If you owe back taxes to the Internal Revenue Service (IRS), then you should have but one goal in mind: to get yourself out of debt to the IRS. But what if you do not have the means to pay it off and your attempts to reconcile the situation through a payment plan have not been successful? In this case, perhaps your foremost goal should be not to get out of debt entirely, but rather just to get out of debt to the IRS.
Obtaining a loan to pay off your tax debt can help you to meet this objective. You might be asking yourself, “What good what that do if I still owe money to somebody?” Consider the following:
If you owe money to the IRS:
You will be charged very high interest that is compounded on a daily basis.
You will be responsible for additional monthly late fees.
The IRS may place liens on your property or garnish your wages in you fail to make progress.
For such reasons, it is very important that you take action as soon as possible to rectify your tax debt situation, because otherwise you will end up owing much more than you did originally in a relatively short period of time. The longer you wait to do something about your debt, the quicker the grows and becomes even more unmanageable.
Consequently, it is a wise decision for some people who are significantly in debt to the IRS to transfer their balances to some other form of credit, and consequently to be in debt to some other lender instead. When you obtain a loan to pay off your tax debt, your debt to the IRS becomes paid in full and you no longer are in debt to the agency, -- generally a very good thing. A “loan” in this case could come in a wide variety of forms:
Home Equity Loans / Home Equity Lines of Credit
If you own a home, then obtaining a home equity loan, or home equity line of credit, may be among your best choices to pay off tax debt. Such funding options allow you to borrower money against the equity that you have built up in your home. A home equity loan provides you with the money in one lump sum (which may be the better option if you have a large tax debt balance), while a line is a type of revolving credit that allows you borrow some, or all, of your allowable line whenever you so choose.
Such loans may be advantageous for paying off taxes because the interest rates generally are low, and you will be eligible for a tax break by using this method. However, before deciding on a home equity loan or line, be certain that the your tax debt does not eclipse the value of your home. There also is moderate risk in this strategy, because if market interest rates rise then so will the rate on your home loan or line. Think carefully before you decide to put your home up as collateral to pay off your tax debt.
If it just is not possible for you negotiate a payment plan with the IRS on your tax debt, then you could consider putting the balance on a credit card. While credit card rates are infamous for being high, they still usually are much lower than IRS rates on your late taxes.
If you choose this method, make sure that you make consistent payments on your card, otherwise your already large debt will continue to grow larger quite quickly. While the main advantage of transferring your debt balance to a credit card is that you no longer are directly liable to the IRS, you definitely do not want to set yourself up to be in a bad position with a credit card company either.
In addition, you should be aware that if you put your tax balance on a credit card, the IRS will not pay the merchant fees associated with credit card transactions. You will be responsible for this payment, which usually is around 2.5% of the item charged.
Another option to pay off tax debt is to obtain a personal loan, a popular choice for general debt consolidation for those who are eligible. Personal loans may be either unsecured, or secured to some property other than a house. Because of this, it is relatively difficult to be eligible for obtaining a personal loan. Usually, borrowers have very good credit histories and are able to show the lender that they will be able to repay the loan.
If you can get one, a personal loan may be a very good option for paying off back taxes, but often there still is a high interest rate attached. If you would like to explore this option, consider applying either at a bank with whom you have worked in the past, or at a credit union.