate that is lower than the IRS interest plus penalty. The better your credit score, the greater your chances will be for qualifying for a personal loan with a low-interest rate.
If you don’t know your current credit score, you can check it for free here.
There are several benefits of using a personal loan to pay taxes. When you pay off your tax bill in a lump sum, you don’t have to worry about penalties and interest from the IRS. You can also sleep better knowing that no one is going to garnish your wages, seize your assets, or file a lien against your property.
Many personal loans have competitive interest rates and no prepayment penalties. This means you can pay off the loan as quickly as you want without paying any additional fees.
Different personal loans come with different rates, fees and requirements, so check out what the best personal loans are to ensure that you choose the best option for you.
Where to get personal loans for taxes
You can get personal loans from major banks, credit unions, and many online lenders. Borrowers now find some of the most competitive rates and fastest funding for personal loans with online marketplace lenders and online lenders. Here are some examples of lenders that may offer personal loans that are cheaper than borrowing from the IRS with an installment agreement.
However, remember only borrowers with excellent credit qualify for a low enough interest to justify paying your tax debt with a personal loan.
SoFi can be a good option for borrowers that have high income and excellent credit. The average income of a SoFi borrower is $150,000, with a 780 credit score. The company also requires that borrowers have at least a Bachelor’s degree from an accredited U.S. university. Personal loans range from $5,000 to $100,000 with payment terms up to 7 years. Loans can often be funded within seven days. There are no loan origination fees with SoFi and no prepayment penalties. See SoFi’s profile for the latest rates and terms.
If you just have fair credit, you can still get a personal loan to pay your taxes. If you have fair credit, you should consider Avant.
Avant is an online lending platform that has originated more than $4 billion in loans through its platform as of 2017. The company will consider borrowers with a minimum FICO score of 580 and has the benefit of next-day funding in many cases. Even though it has higher interest rates, this could still be your best option to pay off your tax bill. See Avant‘s profile for the latest rates and terms.
How to compare lenders
When you compare personal loan lenders, pay attention to the loan’s APR, origination fees, and whether there are prepayment penalties.SuperMoney makes it easy to compare personal loan lenders by providing free expert and consumer reviews.