It was expected that when Americans filed their 2018 tax returns that over one in taxpayers would owe the IRS. While the amounts owed varied, owing money to the IRS often puts a strain on Americans who are already struggling to pay their bills.
It’s also not as if you can avoid paying the IRS, either. Unlike your other bills, it’s not just your credit that takes a dive, you could also face hefty fines and face a prison sentence.
Thankfully, there are options available. One of which is taking out a loan to pay taxes. But it’s not your only option.
If you’re wondering how to pay back tax, keep reading. We’re sharing with you everything you need to know about financial aid for taxes.
What Happens if You Don’t Pay the IRS on Time
Before you begin to panic, the IRS isn’t interested in sending people to prison. And you can’t go to prison because you can’t pay your taxes. While this did happen in the past, the federal law was changed in 1833.
The only reason you would be imprisoned is if you willfully refuse to pay your taxes. The IRS will also impose penalties and interest for each day you fail to pay.
If you still don’t pay, the IRS can take action to garnish your wages. They can also levy or seize your property. This can seriously damage your credit for many years to come.
Penalties begin to accrue the day after your taxes are due, which is typically April 15th. The amount of the penalty differs depending on the issue such as:
- Failing to pay when you file
- Not paying the right amount of estimated tax
- Not filing your taxes
- Failing to pay the full amount
If you fail to pay the full amount by the due date, the IRS imposes a 0.5% penalty on any unpaid tax. And that penalty gets charged every month until it’s fully paid. However, the IRS can only charged up to 25% of the amount owed in penalties.
Avoid Penalties by Showing Reasonable Cause
However, if you can show reasonable cause for failing to pay on time, the IRS won’t impose a penalty on you.
On top of penalties, the IRS also charges interest, which compounds daily beginning on the day your tax is due. And even if you file an extension, you’ll still have to pay interest on your unpaid taxes.
The IRS sets its interest rates on a quarterly basis. For the third quarter of 2019, the interest rate will be 5%.
All of this can add up quickly to a lot more money. It’s best to find a way to pay it off as soon as possible.
Financial Aids Options for Paying Back the IRS
While there are several ways to pay back the IRS using financial aid, the best options are these:
- Installment Agreements
- Offer in Compromise
- Taking Out a Loan
Each option has its plusses and minuses and should be carefully considered with a qualified accountant before making a decision.
You’ll need to apply and be approved before you can set up an installment agreement with the IRS. Start by filling out Form 9465. You can also apply online.
You can either choose a short-term or long-term installment plan with the IRS. Which one you choose depends on your financial circumstances and how much you owe the IRS.
Short-Term Installment Agreement
The short-term plan is a plan to pay back what you owe to the IRS in 120 days or less. You can use this option if you owe up to $100,000 in combined tax, penalties, and interest.
There is no fee to use this plan. You can make payments by setting up automatic withdrawals from your checking account. You can also pay by money order, debit/credit card, and by check.
Long-Term Installment Agreement
The long-term plan gives you up to six years to pay the IRS. This agreement plan does charge a fee to set up. You can set up a long-term agreement if you owe $50,000 or less in combined tax, penalties, and interest.
The fee is lower if you set up automatic withdrawals.
- $31 when applying online and pay via automatic withdrawals
- $107 to apply by phone, mail or in-person and pay via automatic withdrawals
- $149 to apply online when not paying via automatic withdrawals
- $225 to apply by phone, mail or in-person and not paying via automatic withdrawals
However, if you are a low-income applicant, that fee may be waived if paying via automatic withdrawals. If you’re a low-income applicant not paying via automatic withdrawals, your fee can be reduced to $43 or may even be reimbursed in certain circumstances.
Offer in Compromise
Another option the IRS offers is known as an offer in compromise. You can apply for this option under these circumstances:
- You don’t have enough income or assets to pay off the full balance
- You can pay your full balance but it would create an economic hardship or it would be either unfair or inequitable
- You don’t believe the tax amount is correct
An offer in compromise is approved by the IRS when the amount offered represents the most the IRS can expect to collect from someone within a reasonable time frame.
What You Need to Be Aware of Before You File
You will not be approved if you are involved in open bankruptcy proceedings.
It’s important to note that a Federal tax lien may be filed. And that lien will not be released until you satisfy your offer terms.
Paying Options for Offers in Compromise
You have two payment options and you must include a payment with your offer.
A lump-sum usually requires you to pay 20% of the total amount you’re offering when you submit your offer. Within five months or less, you’ll be required to pay off the remaining sum.
That time frame begins on the date the IRS accepts the offer.
