There are multiple options for paying off tax debt. You’ll want to select the one that is best for minimizing your penalties and interest payments. Obviously, time is a factor. Your tax debt increases every day that you don’t submit a payment, so try to make a decision on this as fast as possible.

Option #1: Apply for a personal loan

The IRS charges 5% interest on unpaid taxes. They also add between 0.5% and 25% in additional penalties. Depending on your credit score, personal loans to pay off tax debt could have an interest rate higher than 5%. Eliminating the penalties more than makes up for that.

Here’s what you need:

  • Employment information
  • Bank account statements
  • Credit report
  • Collateral (for secured loans)
  • Personal ID

What are the advantages and disadvantages?

Your loan payments will increase your monthly overhead, but you won’t have to worry about the IRS garnishing wages, i.e. taking money directly out of your paycheck—or seizing your property.

Option #2: Use your credit card

This option depends on your credit card interest rate and how desperate your situation is. Using credit is a good option if you’re paying off tax debt with a low-interest credit card. It could be your only choice if you’re facing wage garnishments or seizures.

Here’s what you need:

  • Credit card
  • Credit limit to match tax debt

What are the advantages and disadvantages?

Your credit card’s interest rate may be higher than the interest and penalties combined on your tax debt. If so, you’re better off setting up an IRS installment plan (Option #4).

Option #3: Refinance your home

You might want to refinance your mortgage even if you don’t use the money to pay back taxes. If interest rates stay low, it could be a win-win. For home equity lines of credit-or HELOCs—the prime rate is a mere 3.25%.

Here’s what you need:

  • Pay stubs
  • Tax returns
  • Credit report
  • Statements of outstanding debt
  • Statement of assets

What are the advantages and disadvantages?

A lower interest rate could save you thousands of dollars on the final purchase price of your home, but you’re also borrowing additional cash to pay off your outstanding tax debt. That may actually increase the amount of your mortgage payment.

Option #4: Enter into an installment agreement with the IRS

This should be a distant fourth option if you can’t obtain financing or credit for paying off tax debt. The IRS, despite being the administrative body for tax collection, doesn’t actually have the power to waive interest and penalties. Installment plans often take years to complete.

Here’s what you need:

  • Tax debt of less than $50,000
  • Valid email address
  • Social Security or tax ID number
  • Bank account to debit payments from

What are the advantages and disadvantages?

An installment agreement is not going to eliminate interest and penalties. On a positive note, if you make higher monthly payments, you will minimize your overall liability.

Option #5: Submit an Offer in Compromise

As of April 27, 2020, the application fee for an IRS Offer in Compromise is $205. You can apply for this option if all your current taxes are paid and you can prove a financial hardship.

Here’s what you need:

  • All tax returns filed
  • All estimated taxes for current year made
  • All current quarterly payments made (for business owners)
  • Proof of inability to pay tax debt

What are the advantages and disadvantages?

An Offer in Compromise is great if you can get one, but you’re likely wasting your time and money applying. The IRS typically only grants an OC when there’s been a documented tragedy or medical event that makes payment of the full tax debt unlikely.