If you anticipate owing money to the federal government, you might underestimate how much you actually owe.
What do you do if you can’t pay your tax bill?
The good news is that the Internal Revenue Service (IRS) is aware that some people won't be able to pay everything they owe upfront.
For this reason, the agency offers different payment plan options. But while these options are available, it may be cheaper to use a personal loan to pay your tax bill.
What is the Cost of an IRS Payment Plan?
Don’t panic if the amount you owe in taxes is more than what you have in your bank account.
If you can’t pay your full balance immediately, you can write a check for what you can afford, and then set up a payment plan for the remaining balance.
The IRS offers a couple of payment options based on when you’re able to pay off the full balance:
- A 120-day extension
- An installment plan (up to 6 years)
Some people only need a little extra time to pay their full balance, perhaps one, two, or three months.
If this applies to you, the IRS will give you an additional 120 days to pay your balance. And the best part, there’s no fee to set up this type of arrangement.
Call the IRS (1-800-829-1040) and request a 120-day extension, or fill out the Online Payment Agreement application on the agency’s website.
Although there’s no fee for this extension, you’re responsible for interest and penalties that accrue until you pay the balance in full.
Sometimes, however, it takes more than 120 days to pay what you owe. If so, you can request a long-term installment payment plan.
Use the Online Payment Agreement form to submit your request, or fill out and mail Form 9465 to the IRS:
- Internal Revenue Service
PO Box 219236, Stop 5050
Kansas City, MO 64121-9236
Installment plans are automatically approved when you owe less than $10,000, and you’re allowed up to three years to pay the full balance.
If you owe more than $10,000 but less than $50,000, you have up to six years to pay off what you owe. If you owe more than $50,000, the IRS requires additional information regarding your finances.
The agency uses this information to determine your installment plan.
Whether you choose a 120-day payment extension or a long-term payment plan, failure to pay on time means the balance is subject to interest and late payment penalties.
The fee for setting up a payment plan via mail is a one-time charge of $225. This fee applies if you’ll make your payment with a check, money order, credit card, or payroll deduction. The setup fee is only $107 if you agree to a direct debit.
When you use the Online Payment Agreement to set up your payment plan, the fee is $149 ($31 with direct debit).
But this isn’t the only fee you’ll pay. You’ll also pay interest on the unpaid balance at the current rate of 4% per year.
The IRS will also charge a failure-to-pay penalty of 0.5% of the unpaid tax.
Although the IRS payment plan is an option, it’s also an expensive option. You might do better paying off your tax bill with a personal loan.
In fact, the IRS even suggests this alternative on its website:
“If you can't pay in full, you should pay as much as possible to reduce the accrual of interest on your account.
You should consider financing the full payment of your tax liability through loans, such as a home equity loan from a financial institution or a credit card.
The interest rate and any applicable fees charged by a bank or credit card company are usually lower than the combination of interest and penalties set by the Internal Revenue Code.”
Using a Personal Loan to Pay Your Taxes
The sooner you pay off your tax bill the better.
But after doing the math, you may discover that the cost of an IRS payment plan is more than you bargained for.
A personal loan might be the more cost-effective solution.
Before applying, here’s what you should look for in a personal loan.
Pros & Cons of Personal Loans
1. Interest rate
Using the IRS’s payment plan to pay off your taxes is comparable to getting a personal loan because you’ll pay the IRS interest until your balance is paid.
So, if you have the option of a personal loan and a payment plan, you should choose the option with the lowest rate.
As you shop for a personal loan, look for a loan with an interest rate that’s less than what the IRS charges.
This way, you can pay off your tax bill and save money on interest.
2. Repayment term
Make sure you get a personal loan with an affordable repayment term. The length of your term determines your monthly payment.
The IRS offers repayment terms between three and six years depending on your balance.
You’ll likely find a personal loan with similar terms, or you may find a loan that lets you pay off the balance over a longer period of time.
This can result in even lower monthly payments. Just know, the longer you extend your repayment term, the more interest you’ll pay on the personal loan.
3. Secured vs. unsecured personal loan
There are different types of personal loans: secured and unsecured.
Secured personal loans will require some sort of collateral in the event of default.
Collateral is a personal item with a value comparable to the amount of the loan. If you don’t pay the bank what you owe, they can take your collateral as repayment.
There’s also the option of an unsecured personal loan. But these loans typically have higher interest rates, and the bank may have higher credit and income requirements for an unsecured loan.
You may only qualify for this type of loan if you have other assets with the bank, including checking accounts, savings accounts, or a mortgage.
4. Income and credit requirements
Make sure you know a bank’s minimum credit score requirement for personal loans before applying.
These loans may require good credit. The bank will also verify your income to ensure you’re able to afford the monthly payment on the loan.
The bank may approve your application with a low credit score if you have sufficient income and collateral. But you’ll likely pay a higher rate.
IRS Payment Plan vs. Personal Loan
At the end of the day, both an IRS payment plan and a personal loan helps you pay the federal government.
At first glance, the interest rate on an IRS payment plan may seem reasonable. You’ll pay 4% interest plus a 0.5% failure to pay penalty. This comes to 4.5%.
This rate is comparable to the rate on some personal loans. But there’s an important detail you must take into consideration.
When you set up an IRS payment plan, the interest rate and penalty you pay isn’t an annual percentage rate (APR) like a personal loan.
Rather, the interest rate on your installment loan compounds daily on the unpaid balance. In addition, you’re charged the failure-to-pay fee every month until you pay off what you owe.
Given these two factors, you end up paying considerably more than a personal loan with a similar rate.
The upside to an IRS payment plan is that the setup fee may be less than the origination fee on a personal loan.
As previously mentioned, payment plan fees with the IRS range from only $31-$225. If you get a $10,000 personal loan and pay a 4 percent loan origination fee, you’ll pay $400.
But even if you pay this fee with a personal loan, this remains the better option.
Common Personal Loan Fees
|Type of fee||Typical cost|
|Application fee||$25 to $50|
|Origination fee||1% to 6% of the loan amount|
|Prepayment penalty||2% to 5% of the loan amount|
|Late payment fee||$25 to $50 or 3% to 5% of monthly payment|
|Returned check fee||$20 to $50|
|Payment protection insurance||1% of the loan amount|
A personal loan lets you pay off your IRS balance on time. You’ll avoid costly IRS penalties and fees, and you avoid the risk of wage garnishment and liens due to non-payment of taxes.
This, of course, doesn’t mean you won’t run into problems for non-payment of a personal loan.
Failure to pay a personal loan can result in late fees and you could lose your collateral (in the case of a secured personal loan).
The bank may also report a delinquency to the credit bureaus. This drives down your credit score and negative remarks remain on your report for up to 7 years.
In a perfect world, everyone would be able to pay their IRS debt on time and move on with their lives.
But sometimes, you simply don’t have enough cash. If not, talk to your bank about a personal loan and see if you meet the income and credit requirements.
Request a free personal loan quote from your bank, and then compare this quote with rates and terms offered by online lenders.