Can I Consolidate My Tax Debt Owed to the IRS?

Alexandra Tapp
Expert Contributor
Last Updated:
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  • Debt consolidation involves taking out a loan that covers all your outstanding debts, paying them off, and then repaying that loan in the form of a single monthly payment.
  • You can consolidate just about any debt with this process, including most tax debt owed to the IRS.
  • The IRS offers its own options for tax debt repayment, including the offer in compromise debt relief program and installment plans, but not all taxpayers will qualify for these options.

Debt consolidation is an option that can help you get your financial situation back on track, especially if you have multiple creditors trying to collect payment. One question that often comes up when looking into debt consolidation is whether you can consolidate the tax debt owed to the Internal Revenue Service (IRS) as part of the process.

You might be able to consolidate your tax debt, although it depends on the amount owed and what other steps you have taken with the IRS or in your own personal financial situation to resolve the tax debt.

How Does Debt Consolidation Work?

Debt consolidation refers to the process of taking out a loan to pay off your outstanding debt. After you’ve paid off your debt, you will make a single payment each month to repay the loan amount. This option appeals to many people who are in debt because they only have to figure out how to pay one monthly payment, rather than prioritize their debts and figure out minimum payments across multiple creditors.

Additionally, a debt consolidation loan might have a lower interest rate than other outstanding debts, such as credit card debt or back taxes. When you owe taxes to the IRS, the monthly interest rate starts at 0.5 percent and can go up to 25 percent per month. Between the interest and fees applied to your back taxes, your bill can quickly become unmanageable.

Types of Debt Consolidation Loans

You can consolidate your debt using a variety of methods. The most common is a home equity loan or a home equity line-of-credit, which is a secured loan that uses the equity in your house as collateral. After closing, you will receive a lump sum of cash, which you can disperse to your creditors as needed. In the case of a home equity loan, you will pay a second mortgage. In a cash-out refinance, which is a type of home equity loan, the loan will be rolled into your existing mortgage and you will continue to make mortgage payments.

Can I Consolidate My Tax Debt Owed to the IRS?

Another option is to take out a personal loan to consolidate your tax debt, credit card debt, and any other unsecured debt you have.

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Finally, if your credit is still good in spite of your tax difficulties, you may qualify for a low-interest credit card or a credit card with zero percent interest for 12 months or more. If your tax debt is small enough that you can consolidate the money you owe the IRS along with any higher credit card debt on one card, you might be able to preserve your credit rating and pay off your debts faster than you imagined.

For most people, though, if you are in trouble with the IRS and facing liens, levies, or wage garnishment, a secured loan that taps into the equity in your home may be your only option to consolidate your tax debt.

Consolidating Back Taxes

Back taxes refer to any taxes you owe from previous tax years. The notices you receive from the IRS will include details on the amount you owe and which tax year applies. These amounts will also reflect any penalties and interest that have been assessed. The IRS does offer several options to taxpayers to resolve their tax debt. If you are able to pay the full amount, you can do so online, by phone, or by mail. If you are unable to pay, you can set up an installment plan or submit an offer in compromise.

Installment plans through the IRS allow you to pay back your debt over time. Interest and penalties might still accrue, depending on the terms of your installment plan and how much you owe. However, this option does provide a cushion if you can pay the amount you owe but are unable to do so all at once.

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The offer in compromise program is a debt relief option that allows you to submit a lower offer to the IRS for the amount you are able to pay. If the IRS accepts your offer, that amount is considered payment in full. Not all taxpayers will qualify for the offer in compromise program. Those involved in bankruptcy proceedings are not eligible. Additionally, failing to file your tax returns disqualifies you from the program.

If you don’t qualify for either of these programs through the IRS, debt consolidation might be your best option. When you obtain a debt consolidation loan, you will use the funds to pay off your outstanding debt with the IRS. For many taxpayers, this option offers several advantages:

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  • Qualifying for a lower interest rate on a secured loan, rather than being susceptible to the penalties and interest assessed by the IRS
  • Removing the financial strain of debt owed to the IRS
  • No longer having wages garnished
  • Receiving tax refunds, if applicable

What Happens If the IRS Put a Lien on My Home?

The IRS has many tools at its disposal to collect owed taxes. These include:

  • Garnishing your wages
  • Withholding your federal tax refunds
  • Placing liens on your assets and property

If the IRS has placed a lien on your property, the lien will show up on your credit report when you try to obtain a debt consolidation loan. If you are trying to take out a second mortgage or a home equity line of credit, your loan might be rejected due to the lien.

In this case, the IRS may release the lien so you can qualify for the consolidation loan, as long as the funds are being used to pay off IRS debt. You cannot apply for a second mortgage or home equity loan to pay for repairs or home improvements when a lien exists on your property. The IRS will only consider releasing the lien when the loan is specifically to pay off tax debt.

Where Do I Find Debt Consolidation Services?

Many lenders and tax relief experts offer debt consolidation services. It’s important to research a financial institution or company before you turn over your personal and financial details to them, as not all providers are trustworthy. Review all information presented, including interest rates and estimated monthly payments, to ensure you’re making the right financial decision. Unfortunately, some companies prey on individuals who are in difficult financial situations.

At Solvable, we offer debt consolidation options for tax and other debt you might have accrued. We work with trusted third-party companies that offer you the resources and solutions you need to consolidate your debt and overcome financial strain. Our goal is to provide you with a list of credible companies that includes verified information and reviews. You can also fill out our form for a free no-obligation consultation with one of our debt relief experts.

 

See More >> Trustworthy Tax Relief Companies + Customer Reviews

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Alexandra Tapp
Expert Contributor
Last Updated: