How To Pay Off IRS Debt Fast

For many Americans, the famous Shakespeare warning to beware the Ides of March better applies to the middle of April when tax season is upon us.

Every year more people find they owe the IRS when taxes come due, adding layers of stress to family budgets in general and end-of-school year vacation planning in particular.

The unexpected question then becomes how to pay off IRS tax debt fast.

The number of Americans receiving a tax refund has gradually declined since 2021, according to Civic Science. The individuals who anticipate owing on their taxes had increased to 43%.

The trend has left many wondering how to pay off IRS debt quickly. While options abound to pay off tax debt, it’s important to explore the most cost-effective ways to settle that debt and to avoid the pricier options.

“You can use credit cards or take out equity in your home, which I don’t recommend,” said Kristine Stevenson Seale, owner of Advocate Financial Coaching In Temple, Texas. “You can sell personal assets, use retirement money (also not recommended), or slash the budget to the bare minimum to pay off debt as quickly as possible.

“The IRS has multiple options for paying the amount of tax owed. It’s the individual’s facts and circumstances, however, that determine in part how the tax bill will get paid.”

The Cost of Paying off Tax Debt Quickly

There’s no cookie cutter fix to paying off tax debt. For instance, some Americans have limited resources to address a tax bill and may need to sell off assets.

Even those who can avoid that extreme solution suffer from not having a plan or even a monthly budget. Consequently they risk rushing into payment options that offer a quick fix but come with fees, high interest rates and credit score consequences.

Households need to weigh the financial costs of paying off debt quickly. It’s not enough to just want the tax burden settled for peace of mind. Fees and interest rates for borrowing to pay Uncle Sam might make a loan counterproductive.

You need to address it in the most cost effective way possible.

Options for Paying off Tax Debt Quickly

Ignoring tax debt is not an option. It’s not going to just go away no matter how many prayers you send up.

The stress that accompanies owing the IRS often causes the opposite of procrastination. People don’t want the burden of waking up in debt every morning, so they look to pay off tax debt quickly if at all possible and sometimes fail to consider the overall costs.

Dealing quickly with tax debt can mean taking out a personal loan from a bank or a family member, using a credit card, refinancing your home and, in some extreme cases, filing for bankruptcy.

1. Use a Personal Loan

A personal loan can be an effective way to avoid IRS penalties and interest charged on unpaid taxes. Just know the interest rate you get from a commercial lender on your personal loan will depend on your credit score and debt-to-income ratio. The costs will include a loan origination fee.

“Personal loans from family members are a great way to pay taxes, if available,” Christopher Gray of Norris McLaughlin in Allentown, Pennsylvania, said. “The interest rate will likely be much lower than commercial loans and the terms may be more flexible than an unsecured bank loan.”

2. Use a Credit Card

Using credit cards might buy you some time but that option only makes sense if you are certain you can pay off the debt without carrying it multiple months. Accruing penalties and credit card interest rates of 20% or higher is the definition of counterproductive.

Gray calls using credit cards to pay off tax debt a “last resort,” pointing out that in addition to excessive interest rates the “high use of available credit could adversely affect the taxpayer’s credit rating.”

3. Refinance Your Home

Another option is to refinance your home. That option offers much better interest rates than credit cards and often better terms than IRS payment plans.

Just educate yourself on the potential downsides such as refinancing fees and know that interest on home equity loans used to pay taxes is not tax deductible. For some homeowners, a lack of equity can sabotage refinancing as a viable option in paying off tax debt.

4. Filing for Bankruptcy

Filing for bankruptcy could mean selling off assets and using that money to pay off tax debt. Depending on the terms of a Chapter 7 bankruptcy filing, some portion of the debt might be forgiven but the IRS will first require documentation to prove taxpayers didn’t purposely avoid paying taxes to file bankruptcy.

“Discharging tax debts by filing bankruptcy is not as easy as it would seem,” Gray said. “Only taxes older than 3 years can be discharged in a Chapter 7 bankruptcy. A Chapter 7, also known as a ‘liquidation,’ allows a taxpayer to retain exempt assets, but the rest are used to pay the individual’s debts.”

Alternatives for Paying off Tax Debt

Some options for paying off tax debt aren’t necessarily quick-strike solutions, but they can be more cost-effective than the strategies already mentioned. “Can be” is the key phrase here.

Payment plans with the IRS cover short-term and long-term installments. However, qualifying standards and other considerations might make them less than ideal, depending on how much money is owed, and the fact that interest accrues during the payment period.

Before considering an installment plan or an Offer in Compromise, which is basically a tax settlement, a consultation with a tax attorney experienced in dealing with the IRS is a smart move.

Short-Term IRS Payment Plan

A short-term IRS payment plan has benefits such as no setup fee and more flexible payment options but is not a viable option for taxpayers with a significant amount of tax debt.

A short-term payment plan is best for taxpayers that have tax, interest and penalties that total less than $100,000 and who agree to pay the entire balance in less than 180 days.

Long-Term IRS Payment Plan

A long-term IRS payment plan is for taxpayers who owe less than $50,000 in tax, interest, and penalties, are up to date in filing their taxes but can’t pay off the debt within 180 days. Setup fees apply (except for low-income taxpayers) and interest and penalties can accrue throughout the payment period. Payment options are less flexible.

“If the total balance exceeds $25,000 payments must be made in a direct debit installment agreement,” Gray said.

Apply for an Offer in Compromise (OIC)

An Offer in Compromise is a tax relief program that allows taxpayers to settle their debt for less than what they owe.

It isn’t quite the equivalent of a fourth-down-and-40 pass in the NFL, but its success rate is only marginally better.

“Very few people qualify for the OIC program, and it comes with scrutiny for the next five years,” Stevenson Seale said. “It is strictly facts and circumstances dependent. You qualify or you don’t.”

Qualification depends on income and assets.

“Taxpayers should understand that their debts and expenses are only considered within IRS allowances that prevent a taxpayer from avoiding taxes but retaining luxuries,” Gray said. “The more net assets and income that a taxpayer has, over and above IRS allowances, the more the IRS will expect the taxpayer to pay.”

Struggling To Pay Your Tax Debt? Get Help Today

Discovering you owe a significant tax bill, or failing to address back taxes that are accumulating penalties and interest, should sound a financial alarm.

Often, a tax bill you can’t afford to pay out of your savings account isn’t a singular debt issue for many Americans struggling to keep up with credit card bills, mortgage payments, student loans and medical costs.

You can’t run out the clock on debt so it’s best to seek help to take control of your finances before looking for a quick fix that fails to address the root cause of your issues.

Take some time and research nonprofit credit counseling.

Credit counselors are experienced in helping people put a plan in place that covers everything from budgeting and money management to debt settlement and debt management plans designed to bring order and erase the stress of living paycheck to paycheck.

Nonprofit credit counseling is available all year round, not just during tax season.