Should I Get a Loan to Pay Back Taxes to the IRS?

Anna Kuehl
Expert Contributor
Last Updated:
At Solvable, we care about your financial well-being and are here to help. Our research, articles and ratings, and assessments are based strict editorial integrity. Our company gets compensated by partners who appear on our website. Here is how we get compensated.

Finding out that you owe back taxes to the Internal Revenue Service (IRS) isn’t unusual, as it’s increasingly complicated to file even a basic tax return
Getting a bill for back taxes is never pleasant, however, because you’ll typically have to pay quickly without having much time to assess your options fully. If you can’t afford to pay your bill, your first thought might be, “Should I get a loan to pay back taxes?” Find out whether you should take out a loan to pay IRS back taxes and learn more about alternative options for handling back taxes.

Image via Flickr by 401(K) 2013

Why You Should Get a Loan to Pay Back Taxes to the IRS

Getting a loan to pay back taxes to the IRS might seem like a drastic solution, but borrowing money does offer a few key benefits. From saving money and preventing late fees to avoiding liens and preserving your investments, learn about a few key reasons to get a loan to pay your tax bill.

Prevent Late Fees and Other IRS Penalties

If you’re seeking a quick answer to your tax woes, a loan offers a fast and straightforward solution that can help you avoid accruing additional fees. After all, the IRS has the ability to levy substantial penalties and late fees, which can add up quickly, particularly if your back tax bill is on the large side. You’ll especially want to avoid receiving the IRS’s “failure to pay” penalty, which is the equivalent of a half percent of the amount you owe for each month your payment is overdue.
The IRS also has the ability to charge interest on any unpaid tax burden starting on the date your taxes are due, which is typically April 15. The IRS’s default interest rate isn’t exactly low, as it’s 3 percent higher than the federal short-term interest rate. This interest rate changes periodically and is liable to increase, and it’s almost always higher than the rate you’d receive on a personal loan from a bank or credit union. That means taking out a loan to pay your back taxes can often save you money over what you’d pay to the IRS.

Avoid Liens

If you neglect to pay your taxes for an extended period of time, the IRS can do more than levy late fees and interest charges against your back tax bill. Eventually, the agency can take your assets or even place a lien on your property, which prevents you from selling your home or your land without first paying back the IRS. Though a lien might not have immediate consequences, it won’t go away if you don’t pay off your back taxes.

Solvable Exclusive Offer

How Much Tax Debt Do You Owe?


A tax lien can also compromise your finances and your ability to borrow money down the road. This is considered a major black mark on your credit report, and it may prevent you from applying for a new credit card, opening a line of credit, or improving your credit score. In some cases, a tax lien can even make it difficult for you to rent an apartment or land a high-level job if a credit check is part of the application process. In many cases, you can avoid this unnecessary chain of events by taking out a loan to pay your overdue taxes quickly.

See More >> I Paid off $150,000 of Debt - Learn Her Secrets!

Preserve Investments

If you have numerous investments, you might be tempted to tap into the funds you already have before borrowing more money. While this seems logical on the surface, drawing on funds or borrowing against your investments can hurt you in the long run.

Tapping into your retirement accounts too early can result in steep financial penalties. You may end up paying a substantial fee plus income taxes on the amount you withdraw, which could partially negate the benefit of accessing the funds in the first place. Drawing on your retirement fund early also means it will stop growing or gaining value years ahead of schedule. That could seriously compromise your ability to retire when you’d planned to do so, creating long-term financial issues. A personal loan won’t typically have such drastic implications and is often a much better choice than compromising your existing investments.

Why You Shouldn’t Get a Loan to Pay Back Taxes to the IRS

While borrowing money to foot your IRS bill can be a good idea in some situations, using loans to pay back taxes isn’t always a smart solution. Some loans can end up costing you more, and others can compromise your home equity. Learn more about when you shouldn’t get a loan to pay back taxes to the IRS and why this could hurt you.

Debt Doesn’t Cancel Out Debt

When you need to pay your IRS bill but you don’t have the cash on hand to do so, taking out a personal loan might seem like a quick and easy solution. However, it’s important to remember that getting a loan doesn’t just make your IRS bill go away. Instead, it effectively replaces one back taxes with another, as you’ll be borrowing a large sum of money to pay your outstanding tax bill.

Before you sign on the dotted line, it’s always in your best interest to consider whether you can truly afford to take out a personal loan. You could be paying it off for many years to come, and borrowing a large sum of money could prevent you from taking out other loans or opening new lines of credit, as it could compromise your debt to income ratio.

