Paying a Tax Bill: IRS Payment Plan or Personal Loan?

What an unpaid tax bill costs while it waits

The balance you owe the IRS does not stand still. Two charges keep adding to it until it is paid in full, and both matter when you compare an IRS plan with a loan.

• Failure-to-pay penalty. 0.5% of the unpaid tax for each month or part of a month, up to 25% of the unpaid tax. If you filed your return on time and have an approved payment plan, it drops to 0.25% a month during the plan. If you do not pay within 10 days of a notice of intent to levy, it rises to 1% a month.
• Interest. The IRS charges the federal short-term rate plus 3 percentage points, reset each quarter and compounded daily. For October through December 2026 the rate is 7% a year. The IRS also charges interest on penalties.

The IRS payment plans and their fees

The IRS offers a short-term plan for balances you can clear within 180 days, and a long-term plan, called an installment agreement, paid monthly. You can apply online for a short-term plan if you owe less than $100,000 in combined tax, penalties and interest, and for a long-term plan if you owe $50,000 or less and have filed all required returns.

Interest and the failure-to-pay penalty keep running on a plan, at the reduced penalty rate if you qualify. Choosing direct debit and applying online keeps the setup fee lowest.

Plan or loan: an $8,000 bill over 24 months

Suppose you owe $8,000, filed on time and want to pay over 24 months. The IRS plan figures below are a rough estimate: they assume today's 7% rate holds for two years and apply the 0.25% monthly penalty to the declining balance, which together work out to about 10% a year. The real figures will differ as the rate changes each quarter and as the IRS applies payments. The loan is a worked example computed with the standard amortization formula, not an offer.

On these assumptions the IRS plan costs about $330 less. A loan comes out ahead only if its APR, fees included, is below roughly 10%. A loan with an origination fee also deposits less than you borrow, so you would need to borrow more than $8,000 to pay the bill in full; the net proceeds calculator shows how much.

When a personal loan makes sense for taxes

A loan can fit when you qualify for a low APR, when your balance is above the limits for an online installment agreement, or when you would rather pay the IRS in full now and stop the penalty and interest from building. It can also fit if you have already missed payments on an IRS plan and want to avoid a default; the IRS may charge a fee to reinstate a plan after default.

It fits poorly when the only offers you qualify for carry an APR well above the IRS plan's cost, or when the loan payment would leave you short for next year's taxes. If you are self-employed, set aside estimated tax for the coming year before you commit to a payment; borrowing when you are self-employed covers how lenders read your returns.

1. 1 Get your exact balance, including penalty and interest to date, from irs.gov or the latest IRS notice.
2. 2 Price the IRS plan: the setup fee for the way you apply, plus roughly 10% a year at the current rate and the reduced penalty.
3. 3 Collect two or three loan offers and read the APR on each disclosure, fees included.
4. 4 Choose the loan only if its APR is lower and its payment fits your budget; otherwise set up the IRS plan.
5. 5 Whichever you choose, pay on time: a missed IRS plan payment can lead to default, and a missed loan payment can bring a late fee.

Watch for IRS impostors

A tax debt makes you a target for scams by people pretending to be the IRS. The IRS says it does not:

• Start contact by email, text message or social media to ask for personal or financial information.
• Call to demand immediate payment with a specific method such as a gift card or prepaid debit card. It never asks for or accepts gift cards for a tax bill.
• Threaten to bring in police or immigration officers to arrest you for not paying.

1. 1 Hang up or do not reply. Check your balance yourself by going to irs.gov directly, not through a link or number the caller gives you.
2. 2 Report an impostor call to the Treasury Inspector General for Tax Administration, online or at 800-366-4484.
3. 3 Be wary of any lender or tax-relief company that contacts you first about your IRS debt and asks for fees up front; check who you are dealing with.

Questions people ask