4 Tips for Using a Personal Loan to Pay Back Taxes

The longer you wait, the greater your risk of adding penalties and interest to your balance. Having unpaid back taxes may also limit your ability to:

• Claim a refund on your current taxes 
• Protect future Social Security benefits
• Avoid issues when applying for a loan or mortgage

The good news is that there are steps you can take. Keep in mind, everyone’s tax situation is  different, so you should consult a tax professional for advice. These four tips can help you create a strategy for any unpaid back taxes now by paying off all or some of the balance with a personal loan. 

Table of contents

1. Figure out what you owe in back taxes
2. Apply for a tax extension if you need one
3. Consider a personal loan
4. Stick to your plan

1. Figure out what you owe in back taxes

Because you are legally required to pay back taxes, putting it off will not help your situation. A delay in payment could even lead to a bigger bill because of added interest and penalties. Instead, dealing with the problem now could bring much-needed relief.

The first step is finding out how much you owe. There are a few methods you might find useful.

• Gather all necessary tax documents  for the appropriate years, such as W-2s, 1099s, and receipts for deductions and credits.
• Request any missing W-2 or 1099 information by contacting the issuer of those forms.¹ If you need information about past tax returns or other information from the IRS, you can use Form 4506-T, Request for Transcript of Tax Return.
• Download past tax returns or other forms for the years that you owe.
• Prepare and submit your new or revised tax returns (or get help from an accountant or tax specialist).
• Wait for a statement from the IRS with the amount you owe in penalties and interest.
• Check directly with the IRS for information about your account for the amount you owe and a breakdown by tax year.

2. Apply for a tax extension if you need one

Some people may avoid filing past-due tax returns because they’re concerned that they’ll owe more than they can pay.

If you’re unable to pay what you owe, there are a few options. You may want to request a filing extension² from the IRS (for up to six months³), set up an installment agreement⁴ (allowing you to pay over time), or see if you qualify for an offer in compromise⁵ (to pay less than the total amount due).

As you work through the options, think about how you can plan ahead and work your payments into your budget. And don’t forget to include your tax situation for the current year in your plan to pay any back taxes.

3. Consider a personal loan

A personal loan might help you settle the bill once you know the amount of back taxes you owe and how much you may need to borrow. Paying off the balance could help you avoid additional penalties and interest charged by the government.

Because a personal loan is a type of unsecured loan, you don’t need collateral to obtain the funds necessary to pay some or all of your back taxes. These funds are considered debt, not taxable income, so a personal loan will generally not affect your future taxes .

There are other potential benefits you can receive from a personal loan if you choose to apply.

• Flexible options that let you find the repayment plan that fits your budget  and calculate your monthly payments ahead of time.
• A fixed repayment term and a fixed interest rate that ensure one set regular monthly payment.
• Interest rates from 7.99% to 24.99% APR from Discover® Personal Loans.
• Money sent fast. For example, with a Discover personal loan, you can send money straight to many creditors or to your bank account as soon as the next business day after you are approved for and accept the terms of your loan. 

4. Stick to your plan

As frustrating as it may be to owe back taxes, the issue won’t disappear on its own. That’s why it’s best to act now to avoid extra complications.

But keep an eye out for tax scams from fraudsters claiming to collect back taxes. Remember that the IRS will generally contact you the first time by mail, not by email or phone.

If you find yourself having to pay back taxes, take a deep breath and follow the steps above. Calculate what you owe, adjust your budget if needed, and take action. You’ll feel better when you do.

Already know how much you owe in taxes? Use our loan calculator to estimate what your monthly payments might be with a Discover personal loan.

Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information.

The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Individuals should consult a tax professional. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.