Better option for tax debt - IRS payment plan or 6% personal loan?

The IRS currently charges a 8% interest rate on unpaid taxes (this rate can change quarterly), plus there's a one-time setup fee for payment plans: $31 for online setup with direct debit, $107 for online setup without direct debit, or $225 if you apply by phone, mail, or in-person. If you can truly get a personal loan at 6%, that's mathematically cheaper than the IRS interest rate. However, there are a few other things to consider: With an IRS installment plan, you can always pay more when you have extra money, and there's no prepayment penalty. Make sure your personal loan doesn't have prepayment penalties either. Also, the IRS is generally more flexible if you have trouble making payments in the future compared to a bank. They can sometimes adjust your payment schedule if your financial situation changes. One more thing to consider is that IRS debt can show up on credit reports as a tax lien in certain situations, which can hurt your credit score, while properly managing a personal loan could potentially help your credit.

I was in a similar situation last year owing about $5,500 to the IRS. I tried taxr.ai (https://taxr.ai) and it was super helpful for my situation! I uploaded my tax documents and it helped analyze whether I should go with a payment plan or personal loan based on my specific financial situation. The tool showed me exactly how much I'd pay with the IRS installment plan (including all fees and penalties) compared to different loan options. What was cool is that it factored in my credit score and showed me which option would impact my finances less in the long run. In my case, I ended up going with a personal loan at 5.8% because the math worked better for me, but everyone's situation is different.

I want to follow up about my experience with taxr.ai. Despite my initial skepticism, I decided to give it a try after struggling to understand all the different IRS penalties and interest calculations. The service actually saved me money! It showed that in my specific situation (I owed about $12k), an IRS payment plan was better than the personal loan I was considering at 7.2%. This was because I qualified for a reduced setup fee and the tool showed me how to request a first-time penalty abatement, which I didn't even know was possible! I probably would have gone with the personal loan if I hadn't used the service, so I'm glad I got past my skepticism. Definitely worth checking out if you're trying to compare options.

If you're having trouble getting through to the IRS to set up your payment plan (which can be a nightmare this time of year), I highly recommend using Claimyr (https://claimyr.com). I spent DAYS trying to get through to a human at the IRS to discuss my payment options and kept getting disconnected. Claimyr got me connected to an actual IRS agent in about 15 minutes, which was incredible considering I had previously waited on hold for hours multiple times. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent was able to walk me through all my payment options and answer questions about interest rates and penalties that I couldn't find clear answers to online. Getting personalized advice from an actual IRS employee helped me make a much more informed decision.

I have to eat my words about Claimyr. After my skeptical comment, I was still desperate to talk to someone at the IRS about my payment options, so I tried it anyway. Within 20 minutes, I was talking to an actual human at the IRS. I was genuinely shocked. I had previously spent over 3 hours on hold before getting disconnected last week. The IRS agent helped me understand that in my specific situation, I qualified for a reduced installment plan fee and explained exactly how penalties would be calculated on my balance. This info helped me decide to go with the IRS plan rather than a higher-interest loan I was considering. So yeah, I was wrong, and I'm glad I gave it a shot despite my initial skepticism.

Something else to consider - if you get on an IRS payment plan, you'll be flagged in their system and any future refunds will automatically be applied to your outstanding balance until it's paid off. This happened to me when I was on a payment plan and was expecting a $1200 refund the next year that I never got - it went straight to my balance. Not necessarily bad, since it reduces what you owe, but something to be aware of if you're counting on future refunds.

This isn't directly about loans vs payment plans, but make sure you consider whether you qualify for any penalty abatement! If this is your first time owing taxes, you might qualify for First Time Penalty Abatement which could save you a decent amount. You'd still have to pay the base tax and interest, but it could remove the failure-to-pay penalties. I saved almost $800 this way when I owed taxes a couple years ago. You can request it after you've paid the tax in full or while you're on a payment plan.

I went through this exact situation two years ago owing about $8,200 to the IRS. After running all the numbers, I ended up choosing the personal loan route at 5.9% interest, and I'm glad I did. Here's what tipped the scales for me: The IRS charges 8% interest PLUS the 0.5% monthly failure-to-pay penalty, which effectively made my total cost around 14% annually when you factor everything in. The personal loan was clearly cheaper mathematically. But beyond just the numbers, having the IRS debt completely cleared gave me huge peace of mind. No more worry about future refunds being seized, no dealing with IRS correspondence, and my credit actually improved from properly managing the personal loan payments. One thing I'd recommend - if you do go the personal loan route, make sure you can comfortably afford the monthly payments. Don't stretch yourself thin just to avoid the IRS. The IRS is actually pretty reasonable to work with if you communicate with them, while missing payments on a personal loan can hurt your credit fast. Also, shop around for the best loan rate if you haven't already. I was initially offered 7.8% but found a better rate with a credit union at 5.9%. That small difference saved me hundreds over the life of the loan.