Should You Use a Loan to Pay Taxes? What to Know

Should You Use a Loan to Pay Taxes

Taxes are a fact of life, and filing your taxes in April comes along with it. When many Americans file a return, they may be pleased to find that they’ve overpaid their taxes throughout the year, and the IRS actually owes them money back. However, for many more, the opposite is true: they submit their tax return, and find out that they’ve underpaid all year, and they now owe the IRS money.

If that sounds like your situation, you might be scrambling to figure out the best way to pay for your tax bill. For some, like self-employed workers and freelancers who are paid directly by clients without an I-9 Form, they may have completely forgotten about their tax burden up until the bill is due. That can result in a massive sum, especially for those who have neglected to file quarterly taxes throughout the year.

Some taxpayers who wind up with a large tax bill may be tempted by the thought of using a personal loan to pay down the balance. After all, the thought of the IRS coming after you with punishing fines and audits is enough to send chills down your neck. However, using a personal loan to pay taxes is usually not the most financially savvy option. In this article, we’ll cover what you should know about personal loans and tax bills. 

Take a brief look at the topics we’ll go over:

Before rushing online or to the nearest payday lender to take out a loan to pay taxes, familiarize yourself with the pros and cons of this option. You may find that there are much easier things you can do instead, like applying for an IRS installment agreement

First, let’s take a look at what actually happens if you don’t pay your taxes. 

What happens if you don’t pay your taxes?

Failing to pay your taxes is a crime, punishable by fine and interest applied to your tax bill. Remember: paying taxes is your duty as an American citizen or resident, and the government will penalize you for failing to meet that responsibility. Here’s a quick explainer on what you can expect if you don’t pay:

  • First, those who don’t file their taxes by the April 15th deadline are fined 5% of their total tax bill. This accrues continuously until it hits a maximum of 25%. 
  • If you do file on time, but are unable to pay the full amount you owe, you will not be charged the above amount. However, there are other costs incurred by failing to pay your due by the deadline. Unpaid taxes build interest at a rate of 3%, compounded daily, plus the current federal interest rate, compounded daily, plus an additional 0.5% failure-to-pay penalty, capped at 25% your principal amount. 
  • If your debt is substantial, and remains unpaid for a significant period of time, the IRS may impose a levy on your assets. That’s a fancy way of saying they may directly seize your money, property, or car — and they may also garnish your wages and retirement.

If that all sounds pretty worrying, then you get an idea why some people might consider taking out a personal loan to pay off tax debt. 

What happens if you dont pay your taxes

Before we dive into the pros and cons of that strategy (hint: the cons almost always outweigh the pros), let’s carefully explain what a personal loan is. 

What are personal loans?

A personal loan is a loan from a bank, credit union, or lending agency that can be used for a wide variety of purposes. Commonly, they’re used for home renovations, consolidating credit card debt, planning a wedding or other large expensive event, or making a large purchase, like a bike or appliance. 

If you have a credit card, then you’re familiar with a more common type of personal loan. When you pay for things with your card, you’re essentially borrowing that money from your credit card company. You have the month to pay it back, or, just like with any loan, interest will start to apply, increasing your total debt.

The price of and conditions applied to a personal loan can vary widely. While a consumer with an excellent credit rating (say, above 750) getting a personal loan from their local credit union may obtain an annual percentage rate, or APR, of only 6%. (APR refers to interest plus other fees, like origination fees.)

But someone with poorer credit, or someone who gets a loan from an untrustworthy source like a payday loan shop, might experience an APR as high as 36%. The bottom line is that quality of personal loans largely depend on (a) your personal credit history, and (b) the institution you borrow from. Credit cards can work in a similar way, but often have even higher APRs. 

So, can you get a loan to pay taxes? The short answer is yes, depending on the conditions of your loan. Some lenders may specify that you can only use the loan for certain purchases—like an auto loan. Whether or not you can get a loan to pay taxes, though, might not be as important a question as whether you should

Should you use a personal loan to pay tax debt?

