Can You Take Out a Loan to Pay Taxes?

A tax liability can arise unexpectedly or be larger than anticipated, leaving individuals without immediate funds to fulfill their payment obligations. Many taxpayers wonder if borrowing money is a viable solution when faced with such a situation. This article explores various avenues for addressing tax debt, including obtaining external loans and utilizing official payment programs offered by the tax authority. Understanding these options can help taxpayers navigate financial challenges and meet their responsibilities.

Using Borrowed Funds for Tax Payments

When immediate funds are unavailable to cover a tax bill, taxpayers may consider various borrowing options to bridge the gap. These methods convert a tax obligation into a different form of debt, each with its own costs and considerations. While they provide immediate liquidity, assessing the financial implications before proceeding is important.

Using credit cards to pay taxes, typically through third-party processors, incurs a fee (1.87% to 2.29%). High interest rates can significantly increase the total cost if the balance isn’t paid quickly. Cash advances usually have even higher fees and interest.

Personal loans from banks, credit unions, or online lenders provide a lump sum. These unsecured loans have variable interest rates based on creditworthiness; strong credit often secures lower rates. Borrowers with fair or poor credit may face annual percentage rates (APRs) up to 36% and origination fees (1% to 12%).

Home equity loans or lines of credit (HELOCs) are secured loans allowing homeowners to borrow against their property’s equity, often with lower interest rates than unsecured options. A home equity loan provides a lump sum, while a HELOC offers a revolving credit line. However, using a home as collateral puts the property at risk if payments are missed. The setup process can take time and involve upfront costs like appraisal or origination fees.

IRS Payment Programs

The tax authority offers several formal programs for taxpayers who cannot pay their tax liabilities in full by the due date. These programs provide structured solutions to address tax debt, often at a lower cost than external borrowing options. Interest and penalties generally continue to accrue, though sometimes at a reduced rate, while these programs are in effect.

An Installment Agreement allows monthly payments for tax debt, typically up to 72 months. Taxpayers must be current with filing requirements to qualify. The failure-to-pay penalty is reduced to 0.25% per month (from 0.5%), though interest accrues. A setup fee applies, which may be waived for low-income taxpayers.

An Offer in Compromise (OIC) allows taxpayers to resolve their tax liability for a lower amount than owed. This option is considered when there is doubt about the ability to collect the full amount, the accuracy of the liability, or if collecting it would cause significant economic hardship. Applicants must submit detailed financial information.

Individuals use Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, detailing income, expenses, assets, and liabilities. Businesses use Form 433-B, Collection Information Statement for Businesses, for similar data. The tax authority evaluates this information to determine “reasonable collection potential” and OIC acceptance. A non-refundable application fee applies, which may be waived for low-income individuals.

Currently Not Collectible (CNC) status offers a temporary delay in collection for taxpayers facing significant financial hardship. If the tax authority determines a taxpayer cannot pay basic living expenses and their tax debt, the account may be placed in CNC status. Active collection efforts, like levies, generally stop, but the debt remains. Interest and penalties continue to accrue, and future tax refunds may be applied to the debt. A Notice of Federal Tax Lien may still be filed, affecting credit and property sales.

Consequences of Unaddressed Tax Debt

Failing to address tax liabilities can lead to escalating consequences imposed by the tax authority. These measures encourage compliance and can significantly impact a taxpayer’s financial standing and future. Understanding these potential outcomes underscores the importance of proactive engagement with tax obligations.

The tax authority levies penalties for failing to file a return on time and failing to pay taxes by the due date. The failure-to-file penalty is 5% of unpaid taxes per month (capped at 25%). The failure-to-pay penalty is 0.5% of unpaid taxes per month (capped at 25%). If both apply, the failure-to-file penalty is reduced by the failure-to-pay penalty for that month, with a combined maximum of 5% per month.

Interest accrues on unpaid taxes and penalties from the original due date until paid. The quarterly interest rate is the federal short-term rate plus three percentage points, compounded daily. This continuous accrual can substantially increase the total amount owed.

A federal tax lien is a legal claim the government places against a taxpayer’s property for neglected or unpaid tax debt. It secures the government’s interest in all current and future assets. Filing a Notice of Federal Tax Lien can negatively impact credit and limit the ability to obtain loans, mortgages, or sell property.

If tax debts remain unpaid, the tax authority may proceed with a tax levy, the legal seizure of a taxpayer’s property to satisfy the debt. This can include seizing wages, bank funds, or other financial assets. Unlike a lien, a levy involves directly taking the property.

For seriously delinquent federal tax debt (over $62,000 in 2025, including penalties and interest), the tax authority can certify the debt to the State Department. This may lead to denial of a new passport or revocation of an existing U.S. passport. The State Department provides a 90-day window to resolve the issue or arrange payment before taking action.

Evaluating Your Options

When faced with a tax liability that cannot be paid immediately, carefully evaluating all available options is important for making an informed financial decision. The choice between utilizing borrowed funds and pursuing official payment programs depends on several individual factors. A thorough assessment of one’s financial situation is crucial.

Consider the total cost of borrowing, including interest rates and fees, comparing them against interest and penalties under tax authority payment plans. Eligibility for loans and tax programs is also important, as credit scores, income, and assets influence approval.

The potential impact on one’s credit score is another factor; loans can affect credit if not managed responsibly. Evaluate the tax debt amount and your financial situation, including repayment ability. Prioritize solutions offering the most favorable terms and least long-term financial burden. Consulting a qualified tax professional can provide personalized guidance.