You can do anything necessary to pay back the taxes you owe the IRS, but there are a lot of things to consider. The last thing you want to do when paying back the IRS is to end up with more than when you started.
Before choosing to take out a loan, or open a credit card, make sure that interest rates are not higher than what the IRS is currently offering, or will end up charging you against your tax burden balance. For example, if you fail to file taxes, the IRS can charge you up to 5% of your taxes owed, each month, until resolved — but never to exceed 25% of what you owe in taxes. There are also late fees and other penalties that the IRS can charge based on non-filing, late filing, or back taxes going back for years. If you do find that borrowing money to pay back the IRS right away is the best thing, consider a few low or no-interest options first.
Banks like Bank of America, Chase, Capital One, and American Express all have some pretty attractive introductory deals on some of their credit cards. They offer a 0% APR on purchases for the first 15 months, or some even offer 0% for up to 18 billing cycles. Plus, 0% on balance transfers in the first two months, and no annual fees. Eighteen months can be a long time to pay off your back taxes, depending on how much they are. If you think about the pros and cons of fees, interest rates, and time — some of those introductory offers might be just the ticket to pay back taxes now.
Opening a credit card to pay off back taxes can affect your credit score, which is something to consider before taking that step. Opening the card and putting a large balance on it right away, will lower your score until you pay that off. The upside is you are given a 15-18 month period to pay off that balance within the 0% APR time limit, which can potentially be a better deal than you can work out with the IRS. All in all, opening a credit card shouldn’t be taken lightly, but if the benefits of paying back taxes off quickly, and avoiding further fees from the IRS, it could be a great option for the right situation.
Some companies have popped up in recent years to help people out of various tax burdens with low-interest personal loans. You can apply online, get the loan within a few business days, and be well on your way to getting out of tax burdens. Payoff, So-Fi, and Upstart, to name a few, offer personal loans for anywhere between 5k and 100k, depending on credit score. You must have a minimum credit score between 620 and 680 for the majority of these online personal loan services. If you qualify, interest rates can be as low as 5.67%, which may be higher than some of the interest rates on your tax burden, but it would be a good option to pay off quickly, and efficiently.
If you’re in a position where you can take out a home equity line of credit, it could end up being a lot lower interest rate than your taxes, and could be a good consideration. Interest rates on home equity loans are generally lower because they are borrowed against your home as collateral, unlike most personal loans where you are not required to put up collateral. You have to have equity in your home, of course, to borrow against it. Home equity is determined by the fair market value of your home, minus what you owe on your mortgage. It’s fairly accurate, but also you will likely not be able to borrow the entire amount, so for this to be plausible you’ll want enough equity on your home that allows you to pay off your tax burden.
Taking a loan out of your 401k can come with its downfalls, such as high penalties, and limits on the amount you can take out. However, if it’s your only option, it can get you the money you need to pay off that tax burden. For consolidating this burden, and other financial hardships, you will likely only qualify to take out a loan against your 401k. The thing with the loan though, is that you will be paying it back, to yourself. Anyone under 59 years old will get charged a 10% penalty for withdrawing, but this penalty is not usually applied to loans from your 401k, and may also have a period of time where you cannot contribute to your 401k. So it’s very important to examine all possible options before jumping right into your 401k contributions, but a tax professional can help you determine if that’s worth it or not. Consult your 401k provider or plan documents for details on your specific plan and options.
One way to borrow money, that doesn’t require paperwork, background checks, or any extra interest rates or fees, is asking a family member or friend to loan you money. Falling behind on taxes happens to almost a quarter of Americans, and should not be something to be ashamed of. Some people think asking for help for this would be embarrassing, especially when asking a family member to help, but they can really be a great resource for you to re-establish your good standing with the IRS. Make sure to sign some form of documentation, like a promissory note, that includes due dates and interest amounts, if any. This can formalize the agreement and make sure that your lender knows you’re serious about paying them back. Consider it a bonding opportunity, that’s also interest-free. Just make you sure you pay them back, or you might face a wrath worse than the IRS on your trail.
There are many options if you fall behind on your taxes to the point where you can’t pay back the amount with your salary and assets alone. Call a tax professional before making any moves towards paying back taxes on your own, because they will know best, based on your situation, what your next move should be. Call Tax Relief USA at (408) 899-5386. We’re always here, waiting to help.