The short answer is probably not — not unless you can guarantee that the APR is lower than what the IRS would charge for their installment plan (more on that below). 

That may be hard to find, however, as the interest rate on many loans starts at 6%. If you have a rock-solid credit score, and you’re sure you can secure a personal loan at around 6% interest with a fixed rate, it may be worth it to use a personal loan to pay down tax debt. However, if it looks like a loan will cost close to 9% or 10% interest to finance, you might be better off with alternatives. 

That’s because the interest rate for IRS debt works out to about 8%: the federal rate (around 5%) plus 3%, plus the additional 0.5% failure-to-pay penalty. Experian data from 2019 found that the average personal loan cost %9.4 percent interest. On top of that, the conditions applied to a personal loan can vary widely from lender to lender. A responsible lender, like a bank or credit union, might be lenient on missed payments. But a payday lender, alternatively, could have eye-popping fees attached to any failed requirement.So, for the average borrower, it might be worth looking elsewhere for a means to pay off IRS debt.

Pros and cons of using a personal loan to pay taxes

For a significant number of consumers, the cons of using a personal loan to pay taxes may outweigh the pros. 

Credit cards look like an even more worrisome option upon closer inspection. The average APR on a credit card is 16.69%, according to Plus, for many, their credit card comes with a credit limit, a max amount they can charge to the card in a month. Depending on the size of your IRS debt, that amount might be more than your credit limit anyway. 

If personal loans and credit card payments aren’t the best choice for many taxpayers with outstanding tax debt, what alternatives are there? Let’s dive into that now. 

What alternatives are there to paying taxes with a personal loan?

If you don’t want to risk taking out a loan to pay off your taxes, but you need a way to steadily make payments, or otherwise defer having to pay off your total liability, the IRS itself offers help. Here are a few ways that you responsibly manage tax debt without having to go into debt with a loan agency. 

Alternatives to personal loans for unpaid taxes

Even if you cannot pay your tax debt in full, it’s always smart to file by the April 15th deadline (deferred to July 15 for 2019 taxes, filed in 2020). 

If you fail to file, there will be an additional 5% failure-to-file penalty applied to your debt. There is no additional penalty for filing when you are unable to pay in full, apart from the previously mentioned interest and 0.5% penalty.

IRS payment plan

The first option to consider when faced with a massive amount of tax debt is an IRS payment plan. IRS payment plans allow taxpayers to defer the final due date of their total tax debt, and instead of paying in one lump sum, they may make monthly payments. When applying, taxpayers decide on a timeframe and set amount to pay each month. 


If you haven’t heard of this option, or simply don’t know how to sign up, you can follow these instructions:


  1. You can apply on the IRS website using the Payment Plan application tool
  2. Call  800-829-1040 for individuals, or 800-829-4933 for businesses to set up a plan over the phone
  3. Download Form 9456 and fill it out. You can then bring it to an IRS walk-in office (please note that the current COVID-19 pandemic may mean that IRS walk-in offices are no longer open).
  4. You can also mail in your Form 9456 directly to the IRS. To find the right IRS address for your state of residence, consult the chart below.


If you live in: Then use this address:
Alaska, Arizona, Colorado,

Connecticut, Delaware, District of

Columbia, Hawaii, Idaho, Illinois,

Maine, Maryland, Massachusetts,

Montana, Nevada, New

Hampshire, New Jersey, New

Mexico, North Dakota, Oregon,

Rhode Island, South Dakota,

Tennessee, Utah, Vermont,

Washington, Wisconsin, Wyoming

Department of the Treasury

 Internal Revenue Service 

310 Lowell St. 

Stop 830 

Andover, MA 01810

Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Texas, Virginia  Department of the Treasury

 Internal Revenue Service 

P.O. Box 47421

 Stop 74 

Doraville, GA 30362

Arkansas, California, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, New York, Ohio, Oklahoma, Pennsylvania, West Virginia  Department of the Treasury 

Internal Revenue Service 

Stop P-4 5000

 Kansas City, MO 64999-0250


Note: The IRS Form 9456 instruction manual contains full instructions on filling out the form.