Like with a lump-sum, you’ll need to make your first payment when you submit your offer. You’ll then have to pay off the remainder within 24 months.
Taking Out a Loan to Pay Taxes
You can also take out a loan to pay your taxes. You have three options on the type of loan you can take out for this purpose:
- Business loans (if you owe business taxes)
- Home equity loans
- Secured and unsecured personal loans
Before you apply for a loan you should check your credit score. Your credit score will largely determine what amount you can apply for so make sure it’s as high as it can be before you apply for a loan.
Factors that Affect a Personal Loan
It’s not just your credit score that affects a personal loan. Every loan is different so make sure the lender will allow you to use the funds to pay off the IRS before you go through the approval process.
Your income and how much debt you carry will also be factored in. But there are still a few more factors that affect your loan such as:
If you’re already a customer with a bank or credit union you might be able to take advantage of a special interest rate discount. Online lenders can also pass on savings because they don’t have brick-and-mortar locations.
Online lenders may also have lower credit score requirements. And you can also look into obtaining a peer-to-peer loan, but keep in mind you’ll be loaned money directly from an individual, not a banking institution.
If you opt for an unsecured loan you won’t have to deal with being asked to put down any type of collateral. However, unsecured loans are typically only available to people with good credit scores.
If your credit score is low, your only option may be to apply for a secured loan which does require you to offer some type of collateral. This way, if you default on the loan, the lender still gets their money.
Often, a car or home is offered as collateral. Make sure you can afford to pay back the money if you need to apply for a secured loan.
Interest Rate Type
You can choose between a variable interest rate and a fixed rate. A variable interest rate fluctuates with the market. A fixed-rate stays the same over the course of the loan.
Most lenders will lend a borrower anywhere from $1,000 to $100,000. If you have a high credit score, make a good income, and have little or no debt, the more money a lender is likely to let you borrow.
Benefits of Taking Out a Loan When Paying Back the IRS
In some cases, the interest rate for taking out a loan is lower than what the IRS charges. And if you choose a fixed rate, the interest rate won’t change, unlike the IRS interest rate which is subject to change every quarter.
And compared to other options, such as paying off your taxes using a credit card, it carries less risk. Also, by taking out a loan you can pay off your IRS bill in one lump sum.
Penalties Won’t Keep Accruing
That means you won’t be subject to penalties accruing every month. You’ll also be given an outline of how much you’ll owe before you take out a personal loan so you can budget.
With the IRS it’s a bit more difficult to pin down the total payment plan cost. And if you end up struggling to pay a personal loan, there’s no way the creditor can garnish your wages.
Cons of Taking Out a Loan
Beware if you plan on taking out a home equity loan. If you can’t pay it back, you may lose your home.
Also, the Tax Cuts and Jobs Act of 2017 changed how the interest rate on these loans was used. Before the laws changed, the interest rate was tax-deductible, no matter how the money was used.
Now, you can only claim the interest as tax-deductible if you use this type of loan for home improvements.
May Not Work With Your Budget
Taking on debt to pay off another debt isn’t easy for everyone. Creating a budget before you apply for a loan will help you determine what additional amount you can handle paying off each month.
You may need to make a few lifestyle changes so avoid defaulting on a loan. You don’t want to end up with that red flag on your credit score for the next seven years.
You should also keep in mind that the loan will be noted on your credit score.
Interest Rates May Not Be Lower
And while a personal loan may mean decreased interest rates, it may not. If you have bad credit, that means a higher interest rate which can reach 36% or higher.
There may also be fees and/or hidden costs associated with your loans. Always read the terms and conditions carefully before taking on any type of loan.
What to Look for When Applying for a Personal Loan
In order to get the best loan for your needs, it’s important to do some research first. Each lender offers different terms and amounts. Always read through the fine print before you sign on the dotted line.
Here’s what to look for:
While you may be eligible for a loan that’s higher than what you need, it’s not necessarily a good idea. You don’t want to take on extra debt.
Most personal loan terms range from one to seven years. But the terms vary depending on the lender and how much you need to borrow.
Some lenders charge a prepayment fee. Others charge a fee to apply for a loan.
However, there are also plenty of loans out there that do not charge you these types of fees.
Unemployment Protection Programs
If you’re worried you may lose your job and therefore default on your loan, look for a lender that can offer you protection.
This type of program allows you to pause payments momentarily.
We Can Help
If you’re wondering how to get out of tax debt and want to know if taking a loan to pay taxes is your best option, we can help. Our team of tax professionals can provide you with the knowledge and support you need to make the right decision.
Don’t wait until it’s too late. Contact us today for your free consultation.