What's the Best Way to Borrow if You Can't Pay Your Taxes?

by Christy Bieber | Updated March 23, 2022 - First published on Feb. 8, 2021

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Tax forms scattered on top of a messy pile of money.

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You have a few different options for how to borrow to cover your IRS bill.

Taxes are due April 15 this year, and, unlike last year, there probably won't be a delay due to COVID-19. You could file an extension to postpone the deadline for submitting your returns until October. But you still need to pay the bulk of what you owe by the April due date to avoid penalties and interest charges.

Unfortunately, you may find yourself in a situation where you can't cover the full amount you owe the IRS. This can happen for lots of reasons. Perhaps extra COVID-related costs ate up the money you were saving for taxes. Or maybe you miscalculated the amount owed or didn't realize certain income, such as unemployment benefits, is subject to tax.

Regardless of why you owe the IRS, you'll need to explore your options for paying your bill. And you have several different choices.

1. Sign up for an IRS payment plan

The IRS offers a number of different payment plans for those who can't pay on time. This includes both short- and long-term plans. However, there is a setup fee for long-term plans. And you'll still owe penalties and interest on the unpaid balance until you've paid your taxes in full.

The IRS interest rate for non-corporate taxpayers is the federal short-term rate plus 3 percentage points. You'll want to compare this rate and the fees you'd owe with other options. If you can find a cheaper way to pay the IRS that doesn't involve a payment plan, it makes sense to do so.

2. Use a 0% APR credit card

Some credit cards charge a 0% introductory APR for a limited time period after you first open the card. If you're able to qualify for one of these cards, you could buy yourself some time to pay off the IRS interest free.

You'll need to use an approved third-party payment processor to pay your taxes via credit card. Their fees will total close to 2% of your transaction. Still, if you have a rewards credit card, the rewards you earn could mostly or entirely offset that fee. And you could take months to pay the IRS without owing any interest -- which may make this a very cost-effective option.

The caveat, though, is that the standard interest rate on the card is likely to be well above the rate you'd pay for the IRS payment plan or a personal loan. As a result, unless you're confident you can pay off the card before the 0% promotional period comes to an end, other alternatives would probably work out better.

3. Secure a personal loan

If you plan to take a long time to pay your tax debt, a personal loan could be your best approach. A personal loan provides you with a fixed repayment schedule that could last several years -- and the interest rates are low compared with most other kinds of debt.

Check what personal loan rates you'd qualify for and compare the costs and terms with the IRS payment plan. If the personal loan costs you less or the repayment timeline is a better fit, this may be your best bet.

What's the best option for your situation?

Your best choice will depend on the specifics of what you owe and when you can pay it. Consider each of these choices carefully. You'll want to find the least expensive route that still gives you enough time to pay back the cash you need to fulfill your obligations to Uncle Sam.

Related: Best Free Tax Software

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