When you set up an IRS installment plan, you can choose to have the IRS automatically withdraw the funds from a linked bank account. This will streamline payment, so once you’ve set up your IRS installment agreement, you won’t have to worry about remembering to pay. If you need to stop payments for some reason, that option is available too.  

Setting up an IRS tax payment plan may seem confusing. Luckily, a Community Tax representative will be happy to help. Feel free to speak to a representative if you have any questions. 

Offer in Compromise

If you can’t be sure you’ll have the funds in the coming months to make payments on an IRS installment agreement, you have a couple more options to choose from. The first is an Offer in Compromise

An Offer in Compromise is basically what it sounds like. The IRS is asking for X amount of money, but you don’t have that much, so you compromise. In some cases, if you can demonstrate that paying the full amount would result in financial hardship, you may be able to settle your debt by paying some amount less than the total. The IRS website details more information on the conditions that may apply to an Offer in Compromise.

If that looks a little complicated, our representatives can help. Community Tax’s team can walk you through what you need to know about making an Offer in Compromise, as well as inform you about the IRS Fresh Start Program. This program makes successfully making an Offer in Compromise more accessible, and may help you get back on your feet and out from under your tax debt. 

Currently not Collectible status

Another alternative to using a loan to pay taxes that may be available to you is filing for Currently not Collectible status. Currently not Collectible status informs the IRS that you are presently unable to pay your tax debt, and it grants you permission not to do so. Essentially, they won’t come knocking on your door demanding payment for the period during which you are designated Currently not Collectible. It also means:

  • The IRS will not garnish wages for unpaid debt
  • They will not seize any property or other assets
  • Your debt will not have a continued effect on credit reporting

This does, however, come with some important caveats. During the time you are not paying, interest still accrues on your debt at the aforementioned rate (federal rate + 3% + 0.5% penalty). Once the period has expired, you will once again be liable for your debt, at the new total it has reached during its time accruing interest.

Currently not Collectible status is ideal for those who foresee that they will be able to pay off their tax debt in full in the future, but are presently incapable of making any payments. Because interest continues to accrue on your tax bill while you are Currently not Collectible, it’s wise not to think of this as a permanent solution.

Delay tax payments

Lastly, the IRS also has an option for small business owners who may be behind on their taxes and cannot afford to pay. Those in this situation can choose to delay payment on their taxes. Similar to Currently not Collectable status, this simply grants business owners permission from the IRS to not pay for the time being. 

You will have to demonstrate your financial situation and why you cannot currently satisfy your tax burden, and indicate when in the future you will be able to pay. It’s also good to remember that you will still be responsible for the interest that accrues on your debt while your payment is deferred. 

Key points summary

Taxes are complicated, and there’s a lot to take in. Let’s review some of the most important points on whether it’s wise to take out a personal loan to pay off tax debt.

Personal loan interest rates vs IRS payment plans

  • Failing to file your taxes can result in a 5% fine, and failing to pay taxes — even if you’ve filed — will result in your tax bill growing via interest during the time when you haven’t paid.
  • If this goes on long enough, you may be liable for garnished wages, savings, assets, or seized property.
  • Some think that personal loans are an effective way to pay down tax debt. However:
    • Personal loan interest rates and fees (APR) can vary widely: from 6% to 36%, per recent data.
    • Credit card APR averages almost 17%.
    • These rates are, in general, higher than the roughly 8% (or so, depending on federal interest rates at the time) you’ll pay on tax debt.
  • If you cannot obtain a personal loan to pay taxes with a more competitive interest rate than the IRS rate, you have options:
    • Opt for an installment agreement
    • Make an Offer in Compromise 
    • File for Currently not Collectable status
    • Delay payments (for small business owners)

And remember, you never have to go it alone during tax season. Whether you need effective tax resolution services to help with your tax debt, or you simply need help filing, Community Tax’s team of experienced professionals can walk you through what you need to know from A to Z.