Navigating the Waters of Unpaid Taxes: Should You Borrow or Not?

Tax season brings a familiar sense of unease. After calculating your taxes, you may find that you owe more than you can pay. This situation is common, but there are options available. Ignoring your tax bill is not one of them. Taking action is crucial.

First, it’s important to know that the IRS can be more of an ally than an enemy. If you can't pay your taxes immediately, it doesn't mean you're heading toward financial disaster. The IRS has systems to assist taxpayers in difficult situations.

Should you consider taking a loan to pay off your tax debt? This is one possible approach, but not the only one. Let’s explore both options: borrowing and IRS payment plans.

Use a Loan to Pay Your Taxes

Pros:

Immediate Relief: A loan can completely pay off your tax debt, reducing immediate stress.
Protect Your Credit Score: Paying your taxes on time helps maintain your credit score. Unpaid taxes can lead to liens, negatively affecting your credit report.
Potentially Lower Interest: If the loan's interest is lower than the IRS penalties, this could save you money.

Cons:

Debt Exchange: You will be transferring tax debt to loan debt. Ensure you can manage the repayment terms.
Variable Interest Rates: Depending on your credit, loan interest rates might be higher than IRS installment plan rates.
Possible Fees: Loans may have origination fees or penalties for early repayment.

If you decide to pursue a loan, compare different lenders. Credit unions, online lenders, and peer-to-peer platforms might have favorable rates. Look at options like LendingClub or Prosper.

IRS Payment Plans

Before considering a loan, keep in mind that the IRS can assist you. They offer payment plans with reasonable terms.

Short-Term Payment Plan:

Duration: Up to 120 days to settle your debt.
Cost: No setup fee; interest and penalties will accrue until full payment.

Long-Term Payment Plan (Installment Agreement):

Duration: More than 120 days for repayment.
Cost: A setup fee applies (lower if you choose direct debit), along with ongoing interest and penalties.

Applying for these IRS payment plans is simple. You can apply online through the IRS Payment Plan application or send a completed Form 9465 by mail.

Letting It Go: Not an Option

Ignoring your tax debt is a poor choice. Failing to file or address your tax obligations can lead to severe financial consequences. The IRS has the authority to collect owed taxes, which may include wage garnishment or bank account seizures.

The Best Course of Action

Communication is key. Whether you choose to borrow money or apply for an IRS payment plan, taking no action is the least favorable choice. Reach out to the IRS, explain your situation, and remember they handle these matters regularly.

When facing your tax bill, evaluate your financial situation honestly. Weigh the pros and cons of a loan, consider IRS payment plans as an option, and act promptly. Acting responsibly will help you navigate through this challenge.

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