Loans Can Compromise Home Equity

If you own a home, taking out a home equity line of credit or refinancing your home may be an option to pay your back taxes. However, these solutions can also have unexpected consequences down the road. If you default on that loan, you could ultimately lose your home to foreclosure. Losing your most valuable asset and your family’s home could easily create much bigger problems than simply owing back taxes.

See More >> How One Woman Crushed $300,000+ of Student Loan & Mortgage Debt

High-Interest Loans Only Cost You More

If you have great credit, you might qualify for some of the best personal loan products. The best loans usually come with low interest rates and no prepayment penalties, which can make it easier for you to manage your financial obligations in a cost-effective way.

If your credit is average or on the bad side, however, there’s a good chance that you’ll only qualify for the less attractive loan options. High-interest personal loans that require you to maintain your amount due until the very end of the loan term will end up costing you more than almost every other repayment option.

Alternative Ways to Pay Back Taxes to the IRS

For many taxpayers, a loan simply isn’t the best way to pay your IRS bill. Fortunately, you may have other options to consider, whether you owe a relatively small amount or a large sum. Take a closer look at alternatives like IRS extensions, tax payment plans, credit card charges, and offers in compromise (OICs) to find a solution that works for you.

IRS Extensions

If you aren’t able to pay your back tax bill right away, you may be eligible for an extension. The IRS offers extensions to qualifying taxpayers, making this an attractive option if you need a little extra time to come up with the funds to pay your bill.

On the positive side, you won’t usually have to pay a fee when you request a short-term extension. However, any interest or late fees that you owe will continue to accrue during the extension period.

It’s important to note that short-term IRS extensions don’t offer much flexibility. They last for 120 days, and you can’t typically request multiple extensions in a row. That means you’ll need to be reasonably sure that you can pay your back tax bill by the end of the extension, or within 120 days. When you calculate what you can afford to pay by the end of the extension period, be sure to account for the principal balance and any fees or penalties.

See More >> Trustworthy Tax Relief Companies + Customer Reviews

Tax Payment Plans

If you need a bit more than 120 days to tackle your outstanding back taxes, a mere extension won’t work. Instead, you may need to sign up for a tax payment plan, which is also known as an installment agreement. You or your back tax assistance professional will need to contact the IRS directly to inquire about your eligibility and learn about the parameters.
Not everyone can qualify for an installment agreement. If you meet these requirements, you could be a good candidate for a long-term agreement:

  • You owe $50,000 or less in back taxes
  • All of your required tax returns are filed
  • You have a history of making on-time payments

Long-term agreements with the IRS come with relatively low fees, and you may be able to sign up for automatic monthly payments to ensure that you never forget to pay your bill. Contact the IRS to apply and learn more about potential time-frames.

Credit Card Charges

Depending on the amount you owe and your available lines of credit, you may be able to charge your outstanding back taxes to a credit card. If you consider this option, be sure to consider your repayment plan carefully. Naturally, a high-interest credit card will cost you if you don’t pay off the balance before your bank starts charging interest.

If your credit card has a special offer, such as 0 percent interest for a certain period of time, this can make charging your credit card a tempting option. Make sure that you can pay off the balance in full before the standard interest rate kicks in, or else you could end up with a sizable credit card interest charge in addition to your back tax bill.

Offers in Compromise

If none of these options are feasible, given your financial situation, you may still have a way to pay your overdue tax bill. An OIC is typically considered a last resort for taxpayers who have exhausted their other options, but it could be a smart solution for you.

You’ll pay less than the full amount you owe to the IRS if you’re eligible for an OIC. You may qualify if paying your full IRS bill would cause substantial financial hardship and if you meet certain other requirements. Use the IRS’s OIC pre-qualifier tool or talk with your back tax assistance specialist to confirm whether this is an option for you.

See More >> Jen Paid Off $42,000 in Credit Card & Medical Debt...

There are several downsides to an OIC, though. You’ll essentially have to relinquish your entire net worth, similar to declaring bankruptcy. If you’re considering this option, take the time to get all the details and understand the consequences.

Don’t let your IRS back taxes ruin your credit or compromise your financial future. Find out what your back tax assistance options are and choose the solution that’s best for your situation. Contact one of the back tax assistance companies we have reviewed for you on Solvable today and start putting those tax problems behind you for good.

Anna Kuehl
Expert Contributor
Last Updated: