If you are facing a large tax bill that you cannot pay, it could be Heading for IRS Tax Debt. And although the IRS offers installment plans, there are other options to help with tax debt problems.
Your options include getting a personal loan, a home equity loan, or using another payment method to pay your taxes. It is important to weigh your options if you owe money to the IRS.
How to get a tax loan to pay the IRS
If having a payment plan with the IRS and paying penalties seems terrible to you, you might consider getting a personal loan to pay your taxes. “In general, if you can get a personal loan for less than the IRS rate, it might be a good idea,” said Steve Repak, certified financial planner and author of “6 Week Money Challenge: For Your Personal Finances.”
If you file or electronically file a tax return on time and owe money, but you can’t pay when you file, the IRS will charge you interest on the amount owed as of the due date of your tax return, usually April 15 (May 17, 2021). The charge will come at an interest rate equal to the federal short-term rate plus 3%, according to the IRS.
Take a look at your credit score and what type of interest rate you might qualify for from your bank or credit union. You may need to shop around to get the lowest possible rate. If your credit score is low, you may not be able to qualify for a personal loan rate that is better than the IRS rate.
Aaron Hatch, CFP and co-founder of Woven Capital, a pay-only financial planning and investment management company, said personal loans to pay off tax debt are probably not the best option for most people. “Often times, personal loans are unsecured debt, so the terms are unfavorable,” he said. But there are other options.
Note that the IRS has announced that the federal income tax deadline for individuals is May 17, 2021 for tax year 2020. However, the state deadlines have not changed, so be sure to confirm your state’s deadline before applying.
To find out: When are taxes due for 2021?
When to choose a home equity line of credit
If you can get a lower interest rate than the IRS will charge, it might make sense to use a home equity line of credit, Repak said.
Be aware that if you do not meet your HELOC, the bank could foreclose on your home. Carefully weigh the pros and cons of your options and choose a method of using loans to pay the IRS that has terms that you can realistically meet.
Using a credit card to pay IRS tax debt
Paying your IRS bill with a credit card probably only makes sense as a last resort because your credit card’s interest rate is likely much higher than the IRS rate, Repak said. However, you may be able to take advantage of a promotional offer, such as 0% interest for a period of time with a new credit card, if you can qualify for it.
Even these 0% credit card promotions can charge you a 3% to 5% upfront fee, Repak said, so you’ll need to compare this cost to the current IRS rate. You should also evaluate how long it will take to pay off your credit card balance to understand the full impact of this choice on your credit utilization rate and your credit history.
Why You Should Pay Your Tax Debt Right Away
Whether you choose a personal loan to pay off IRS debt or another method of managing your tax debt, you must file your taxes on time and pay your tax bill ASAP. Not doing so can cost you much more in the long run.
Not filing a tax return is expensive
“If you owe money to the IRS but don’t file a return, you’re going to incur some pretty severe penalties,” Repak said. “In addition to charging you interest, the IRS will impose a penalty for failure to file, which is generally 5% of the tax owed, per month or part of a month that your return is late,” he said. The penalty will not exceed 25% of your unpaid taxes, according to the IRS.
“If your return is more than 60 days late, there is a minimum late filing penalty, and it is the lesser of $ 210 or 100% of the tax owed, unless your default is due to reasonable cause and not willful negligence. , ”Repak said. More details on late fees and other penalties can be found at IRS.gov under Topic 653.
“When you enroll in an IRS installment plan, the penalty for non-payment will decrease to a quarter of 1% and you will be charged a fee of up to $ 225 to set up the IRS plan, ”said Repak. You will also have to go through an application process.
Avoid consequences by not breaching
If you don’t comply with the IRS, the IRS could seize your assets and garnish your wages, bank accounts, Social Security benefits and retirement income to begin with, Repak said.
If you have tax debt problems, remember that you have the right to representation, Repak said. You also have other options, such as an offer in compromise that could help you avoid needing loans to pay your taxes.
An OIC allows you to pay off your debt with the IRS for less than the amount you owe. However, the IRS considers different factors before allowing this, such as your ability to pay and your assets. Regardless of what tax bracket you are in, if you owe the IRS and cannot pay your tax bill, be sure to explore all of your options carefully before applying for any type of loan.
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Joel anderson contributed to reporting for this article.
Last Updated: March 18, 2021
This article originally appeared on GOBankingRates.com: Is it a good idea to take out loans to pay the IRS?